Taxes

The Economic Risk Of A Very Left Wing Labour

Thursday, December 12 2019 will be an election day in the U.K. that has echoes of 1979. That year was marked by Margaret Thatcher coming to power in May.

Her Conservative government swept into power to reverse the militancy of the trade unions whose frequent strike action led to rubbish bags piled up in the streets and dead left unburied during the “Winter of Discontent”.

The strikes were a result of the Labour government trying to contain inflation by abandoning their social contract with the unions. They imposed rules on the public sector that pay rises be kept below 5%, to control inflation.

Data from the Office For Budget Responsibility shows the budget deficit during the tenure of the then-prime minister James Callaghan ran between -6.5% and -4.0% of GDP. Such was the weak state of U.K. finances that in 1976 the Labour government had been forced to borrow $3.9 billion ($17.5 billion in 2019 Dollars) from the International Monetary Fund (IMF). This at the time was the largest loan to have been requested from the IMF.

A return to the 1970’s?

Could the nation be willing to go back to those unionised days of despair?

The economic agenda that has been proposed in Labour’s manifesto is going to be costly. The plan to seize 10% of UK firms and transfer those shares to employees has been judged to cause a hit to the economy worth £67 billion ($86.4 billion), in research carried out by the Centre for Economics and Business Research (CEBR). Under the Labour plan, 10% of every UK company with more than 250 staff would be transferred into an employee owned fund. The Government would then take any dividend paid above £500 ($645) per employee.

Officials at the CEBR have warned that the economy will suffer and rather that Labour’s plans under Jeremy Corbyn and John McDonnel boosting economic growth the level of output could be 3.1% smaller in 20 years’ time as a direct result of the policy. The lost GDP would also include investment spending by businesses, forecast to be lower by 28% and would see the revenue collected as corporation tax fall by £25 billion ($36 billion).

The plan has been regarded as more economically damaging than the 1970’s ambition of Labour’s Tony Benn to nationalise the UK’s 100 biggest companies.

The forecast came as Brexit uncertainty damaged the UK economy which grew 0.3% in the third quarter of 2019. This marked a recovery from a 0.2% contraction in the previous three-month period, however, it missed market expectations of a 0.4% expansion. The service and construction sectors provided positive contributions to GDP growth, while output in the production sector was flat.

Corbyn’s confusing Brexit

If the issue were not so serious it would be comical. Jeremy Corbyn insists that within three-months of taking office his team could negotiate a new Brexit deal which the party would put back to the people of the U.K. alongside the option of remain.

Who would be on the team he would dispatch to Brussels? The shadow cabinet members Chancellor, John McDonnell, Foreign Secretary, Emily Thornberry and Brexit Secretary, Sir Kier Starmer would be the obvious choices, given the Labour leader cannot decide. However, they are all active “remainers”. How can the British public have any confidence that the EU would offer a good deal, when that institution would much prefer the U.K. remain.

In such a case, the U.K. would face a total of six months, at the very best, of more confusion, debate and dither. All the while denying U.K. business any certainty as to how it should plan for the future.

Economic challenges

The British economy certainly faces a multitude of challenges regarding inequality, productivity and a financial skew.

The Equality Trust reports that the majority of households in the U.K. have disposable incomes below the mean income, £34,200 as of 2018 ($44,460)). This includes wages and cash benefits, and is after direct taxes but not indirect taxes like VAT. The median income has been rising by 2.2% on average for the last five years. Most of this is accounted for by the rise in average income for the richest fifth, which has increased by 4.7%. The poorest fifth, on the other hand, have seen a fall in income by 1.6%.

Labour productivity in the UK, as measured by output per hour, increased 0.3% quarter-on-quarter in the three months to September 2019. The productivity index stood at 101.3 cf. 107.5 in the U.S. and 105.2 in the euro zone

The issue of “financial skew” addresses the fact that 80% of financial sector activity drives other forms of finance, insurance and real estate rather than the productive capacity of the manufacturing economy. (Source: CEBR).

This economy is growing through private debt-fuelled consumption.  Households debt in the U.K. runs at 86.60% of GDP in 2019. Higher than in 2017, although down from last year.

If change is needed one may say at least Labour are being radical, and a watered-down version might shift the needle of the nation’s economic structure. The trouble with the Labour program is the short-term cost and whether it will create long-term growth and profit opportunities?

The doubling of 2017’s already ambitious borrowing and taxation is an aggressive socialist wish list of raw red radicalism. However, the Institute of Fiscal Studies (IFS) has branded the plan as not being credible as the public sector lacks the capacity to expand as far as Labour would like in the time frame they suggest. (Note the IFS were highly critical of Conservative plans as well).

The spending would be out of control with public debt soaring by more than the three-fold increase seen under the Blair/Brown era of 1997 to 2010

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