Oh! Jeremy Corbyn: a case of straws and camels’ backs

Although Labour’s manifesto contains no single policy that could be labelled radically hard left, the cumulative impact of higher wages, higher taxes and renationalisation could be a significant drag on economic growth. But the increase in spending on infrastructure could improve the outlook too.

In this final instalment of our three-part Oh! Jeremy Corbyn series, we conclude our look at some of the key features of Labour’s manifesto. This time the focus is on plans for renationalisation and infrastructure spending, and we finish with an overall assessment of the potential impact on the UK economy.

The infrastructure card

Labour’s plans for increased infrastructure spending could have a large positive economic impact. The party’s manifesto sets out a significant package of £250 billion in investment over 10 years, as well as plans to set up a National Investment Bank financing a further £250 billion of private sector investments in public infrastructure. This equates to a 50% increase in government capital spending. Initially, the programme would require extra borrowing, but Labour believes that it too could lower the national debt relative to the size of the economy and even commit to another ‘fiscal rule’ that mandates them to do so over the course of the next parliament.

Countless papers from mainstream economists, think tanks and consultants published since the financial crisis have advocated greater UK investment in public sector infrastructure. Although it may sound counterintuitive it is very possible, if not probable, that borrowing money at record-low interest rates today could lower the ratio of national debt relative to GDP tomorrow if it is invested in infrastructure – and it’s the ratio that’s important to debt sustainability. Faster railways, wider broadband coverage and so on should raise the productive potential of the economy and therefore increase future tax revenues required to pay back debt.

Nationalisation: Populism over profits?

The haziest part of the manifesto is the uncosted commitment to renationalising utility, mail and rail companies. A back of the envelope calculation based on current market capitalisations suggests that this would cost more than £100 billion. That would render any early reduction in national debt all but impossible and could well cause Labour to break its own fiscal rule. Although the government would be acquiring cash-generating assets to offset the new liabilities, the ability of the civil service to manage them productively is a serious concern (until recently, most government departments couldn’t even measure their productivity!).

McDonnell has claimed that Labour’s nationalisations would be costless over the long term. Theoretically, this is possible, and they could increase investment, assuming they can generate as much free cash flow as the old privatised ones. However, if that’s not too big an assumption already, McDonnell also wants to cut bills, and that could turn profitable utilities into loss-making ones. When this happens, as Mitterrand found out to his detriment (see the first entry in our blog series), politicians must choose between the jobs, wages and pensions of employees and investing to ensure a profitable future. The question is, will politicians be less short-termist and self-serving than the average person?

Adding it all up

Assessing the potential impact of Labour’s policies on UK GDP over five or 10 years is difficult. Oxford Economics and Capital Economics both conclude that ending the fiscal squeeze by investing in infrastructure is most likely to lead to higher growth within this Parliament. Although four new bank holidays would exert a significant effect in the opposite direction, and the bold increase in minimum wages (see our previous blog) also poses a risk. Higher taxation and nationalisation could also exert a negative influence, especially if they deter future direct investment from overseas.

As for the UK’s government borrowing, Oxford Economics estimates that national debt would be around 6% of GDP higher by 2020 (including nationalisations) under a Corbyn government, and the UK debt ratio an estimated 95%, still well within the better half of developed countries. Even if tax shortfalls from Labour’s plan are made up with higher borrowing, it is difficult to envisage the total debt ratio approaching anything like that of France or Japan, neither of which pay a risk premium to access the bond market.

So, for all the bluster, there is no major policy that is radically hard left, and no single policy that should make capital head for the hills. But it may be a case of straws and camels’ backs. Modestly higher taxes, modestly higher interest rates, significantly higher minimum wages and the threat of nationalisation all add up. And with the threat of Brexit still clouding the horizon, it may be one disincentive too many.

For more detail on our views about the potential economic impact of a Jeremy Corbyn-led government, you can read the full report, Oh! Jeremy Corbyn on our website, or request a copy from your sales representative.