John McDonnell’s radical economic agenda would risk empowering a new set of “unaccountable elites”, says Lord Mandelson, Former Business Secretary and First Secretary of State, in the Foreword to a major new Policy Exchange report, published on Monday, which examines in detail what McDonnell would aim to achieve as Chancellor. Lord Mandelson warns that a Corbyn/McDonnell government would “reassert the statist mindset that New Labour disavowed” and that “there is almost no area of policy to be left untouched by Corbyn’s and McDonnell’s ‘transforming’ hand.”
McDonnellomics: How Labour’s economic agenda would transform the UK [see draft, with Mandelson Foreword, attached] is the most thorough examination so far of the Shadow Chancellor’s policy approach and inspiration, rooted in a 1970s Bennite socialist political tradition. Based on a wide-ranging analysis of Labour’s published plans, academic papers and interviews, it finds that McDonnellomics would represent the biggest shift in UK economic policy since the advent of Thatcherism. Even after a short period under a Labour government with John McDonnell as Chancellor, the paper concludes, the British economy would be less resistant to shocks, with a more concentrated and volatile tax base, less flexible labour market and lower investor confidence.
Analysis by Policy Exchange shows that:
- McDonnellomics would represent the biggest shift in UK economic policy since the advent of Thatcherism.
- Concentrating the UK’s tax base further on corporations and the highest earners would increase volatility of revenues, making it difficult for the government to plan ahead.
- Changing the structure of private company boards and their shareholdings and nationalising industries would result in complex bureaucratic tiers of control that would hinder the effective management of companies, industries and their economic assets.
- Proposals for financial services, including the introduction of a financial transactions tax, could lead to a significant contraction in a sector which supports 1.1 million jobs and £29 billion of tax revenue. Financial services operate in a highly competitive international market and a deliberate increase in transaction costs would be a gift to financial centres outside of the UK such as New York, Tokyo and other centres in Asia.
- Proposed changes to employment law and industrial relations law would raise the cost of employment and make the labour market less flexible.
- If Parliament were to compensate shareholders, largely pension funds, for the acquisition of their assets by the state at below a fair market valuation, there would be significant scope for legal action against the government as well as significant damage to the UK’s reputation as a safe place to invest.
- This would have malign implications for the future relative cost of capital in the UK, raising UK risk premiums.
Policy Exchange’s Head of Economics, Warwick Lightfoot, said:
“John McDonnell has set out a highly ambitious policy agenda in terms of increases in public spending, taxation, nationalisation, modifications to property rights and employment and industrial relations law. Policy Exchange’s research shows that this economic experiment – ushering in the greatest shift in economic policy since the advent of Thatcherism – would, over time, have a radical and transformational impact on the UK’s economy. But there is much more doubt about how it would benefit UK businesses and employees.
“In particular, nationalisations and the proposed Inclusive Ownership Funds would be transformational for the current owners of those companies. But it is doubtful that these policies would be beneficial for ordinary people’s lives. ‘Democratisation’ of the type McDonnell proposes would in effect be bureaucratisation, adding inefficient layers of management and quasi-state control. The main effect of the changing shareholding would be to increase the taxation of corporations.
“Any proceeds from nationalisation will be needed to cover debt interest payments incurred by paying for these assets. Transforming entire industries from top to bottom will not be cost free. By the time all of that is taken into account, how much will there be left for lowering customers’ bills, increasing the pay of the lowest paid employees, investing in infrastructure and improving service quality? Nationalising those industries is therefore unlikely to improve their performance yet will require expensive future taxpayer support.
“The full impact of the macro-economic and micro-economic consequences of this radical reshaping of economic policy and the structure of the economy will have a profound effect on the UK’s economic performance. Given the potential scale of Labour’s ambitions, the supply performance of the UK economy might in the long-term be constrained with potential malign implications for the future trend rate of growth.”
Please contact Will Heaven (by email or on 07815 953132) and Amy Gray (07776 124660) if you have queries.