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The claims green policies will add £150 to your energy bill don't stack up

Figures from British Gas have a whiff of corporate spin and media hysteria.

Just when you thought the debate over energy bills, which was such a feature of the recent general election campaign, had died down, along comes British Gas.

The energy firm sparked media outrage this week with the news that it is hiking electricity prices for over three million households by an inflation-busting 12.5 per cent, adding around £76 pounds to the average bill.

Predictably, the accusations flew. Many papers rounded on the "greed" of British Gas, noting the firm’s healthy profit margins, the highest in the sector – its average pre-tax profit margin over the last eight years is 7.0 per cent, twice the 3.4 per cent aggregate average of all big six energy firms – and the hefty salary enjoyed by Centrica boss Iain Conn.

The Government and Ofgem were also a target of anger. Ministers were criticised after backing away from pledges to cap energy bills post-election, and passing the responsibility to the regulator. Ofgem for its part batted the responsibility back, arguing that it’s not the job of the "unelected regulator" to do this, and cap would need legislation.

British Gas itself, like other big six firms that raised prices before it, sought to blame factors outside its control, notably "policy and transmission costs", it said in a press release, explaining to journalists that "green energy subsidies" and the costs of energy networks were to blame.

"Green tax"

But amid all the claim and counter-claim, one report stood out: a front-page article in the Daily Telegraph, which led with the assertion from British Gas that "green tax" - funding for renewable forms of energy like wind and solar power - will add £150 to home energy bills next year.

The figure caught the eye of energy experts and journalists from other outlets; where had it come from? Admittedly, British Gas doesn’t have an unblemished record on being straight on costs (the £76 increase this week, for example, also includes the scrapping of a £15 dual fuel discount, something the firm didn’t mention in either its press release or explanatory blog), but the £150 figure seemed to have come out of the blue.

It also seemed to surprise the Department for Business, Energy and Industrial Strategy (BEIS) too, which put out a statement saying that it "did not recognise" the numbers, citing independent reports that said the true figure was lower.

A report in March by the Committee on Climate Change (CCC), for example, gave a much clearer breakdown of policy costs on bills, putting the cost of all climate policies, which might be labelled "green taxes", at £104 in 2016, and expected to rise to £110 this year. This figure, however, excludes other policy costs, such as the costs of helping people in fuel poverty or the rollout of smart meters.

So, if you were being charitable, you might say that British Gas was rolling all policy costs into their £150 figure – but the Telegraph was clear that it referred to clean energy subsidies, and journalistic pleas to British Gas for an explanation of how they arrived at the number yielded little clarity.

Informed debate

For long-term watchers of the UK energy sector like myself, the argument over the £150 figure had the familiar whiff of corporate spin and media hysteria, which regularly combine to form a toxic cloud on energy issues, obscuring the facts and ignoring the important issues.

For example, one vital fact left out of much of the media coverage, and certainly ignored by the Daily Telegraph, was detailed analysis earlier this year by the CCC of the long-term impact of climate policies on energy bills.

The Committee found that, although support for low-carbon policies does add costs to bills, these have been more than offset by savings delivered by those same policies. Overall, said the CCC, improvements in energy efficiency and cutting energy waste has saved households an average of £290 a year since 2008.

In other words, Britain’s efforts to decarbonise, which enjoy cross-party political support, have been very successful at both cutting emissions and saving people money. They also enjoy strong popular support too; a regular Government survey, published this week, showed that support for renewable forms of energy remains high, with around 75-80 per cent of people saying that they support its use, with very few opposed.

In other words; politicians and the public want to see the development of a cleaner, more efficient energy system and, although there remain differences of opinion over specific aspects of energy policy, the direction of travel is clear.

But resolving those differences of opinion is made much more challenging by efforts to muddy the debate. Investing in the energy system of the future, while keeping bills manageable, maintaining energy security and cutting carbon emissions, is a complex task which in a democracy deserves and needs a public debate.

But this debate most be informed by clear and honest evidence; when energy market incumbents like British Gas play fast and loose with the facts for their own advantage, and journalists fail to properly question them, their customers are misled and the job of managing the energy transition becomes that much harder.

Catherine Mitchell is Professor of Energy Policy at Exeter University 

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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?