The devolution of health spending hasn't met with the level of euphoria that Manchester City's title win did. Photo:Getty Images
Show Hide image

There are big questions to answer for Manchester's new mayor

Devolution to Greater Manchester was greeted with general celebration. But there are broader concerns about the role and how it develops.

A fortnight ago, Tony Lloyd became the first Mayor of Greater Manchester. There were no public debates or hustings. The electorate consisted of ten people, the leaders of the local authorities that comprise Greater Manchester. After two hours of wrangling Lloyd was appointed to the post over Wigan’s leader, Lord Smith. If you wanted the antithesis of democracy and transparency, this was it.

Lloyd – a Manchester MP for nearly three decades and currently the elected Police and Crime Commissioner (PCC) – is only an interim Mayor. In 2017 Greater Manchester’s citizens will elect their first ‘proper’ Mayor. What will Lloyd actually do? He will become the chair of the Greater Manchester Combined Authority (GMCA), which coordinates economic development, transport, and urban regeneration across the ten local authorities. Currently the role of chair is taken by one of the ten leaders. He will, however, do far more that preside over GMCA meetings.

The next two years will crucial in the implementation of ‘Devo Manc’. A range of powers covering transport, strategic planning, housing, business support, apprenticeships, and the work programme, representing more than £1 billion in public expenditure, will be devolved. And that’s not to mention the subsequent announcement that a pooled £6 billion health and social care fund will be created and placed under the control of a new Strategic Partnership Board (not the Mayor, it must be noted).

Devo Manc has arisen because of two intersecting sets of interests Local leaders want to get their hands on more money and power, ostensibly to deliver economic growth and more efficient, tailored public services. And George Osborne, Devo Manc’s Whitehall champion, is driven by a combination of political economy and party politics. He sees the deal as a key component of his ‘Northern Powerhouse’ strategy, which is as much about reviving Conservative fortunes in the North as it is about growing the North’s economy. The Chancellor insisted on a directly elected Mayor as a quid pro quo for the new powers. The speed with which the package ultimately came together over the summer of 2014 has created two significant problems that Lloyd must now grapple with.

The first problem concerns the governance arrangements. More thought needs to be given to what structures are to be put in place across Greater Manchester to receive the new powers. Local leaders will point out that their aim is not to create an unwieldy new bureaucracy at the city-region level. But, with the Mayor assuming responsibility for transport, housing and policing, it isn’t hard to imagine a degree of consolidation of existing authorities and boards, as well as a range of appointed Deputy Mayors, under the banner of an ‘Office of the Mayor’. We are told that the ten local authority leaders will each take on some Greater Manchester-wide portfolio and will collectively form the Mayor’s cabinet. But through what mechanisms will they be held accountable? The current ‘Scrutiny Pool’ arrangements for the GMCA leave much to be desired. Lloyd and his colleagues must carefully plan these, and many other, issues. But they are in some ways the easiest of the tasks ahead.

The second problem concerns democracy. On a simple level Lloyd’s selection is an affront to democracy. Despite suggestions that he will have no new powers and will ‘merely’ chair the GMCA, Lloyd will have power to shape the future governance arrangements of Greater Manchester. This will come from the soft power of his new post (it will be what he makes of it) and also the fact that, as the government’s own paper makes clear, certain powers may be transferred before 2017. Whilst those powers will technically be transferred to the GMCA, and not the interim Mayor, the potential exists for Lloyd to shape the agenda.

But there is a far bigger question about local democracy and community empowerment. Evidence shows that people want decisions to be taken at a local level, and that they trust their local councils far more than Whitehall. However, we also see increasing evidence of a desire on the part of citizens to be involved in how they are governed. This can only be done if leaders are committed to the principles of participatory democracy and local empowerment. It cannot occur by transferring powers from Whitehall to a shadowy, distant combined authority chaired by a Mayor for whom nobody voted.

Leaders across Greater Manchester are aware of their failure of engage with the public about these plans. They also share the view that one of the main jobs of the interim Mayor is to ‘sell’ Devo Manc to the public. But Lloyd must understand that his job is not that of a salesman but that of an architect. Not only must he think carefully about the governance arrangements, he must also think about how he can build an inclusive, participatory local democracy. He will begin the job with questions of legitimacy hanging over him. But the past cannot be undone. We are where we are.

How Lloyd chooses to engage from now is crucial. He should quickly launch a broad public consultation that takes its cues from strong academic research on participatory and deliberative democracy. He should make it clear that people in Greater Manchester still have a chance to talk about and shape the way in which they will be governed in the years to come. It may be the last chance to salvage something truly legitimate and democratic from this process.

 

Dr Daniel Kenealy is a Lecturer in Social Policy at the University of Edinburgh. He, and colleagues, are currently undertaking ESRC funded research on attitudes towards how the UK is governed. They are on Twitter as @Edinburgh_AoG.

Getty
Show Hide image

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?