Corbynomics Stalks Contest to Be Britain’s Next Prime Minister
Central to the ongoing battle to find Britain’s next prime minister is the man the winner will have to face: Jeremy Corbyn, the hard-left leader of the opposition Labour Party.
Boris Johnson, the front-runner to lead the Conservative Party, and thus the country, has called Corbyn the biggest threat facing the U.K., an admirer of the marxist Venezuela created by Hugo Chavez. Johnson’s rival, Jeremy Hunt, says the Conservatives risk losing power to a “dangerous” Corbyn if a general election is held before Britain leaves the European Union.
While the next election is only scheduled for 2022, a ballot could be triggered if Johnson becomes prime minister and a no-confidence vote is then brought by lawmakers determined to stop a no-deal Brexit. Backers of his campaign are said to be war-gaming an early election within months.
To his opponents, Corbyn would take country back to the 1970s, when Labour governments pushed up spending and the country was labeled the “sick man of Europe.” His supporters see him as someone trying to restore morality to politics with a mission to help the victims of austerity and profit-hungry corporations.
Corbyn’s blueprint, which includes a National Investment Bank and forcing big companies to hand over 10% of their equity to worker-owned funds, was laid out before the 2017 general election and much of it remains intact. Conservatives have long criticized Labour for overspending, though both Johnson and Hunt have come under fire this week for their own spending promises.
Labour promised to raise almost 50 billion pounds ($63 billion) to fund its commitments, with companies and top earners bearing the brunt. Tax on corporate profits, set to fall to 17% next year under Tory plans, would rise steadily to 26% if Labour takes office; a 50% tax rate would be reinstated for incomes above 123,000 pounds; and an “excessive pay levy” would hit firms that pay employees 330,000 pounds a year or more. Shadow Chancellor John McDonnell confirmed this week that Labour is also considering a tax raid on inherited wealth.
That would still leave the overall tax burden at less than 40%, below countries including Germany and France. Public opinion may be more in tune with Corbyn than with the two Conservatives leadership candidates, who have promised hefty tax cuts in their bids for power. A survey by the National Centre for Social Research last year found a majority of people were in favor of taxing and spending more.
Labour wants to unpick the privatizations since the 1980s by taking control over the energy, water and rail industries, plus the postal service. The proposal has hit the market value of companies including Severn Trent Plc and National Grid Plc and raised fears that billions of pounds of debt could be added to an already stretched national balance sheet. Labour says the cost of the borrowing would be covered by the profits from the industries.
Elchin Mammadov of Bloomberg Intelligence puts the cost of nationalizing the water, power and gas networks at 141 billion pounds -- 49 billion pounds to buy out equity holders and 92 billion pounds in debt taken on by the government. Compensation would likely be based on book value rather than market value, denying investors any premium over the worth of the companies’ assets.
Corbyn is prepared to borrow to invest in transport, energy, communications, science and housing, with plans to increase capital spending by 250 billion pounds over a decade. If delivered, it would take net investment to a level not sustained since the 1970s.
But it also means adding 25 billion pounds a year to the budget deficit. With Labour also proposing to plow extra resources into schools, health care, pay and welfare, overall public spending would rise to around 41% of GDP -- its highest since the mid-1980s, excluding the years after the financial crisis.
Controversy surrounds Labour plans to slap rent controls on private landlords. London Mayor Sadiq Khan is already urging the government to let him experiment in the British capital, where rent claims a larger share of wages than in any other part of the country. Critics say controls lead landlords to skimp on repairs and damage housing supply.
Meanwhile, a surge in house prices, especially in London, has dashed the hopes of a generation of aspiring homeowners. Labour is pledging to tackle the crisis with 1 million “genuinely affordable” homes over 10 years and suggested giving the Bank of England an explicit target for house-price inflation.
The promise of renewed central bank stimulus is driving down bond yields worldwide. The U.K. can currently borrow for 10 years for less than 0.7%, the cheapest rate since the aftermath of the Brexit referendum in 2016.
But the market has yet to price in a Corbyn government, which would need to borrow heavily to fund its program.
Huw Worthington of Bloomberg Intelligence says foreign investors, and possibly U.K. ones, could be expected to flee gilts at the prospect of a Labour administration. Overseas buyers have been key supporters of the securities, adding more than 150 billion pounds of holdings since the start of 2015.
©2019 Bloomberg L.P.