David Gauke, the minister responsible. Photo: Getty
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Laura Pidcock: don't ruin Christmas – pause the rollout of Universal Credit

The rollout has been plagued by delays to payments – it should be paused until they are resolved, says the Labour MP.

Like any northern community which has been hit by the double whammy of long term deindustrialisation and lack of investment, my constituency of North West Durham has its fair share of problems with unemployment, low pay and mental health issues. A lot of people here are struggling to pay rent, fuel bills and buy the basics of food and clothing, not through any fault of their own, but because for far too long, our part of the country has been neglected by a distant, and at times, callous, government.

It’s a familiar story. Sensationalist TV programmes like Benefits Street love to individualise these problems, to make them the fault of the person in receipt of benefits. But talking to people during my MPs surgeries, on the doorstep and in meetings, it’s noticeable most have a common thread: that people have been left behind by a government that is becoming increasingly uncaring and often shuts off support to those who’ve fallen on hard times, been trapped in poorly paid work or had bad luck in their lives. The safety net which was once provided by the State is now falling to voluntary organisations, trade union branches, religious groups and dedicated volunteers who won’t stand by and watch people in hardship. When the state fails, the people organise.

When I was a small child, my parents used to push me along in a buggy at anti-Thatcher marches, so I know none of this is new, but the 2017 version of the Tories have almost seemed to revel in that uncaring attitude. Instead of taking an evidence-based view of why people are in poverty, distress, unable to work or struggling to fulfil their potential, the Conservatives come out with mantras such as “employment is the best route out of poverty”. In fact this is a direct quote from a reply I received from the Minister for Employment when I first asked to pause the roll-out of Universal Credit.

Anyone who has spent any time in constituencies like North West Durham know that it is more complicated than this – but this has been a pattern since 2010: a sound-bite politics with little or no regard for long-term solutions. If your wages are so low, or your terms and conditions so insecure that your employment entrenches your conditions of poverty, you can see why such a patronising mantra seems so out of touch. Talk to any care worker who is not paid for their time in-between visits, not paid mileage for the extensive journeys between patients, and on a minimum wage and ask them how easy it is live a comfortable life. Irrespective of the important detail of the complexities of modern life, like debt repayments, exploitative pre-payment energy meters, the rising prices of food, petrol and rents. Work in 2017 does not always help alleviate financial worries.

Over the last few months, I’ve picked up on another looming disaster for people in my constituency: the rollout of Universal Credit right in the middle of Christmas, traditionally the most difficult time for working class families financially. Despite the joy Christmas can bring, there is hypermaterialism, the normalisation of overconsumption and the social expectation to purchase the latest goods, especially for the Instagram generation, which makes this is an extremely pressured time. Many people feel guilt and shame at their inability to provide any ‘extras’ when they are already struggling to tread water. I couldn’t think of a worse time to be introducing a shake-up to benefits that, when introduced in other parts of the country, has left many claimants without payments for up to seven weeks.

I've discussed the issue with constituents, and read evidence in a report by Citizens Advice, who – as the experts in the field – dealt with the fall-out from the initial rollout of Universal Credit. They reported a series of issues, including delays to payments, the removal of the severe disability premium, and problems with the Universal Helpline. which you have to pay to call. People also struggled to pay back crisis loans of £150 in lump sums of £50 at a time. The way that Universal Credit has been introduced is a clear sign of how out of touch the Government are with the lives of many people who are struggling. Who would introduce this at Christmas? Only people that know nothing about the nature of poverty.

My background is in campaigning: when I see a problem, my first instinct is to ask how we solve it, and the answer is normally, collectively. So my office staff and I got to work, emailing colleagues right across the political spectrum, following up with phone calls and eventually, collecting signatures from 30 other MPs, all of whom had constituencies that were going to be hit by the aggressive rollout of Universal Credit in November and December this year. My office also received many messages of support from MPs whose constituencies were in line for Universal Credit later, but were equally concerned about its impact.

What we are asking is not unreasonable. The government already recognises that there are many difficulties with the system. So why don’t they do the decent thing and pause the rollout until they have sorted out these issues? This is what the Citizens Advice, many campaigning groups and a large group of the MPs whose constituents are affected are saying. My constituents should not have to pay the price of this inadequate system at this special, but expensive time of the year. To push them into further debt and more misery would be entirely consistent of this government, such is their record, but disgraceful nevertheless.

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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?