Show Hide image

Why has it all gone wrong for the Liberal Democrats?

The party's hopes of a rapid revival look to have turned to ashes. 

Before they entered coalition with the Conservatives in 2010, the weeks ­running up to a general election used to be kind ones for the Liberal Democrats. Given some time in the media spotlight, their poll ratings would turn upwards like flowers in the spring.

This year, however, that pattern has not held. The Lib Dem leader, Tim Farron, is ­appearing on television and radio. Their policies are being covered in the national news. They are lucky in their opponents, too. On the right, there is a Conservative Party that has abandoned many of the liberal shibboleths it embraced under David Cameron and is fully committed to a hard exit from the European Union. And on the left there is a bitterly divided Labour Party led by Jeremy Corbyn.

Yet the long-awaited “Lib Dem revival” has stalled. The party lost 28 councillors across England and Wales in the local elections on 4 May, when it had expected to gain seats. The latest polls have the Lib Dems barely troubling double figures nationwide. According to YouGov, in the south-west of England, once a stronghold and where many of their former seats are located, the Lib Dems have increased their vote share by only 1 per cent since the 2015 general election. To make matters worse, the Conservatives – their main rival in the region – have increased their share of the vote at the expense of Ukip, which has collapsed.

The Liberal Democrats, who have only nine MPs, are gaining some votes, but mostly in areas where they cannot hope to dent thumping Labour and Conservative majorities. The one region where the party might hope to gain seats is in and around London, but even there, its strategists fear defeat in Carshalton and Wallington, where the Lib Dem chief whip, Tom Brake, faces an uphill battle to hold his seat.

Outside the capital, the Conservatives hope to gain North Norfolk from Norman Lamb, Farron’s rival for the party leadership, and are even more optimistic about taking Southport, where the 68-year-old sitting MP, John Pugh, has opted to stand down. The cold reality is that the Liberal Democrats have no safe seats – even Tim Farron could plausibly lose his own in Westmorland on a really bad night – and when an incumbent stands down, the party is particularly vulnerable.

Pugh’s retirement is also a blow to the party’s press office. At the start of the parliament, he was keen to increase his profile and he gave Lib Dem headquarters permission to use his name whenever it needed to respond quickly to events. That helped bolster the party’s reputation for speed, efficiency and an eye for a good gag, which has boosted its stock among political journalists. (The Lib Dem official Twitter feed offered a live commentary on Eurovision; not something the Conservatives would do.)

If the Lib Dems can make gains elsewhere (Cambridge and Twickenham spring to mind) they might come out of the election in no worse shape than they went into it. But that’s not the result their activists and strategists hoped only a few months ago, when they expected to ride an anti-Brexit wave. Just four days before Theresa May surprised Westminster with her decision to call the general election, Farron visited Manchester Gorton, a Labour stronghold since 1935. There he told journalists that he expected a strong second place in the by-election that had been planned following the death of Gerald Kaufman, and, perhaps, even to add a tenth MP to his flock. That optimism has now evaporated.

What went wrong? The obvious answer is that Farron bet heavily on casting the party in opposition to Brexit, and lost. That is a problem in seats such as Carshalton and North Norfolk, where a majority voted to leave the EU. The evidence suggests that few on either side of the referendum divide regret their decision, but since 23 June a distinct bloc has emerged. According to YouGov’s Marcus Roberts, formerly an adviser to Ed Miliband and Sadiq Khan, many Remain voters believe that Brexit is a calamity but accept that the government has a democratic duty to enact the referendum result. He calls them the “Re-Leavers”, and they are not at all receptive to the Liberal Democrat message of a second referendum. 

Even more troubling for Farron is that the Lib Dems are not making headway among voters who want the vote for Brexit to be overturned. Although that’s a smaller group than the Re-Leavers, pollsters estimate that it accounts for close to 20 per cent of the electorate. So why aren’t these hard Remainers flocking to the yellow banner?

Part of the problem, simply put, is credibility. As one senior Liberal Democrat puts it, “voters can count”. No matter how angry you might be about the referendum result, it’s still a stretch to believe that nine Lib Dem MPs could prevent it. For Remainers who usually vote Labour, the prospect of undoing austerity with Jeremy Corbyn is more realistic than stopping Brexit. And Farron himself, though instrumental in driving through the decision to back a second referendum, is not a natural salesman for it. His evangelical Christianity, a repeated issue on the campaign trail, puts him at odds with the bulk of the diehard Remain vote, which tends to be aggressively secular. That Farron's voting record is not an immaculate advertisement for the separation of church and state only compounds that issue. 

Among Conservative Remainers, the ­Liberal Democrats have another problem: the struggles of Labour. That might seem counterintuitive, but it reflects a widespread belief among voters that given a free choice, the Liberal Democrats will always opt to support Labour, rather than the Tories. If Labour is unappealing, then so is voting for anyone who might strike a deal with it to govern Britain. The former coalition minister David Laws, by no means a natural friend of Labour, has long argued that his party does best when Labour is strong and attractive to swing voters.

The fates of the two parties are thus intertwined. We saw that at the last general election when a weak Liberal Democrats, tainted by coalition, collapsed in the south-west and Scotland, delivering a Conservative majority. Now, it is Labour’s turn to toxify its fellow progressives. Corbyn’s troubles have not benefited Tim Farron: while voters fear a Labour Britain, they will not risk a Liberal England.

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.

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?