Why can't we just build some more houses? Image: Getty.
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The Tories want to give away houses to make sure we have enough houses

Black is white. War is peace. Madness is sanity.

Hey, guys, I've got this great new idea for sorting out Britain's defence problems. The British military is under-equipped, right? The biggest problem facing our boys is that they, basically, just don't have enough stuff.

So, here’s my plan for making sure the military does have enough equipment: we sell off all the equipment that it already has. But – and this is the clever part – we do it at a massive discount.

No, trust me, this is definitely going to work.

Because, with the money we get from those sales, we can then buy some new equipment, right? I mean, probably not as much as we had to start with, because we offered that discount to motivate sales. That is certainly a downside, I’ll admit.

But you can only play the cards you’re dealt, and as we all know, there's no money left. So, thanks to the mess that Labour left us in, the only way to guarantee we have a properly equipped military is to sell off all the equipment that the British military already has.

And that is my long-term economic plan for Britain's hardworking soldiers.

Okay, so, nobody seriously thinks that this is a sensible military procurement strategy. And yet, in a different sphere of public life, “giving stuff away to make sure you have enough stuff” is an entirely respectable position, despite the fact it implies a level of economic illiteracy that should get you banned from so much as entering a branch of Tesco.

Yesterday, the Sunday Times confirmed that the Tories were, as a key plank of their manifesto, consider a massive ramping up of the right-to-buy. That, you’ll recall, was an iconic Thatcher era policy under which council tenants were given an automatic right to purchase their homes at a massive discount, and which has had absolutely no downsides in the 30 years since.

The point of the policy was to turn Britain into a "property-owning democracy", and it was, at heart, a political move. It worked on the assumption that people who own homes are more likely to vote Conservative than people who live in council houses. So, if you’re a Tory, you want more of the former, and fewer of the latter.

That, someone clearly thinks, still applies. Somebody in the Tory hierarchy has looked at which voters the party needs to win over to stay in government, looked at the fact there's a housing crisis, and put two and two together to make the square root of minus one.

Now, the party's manifesto will reportedly include an extension of the right-to-buy to cover tenants living in housing association (HA) properties. The proceeds of these sales, unlike the proceeds of past right-to-buy transactions, would be ploughed back into extra housing. In other words, it amounts to making sure we have enough tanks by selling off all our tanks.

There are so many problems with this policy that you’d think at least one of them would have come up in the discussions at CCHQ. One is that it HAs aren't actually an arm of government, so the government is promising to sell things it doesn’t actually own. It can probably find a way of making them do so anyway, but the bills that’ll result from the resulting legal wrangling seem an odd sort of thing to prioritise right now.

Another problem is that the policy will haemorrhage money, since that discount basically amounts to the state giving individual tenants a bung. "Sources" claim it'll eat into the housing benefit bill; that sounds optimistic to me, but even if it does, it will have done so by handing out houses to a lucky few, and as a British taxpayer who isn't being offered a subsidised house I feel a bit miffed about that.

And that is the biggest problem here: never mind the fact it’ll generate less cash that it costs us, or the fact that if the Tories really wanted to get the state building houses again they’ve had five years in which to do that. Consider the political ramifications.

Reuters report over the weekend said that the policy was “aiming to sway voters who are struggling to buy a house”. Now I know quite a lot of voters who'd describe themselves that way, and at least some of them would probably be open to a touch of electorally bribery. Extending right-to-buy to them would be a massive vote winner.

So why is nobody doing so? Because those people, some 9m of them, live in the private rented sector, over which the government has even less control than it does over housing associations. Those people would love the right to buy a house – but nobody is coming forward to give them one.

Because the problem with Britain’s housing market is not that HA tenants can’t buy their own homes. It’s that we need to build more bloody houses.

Still, I'm sure private renters will be delighted to see a future Tory government handing out subsidised houses like sweets to those who were lucky enough to be living in them at the time. It’s quite clear to me now that the only way to make sure we have enough houses is to give away houses. Black is white. War is peace. Madness is sanity.

That makes sense, right? Right?

Jonn Elledge edits the New Statesman's sister site CityMetric, and writes for the NS about subjects including politics, history and Brexit. You can find him on Twitter or Facebook.

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We're racing towards another private debt crisis - so why did no one see it coming?

The Office for Budget Responsibility failed to foresee the rise in household debt. 

This is a call for a public inquiry on the current situation regarding private debt.

For almost a decade now, since 2007, we have been living a lie. And that lie is preparing to wreak havoc on our economy. If we do not create some kind of impartial forum to discuss what is actually happening, the results might well prove disastrous. 

The lie I am referring to is the idea that the financial crisis of 2008, and subsequent “Great Recession,” were caused by profligate government spending and subsequent public debt. The exact opposite is in fact the case. The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically). And - this is the part we are not supposed to talk about—there is an inverse relation between public and private debt levels.

If the public sector reduces its debt, overall private sector debt goes up. That's what happened in the years leading up to 2008. Now austerity is making it happening again. And if we don't do something about it, the results will, inevitably, be another catastrophe.

The winners and losers of debt

These graphs show the relationship between public and private debt. They are both forecasts from the Office for Budget Responsibility, produced in 2015 and 2017. 

This is what the OBR was projecting what would happen around now back in 2015:

This year the OBR completely changed its forecast. This is how it now projects things are likely to turn out:

First, notice how both diagrams are symmetrical. What happens on top (that part of the economy that is in surplus) precisely mirrors what happens in the bottom (that part of the economy that is in deficit). This is called an “accounting identity.”

As in any ledger sheet, credits and debits have to match. The easiest way to understand this is to imagine there are just two actors, government, and the private sector. If the government borrows £100, and spends it, then the government has a debt of £100. But by spending, it has injected £100 more pounds into the private economy. In other words, -£100 for the government, +£100 for everyone else in the diagram. 

Similarly, if the government taxes someone for £100 , then the government is £100 richer but there’s £100 subtracted from the private economy (+£100 for government, -£100 for everybody else on the diagram).

So what implications does this kind of bookkeeping have for the overall economy? It means that if the government goes into surplus, then everyone else has to go into debt.

We tend to think of money as if it is a bunch of poker chips already lying around, but that’s not how it really works. Money has to be created. And money is created when banks make loans. Either the government borrows money and injects it into the economy, or private citizens borrow money from banks. Those banks don’t take the money from people’s savings or anywhere else, they just make it up. Anyone can write an IOU. But only banks are allowed to issue IOUs that the government will accept in payment for taxes. (In other words, there actually is a magic money tree. But only banks are allowed to use it.)

There are other factors. The UK has a huge trade deficit (blue), and that means the government (yellow) also has to run a deficit (print money, or more accurately, get banks to do it) to inject into the economy to pay for all those Chinese trainers, American iPads, and German cars. The total amount of money can also fluctuate. But the real point here is, the less the government is in debt, the more everyone else must be. Austerity measures will necessarily lead to rising levels of private debt. And this is exactly what has happened.

Now, if this seems to have very little to do with the way politicians talk about such matters, there's a simple reason: most politicians don’t actually know any of this. A recent survey showed 90 per cent of MPs don't even understand where money comes from (they think it's issued by the Royal Mint). In reality, debt is money. If no one owed anyone anything at all there would be no money and the economy would grind to a halt.

But of course debt has to be owed to someone. These charts show who owes what to whom.

The crisis in private debt

Bearing all this in mind, let's look at those diagrams again - keeping our eye particularly on the dark blue that represents household debt. In the first, 2015 version, the OBR duly noted that there was a substantial build-up of household debt in the years leading up to the crash of 2008. This is significant because it was the first time in British history that total household debts were higher than total household savings, and therefore the household sector itself was in deficit territory. (Corporations, at the same time, were raking in enormous profits.) But it also predicted this wouldn't happen again.

True, the OBR observed, austerity and the reduction of government deficits meant private debt levels would have to go up. However, the OBR economists insisted this wouldn't be a problem because the burden would fall not on households but on corporations. Business-friendly Tory policies would, they insisted, inspire a boom in corporate expansion, which would mean frenzied corporate borrowing (that huge red bulge below the line in the first diagram, which was supposed to eventually replace government deficits entirely). Ordinary households would have little or nothing to worry about.

This was total fantasy. No such frenzied boom took place.

In the second diagram, two years later, the OBR is forced to acknowledge this. Corporations are just raking in the profits and sitting on them. The household sector, on the other hand, is a rolling catastrophe. Austerity has meant falling wages, less government spending on social services (or anything else), and higher de facto taxes. This puts the squeeze on household budgets and people are forced to borrow. As a result, not only are households in overall deficit for the second time in British history, the situation is actually worse than it was in the years leading up to 2008.

And remember: it was a mortgage crisis that set off the 2008 crash, which almost destroyed the world economy and plunged millions into penury. Not a crisis in public debt. A crisis in private debt.

An inquiry

In 2015, around the time the original OBR predictions came out, I wrote an essay in the Guardian predicting that austerity and budget-balancing would create a disastrous crisis in private debt. Now it's so clearly, unmistakably, happening that even the OBR cannot deny it.

I believe the time has come for there be a public investigation - a formal public inquiry, in fact - into how this could be allowed to happen. After the 2008 crash, at least the economists in Treasury and the Bank of England could plausibly claim they hadn't completely understood the relation between private debt and financial instability. Now they simply have no excuse.

What on earth is an institution called the “Office for Budget Responsibility” credulously imagining corporate borrowing binges in order to suggest the government will balance the budget to no ill effects? How responsible is that? Even the second chart is extremely odd. Up to 2017, the top and bottom of the diagram are exact mirrors of one another, as they ought to be. However, in the projected future after 2017, the section below the line is much smaller than the section above, apparently seriously understating the amount both of future government, and future private, debt. In other words, the numbers don't add up.

The OBR told the New Statesman ​that it was not aware of any errors in its 2015 forecast for corporate sector net lending, and that the forecast was based on the available data. It said the forecast for business investment has been revised down because of the uncertainty created by Brexit. 

Still, if the “Office of Budget Responsibility” was true to its name, it should be sounding off the alarm bells right about now. So far all we've got is one mention of private debt and a mild warning about the rise of personal debt from the Bank of England, which did not however connect the problem to austerity, and one fairly strong statement from a maverick columnist in the Daily Mail. Otherwise, silence. 

The only plausible explanation is that institutions like the Treasury, OBR, and to a degree as well the Bank of England can't, by definition, warn against the dangers of austerity, however alarming the situation, because they have been set up the way they have in order to justify austerity. It's important to emphasise that most professional economists have never supported Conservative policies in this regard. The policy was adopted because it was convenient to politicians; institutions were set up in order to support it; economists were hired in order to come up with arguments for austerity, rather than to judge whether it would be a good idea. At present, this situation has led us to the brink of disaster.

The last time there was a financial crash, the Queen famously asked: why was no one able to foresee this? We now have the tools. Perhaps the most important task for a public inquiry will be to finally ask: what is the real purpose of the institutions that are supposed to foresee such matters, to what degree have they been politicised, and what would it take to turn them back into institutions that can at least inform us if we're staring into the lights of an oncoming train?