The chorus from business is now deafening: "give us certainty on energy policy and low carbon investment"

Businesses need to know what will happen in the future, writes RenewablesUK's Maf Smith. A government in turmoil can't provide that.

Government traditionally likes to avoid picking winners. Individual businesses are rightly in competition with each other. This creative tension is what drives our economic success. Such disagreements are why government traditionally goes to great lengths to avoid second guessing the market. 

However, there are some areas of the economy, like our energy infrastructure, where government has to stay at the table. Today, most politicians will agree that there are market failures in our energy system, and government needs to play a role to solve our so called “energy trilemma”: making sure that the lights stay on, ensuring we have secure sources of energy available, while also cutting greenhouse gas emissions. 

But even though government accepts it has a role, it cannot seem to agree on what needs to be done. It’s said that if you ask four different economists about the economy you will get at least five opinions. Right now the same seems to apply when asking UK Government Ministers their view on energy policy. The "Quad" of ministers is still debating the issue in the final run-up to the much anticipated Energy Bill. Meanwhile, the industry is reeling from a public disagreement between the Energy Minister John Hayes and Energy Secretary Edward Davey on the future of onshore wind in the UK. This was followed by the revelation that the Conservative MP Chris Heaton-Harris supported an anti-wind campaigner in the Corby by-election when he was supposed to be running the campaign for the official Tory candidate instead. To those of us getting used to the vagaries of political point-scoring in the Coalition, these spats may look like just part and parcel of day to day coalition Government. However, to the investment community (and especially the increasing number of foreign companies looking to invest for the long term in the UK’s supply chain) they can be unsettling.  

That is because, outside of Whitehall, in business, something interesting is happening. As government goes through the final negotiations before publishing the Bill, business opinion is settling on a shared viewpoint. 

Last week, the British Chambers of Commerce published a survey of 3,500 member companies. 90 per cent of them want the Government to ensure that the UK has a diverse energy mix, capable of avoiding future supply problems, and that the UK “must not find itself in a situation where it becomes more dependent on fossil fuels from overseas or on one technology at home”. 

In the same week as the BCC’s intervention, business leaders from prestigious organisations including Unilever, Kingfisher, EDF Energy, Doosan Power Systems, Heathrow Airport, Philips, Anglian Water and Johnson Matthey jointly wrote to the Prime Minister, expressing their concern that "the on-going divergence of views at the heart of government on the future of this sector…is paralysing investment and undermining the UK’s growth prospects". There have been similar letters and statements from companies as diverse as PepsiCo, Aviva, BT and Marks & Spencer. And recently seven of the world’s top energy companies – who employ 17,500 people in the UK alone – wrote to the Chancellor warning of political risk in current energy policy. 

Added to all this is RenewableUK’s own recent membership survey, in which almost two thirds of companies from the wind and marine renewables sector stated that policy was less favourable to the sector than 18 months ago. Despite this, 90 per cent of those organisations still expect to see growth over the next 18 months, showing the immense opportunity that clearer direction from government could unlock, as well as the furthering of the commitment that over 130 wind energy companies made to Britain via the Wind Energy Charter in May this year. 

For example, investment in offshore wind alone rose by 60 per cent last year. By 2020, the wind, wave and tidal energy industries alone are set to employ more than 88,000 people, from apprentices to highly-skilled engineers. That’s the scale of the prize on offer – as long as the all-important policy framework is right. 

The case being put forward by businesses, who are ready to make once in a generation investments into our economy, is based upon evidence and global trends. But we run the risk that these investments could be delayed. 

They hinge on the agreement of the UK Government’s Ministerial "Quad" – Cameron, Clegg, Osborne and Alexander – who are apparently set to meet to discuss energy policy. Over the autumn, business opinion has got firmly behind the view that our electricity sector needs to decarbonise. Such a shift will protect us against future price rises, open up investment in new technology and manufacturing, and support a new cornerstone of our economy – the green economy – which alone has delivered a third of the UK’s total growth in the last year. Sometimes business opinion settles on a realisation that future prosperity lies in a particular direction. Sometimes it is important that Government can agree that too, that’s why this Energy Bill is crucial for the sector.

Workers build an onshore wind turbine. Photograph: RenewableUK

Maf Smith is the Deputy Chief Executive of RenewableUK, the professional body for the UK’s wind and marine sectors, with 675 member businesses.

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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?