Oh! Jeremy Corbyn

Whether you’re chanting it from a tent in Glastonbury, or howling it at Radio 4 in despair, the name Jeremy Corbyn tends to incite some rather impassioned reactions.

Some believe that, if he made it into No.10 Downing Street, Mr Corbyn’s bold new policies will usher in a more equal society, while others worry that his agenda will bankrupt the nation and drive businesses from these shores in droves. After extensive analysis, we feel both are likely to be wrong. But there are a few risks. A Corbyn-led government would polarise people, and they are the ones who influence investments. 

It’s hard finding a precedent of a hard-left government coming to power anywhere in the advanced world over the past 30 years. There have been plenty of left-leaning centrist governments, but they made no noticeable difference to share markets or bond yields. If we go back a little further, however, we find one potential case: in 1981 Francois Mitterrand came to power in France touting an economic programme distilled from an alliance of socialist and communist parties. All those policies that stir fear in capitalists were there: a wealth tax, significant expansion of the welfare state, a 10% uplift in the minimum wage, an extra week’s holiday and the start of enforced annual pay negotiations between unions and industry. He also went on a buying spree, nationalising an astonishing number of companies. By the end of his first year as president, the government owned 12 conglomerates, 36 banks and 2 financial services businesses, representing 8% of GDP.

The markets hated it. The stock market tanked: just five weeks after the election, the French index had fallen 35% relative to global equities. Government bond spreads over bunds widened by 2% almost overnight. At the time the franc was pegged to the German mark under the European Monetary System, a precursor to the euro, but the finance ministry was forced into successive devaluations to stem pressure on its foreign exchange reserves from capital outflows. Now, this financial weakness regulated itself in a way that would make an economics professor blush with pride. Higher yields and a weaker currency attracted foreign capital, with money pouring in from 1982 onward. And the stock market actually recovered from its post-election slump, recouping its relative underperformance within eight months, even as Mr Mitterrand rolled out his left-wing agenda.

It’s important to note, too, that Mr Mitterrand’s policies became more centrist as idealism buckled under the heavy weight of economic reality. It hit breaking point in 1983. With money getting tighter the French government unveiled austerity measures: slashing state spending, raising taxes on workers and consumption, and reducing business charges. The former communists were silenced and a new centrist economic consensus prevailed within Mr Mitterrand’s government, driven by his minister of finance.

Labour’s manifesto: Bolshevik or bluster?

For all the furore over the spectre of a Corbyn government, the 2017 manifesto is not as radical as it is sometimes portrayed – and nowhere near as leftist as Mr Mitterrand’s 110 Propositions from 1981.

Council tax will be redesigned to reflect current land values so that poorer homeowners do not pay disproportionately more tax on their homes, but this is small fry and there are no sizeable taxes on wealth, property or inheritance. There are populist nods to workers such as extra bank holidays and a freeze on the state retirement age, but no revolution on workers’ rights. The higher minimum wage is quite radical, but the Conservatives have committed to a very large increase too. Of course, there’s the nationalisation of the water companies, the National Grid and Royal Mail, which would likely prove costly, but they aren’t a major affront to free market economics because they are monopoly industries.

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 also poses a risk. The microeconomic consequences would likely lower GDP as higher taxation alters the attitudes of firms and households toward saving, spending and investing. The impact of nationalisation on total economy productivity is also a matter of considerable concern, especially if it deters 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. 

Edward Smith

Rathbones Head of Asset Allocation Research

About Rathbone Investment Management

Rathbone Brothers Plc, through its subsidiaries, is a leading provider of high-quality, personalised investment and wealth management services for private clients, charities and trustees. This includes discretionary investment management, unit trusts, financial planning, trust and company management and banking services.

As at 31 December 2017, Rathbones managed £39.1 billion of client funds, of which £33.8bn were managed by Rathbone Investment Management.

The Cambridge office has been open for approaching 17 years, providing a local, personal service for the region.  The team now manages £500 million of client funds and is headed up by Mark Winchester, Regional Director.