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Westminster has yet to come to terms with the consequences of Brexit

A political class that failed to predict a Leave vote has yet to come to terms with the consequences.

For pro-Europeans, the referendum defeat happened overnight but it took years. The six-month-long series of warnings about the cost of leaving the European Union was overpowered by a wave of Farageist sentiment, built up over two decades in which anti-European arguments were the background hum of political discourse at Westminster and in the country.

Britain Stronger in Europe, the failed campaign to secure a Remain vote, only cranked into uncertain life on 12 October 2015, when an unexpected coalition of old Labour hands, television presenters from the mid-2000s and a former head of Marks & Spencer were recruited. Meanwhile, the Leave campaign was, in effect, born on the morning of 23 July 1993, when the Maastricht Treaty finally passed through the House of Commons, following close to a year of Conservative infighting.

A gaggle of rebels – including Iain Duncan Smith and John Whittingdale, two of the six cabinet ministers who refused to back David Cameron’s renegotiated deal with the European Union – were defeated that day, but they achieved a sea change within the Conservative Party. Just as, a decade earlier, Tony Blair had been advised that he must “wear the right badges” and support the shibboleths of the then ascendant Bennite left, scepticism (if not outright hostility) towards the European project became the indispensable accessory for any ambitious Tory. It was the little black dress of right-wing politicians.

For a great number of young Conservatives – not least Cameron – this was only ever a pose adopted out of necessity. But that little black dress turned out to be funeral attire for his leadership and for Britain’s membership of the European Union. The Prime Minister’s great miscalculation – which held until a panicked Downing Street ripped up any hope of a reconciliation after a Remain vote with an impassioned press conference outside No 10, the day before the vote – was that, in the crunch, Britain would opt for the status quo rather than a wrenching change. But Cameron also overestimated his ability to peel back 20 years of newspaper stories about bureaucratic interference from Brussels, of faceless foreign mandarins with opinions on every­thing from the curvature of a banana to whether or not Dairy Milk was chocolate. He failed to account, too, for 12 years of anti-immigration sentiment, fuelled by a combination of a worldwide squeeze in middle incomes and the accession of ten new states to the European Union in 2004.

He misread the situation in part because the outcome of the referendum was decided in sections of the country where political campaigns seldom reach. As one Brexiteer said to me on the night, the Leave argument “won where we always win and where we never compete”. The campaign triumphed in the most forbidding of Conservative fortresses and the safest Labour strongholds.

The biggest Leave majorities came, as one pro-Remain cabinet minister told me, from “people without skin in the game”: homeowners without mortgages and school-leavers without degrees, who felt that the warnings of potential economic woes applied only to other people.

Our MPs, through the constant pressure of casework, are more attuned to the consequences of recession than is often supposed, yet Westminster remains a place where economic insecurity is an abstract idea rather than the defining experience of their life. For journalists, bad news is good news. As one joked after seeing their website traffic figures, “Let’s have a Brexit every year.”

Yet there are people worrying about their jobs in SW1. Labour MPs with small majorities and Ukip in second place fear an early election. Jeremy Corbyn’s aides fear a successful coup. Staffers working for Conservative ministers fear a triumph for the “wrong” candidate in the Tory party’s fight to pick Cameron’s replacement.

But few are truly worried about the consequences of the Brexit vote, particularly not the flavour of Brexit championed by the official campaign, Vote Leave. The full-fat Brexit option is one that promises an end to the uncontrolled immigration of the single market. That would result in, among other things, the demise of the City of London as a global financial centre, the reappearance of a hard border between Northern Ireland and the Republic and less easy holidays on the continent for British tourists.

The consequences of such a change in our relationship with Europe’s other countries have yet to be fully appreciated. The Conservatives are split on free movement, while Yvette Cooper, who is rumoured to have her eyes on a second tilt at the Labour leadership, believes that her party should accept the end of free movement, with all the economic consequences that would have.

Put simply, there is no group in British politics offering a way forward that is both politically deliverable at a European level and not economically ruinous for Britain. That is too horrible to contemplate, let alone discuss with the electorate, so the focus, instead, is on the old internal battles: the left and the right of the Labour Party, the “anyone but Boris” caucus in the Conservative parliamentary party.

The marginalisation of England’s poorest and the obsession with the Westminster game were the forces that powered the vote for Brexit. That triumph has sent the pound plummeting, forced the resignation of the Prime Minister and thrown Labour into crisis. It has emboldened the far right across Europe and has been followed by a series of attacks on Britain’s ethnic minorities. It may yet presage the break-up of the United Kingdom and unravel peace in Northern Ireland. The fruits of ignoring its consequences in favour of the parliamentary game may be bitterer still.

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.

This article first appeared in the 30 June 2016 issue of the New Statesman, The Brexit lies

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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?