Labour’s manifesto is no ‘revolution’, but radical enough to skew economic risks to the downside.
Following 2018’s article “Oh! Jeremy Corbyn: in search of a hard-left precedent” and on the cusp of another general election, Ed Smith of Rathbones examines the implications of Labour’s “radical” manifesto.
This time it really is ‘radical’
In our opinion, Labour’s 2017 manifesto was not radical. Populist? Sure. Leftist? Absolutely, although actually no more so than Neil Kinnock’s final manifesto in 1992. But radical? Not really.
In fact, our analysis concluded that there was no one policy that alone should have made capital run for the hills, although we did worry about a case of straws and camels’ backs.
The 2019 manifesto has tacked even further to the left. There’s more nationalisation, the forced transfer of shares to workers, a promise to transition to a 32-hour working week with no loss of pay, and an enormous increase in spending and taxation. Although there is still no revolution of the way that income, wealth and property are taxed, this year’s manifesto is undeniably radical.
We’ve tried very hard to suppress any political bias while writing this. Any analysis that doesn’t isn’t worth the paper it’s written on. In fact, let’s summarise the manifesto via an economic production function: the idea that economic growth is a function of the quantity and quality of labour (also known as human capital), the stock of invested capital (everything from factories and tractors to broadband cables and computers), and the technological and organisational knowhow that interacts with them (what we call productivity). Too many pages of Labour’s manifesto can be summed up as: good intentions, iffy design.
Here are our views in brief on the most controversial elements of Labour’s manifesto (you can read more on these in the full report, attached, or the summary report):
The four-day work week: Plenty of firm-specific studies report positive effects from shorter hours. But a large proportion of these studies suggest that the threshold above which more working hours may be counter-productive lies somewhat above 32 hours.
Increasing the minimum wage: For firms, the effects of a rapid increase in wages could probably be managed by some combination of lower profits, lower non-wage benefits and price hikes, without cutting jobs. Past experience suggests a larger role for price hikes, but 1970s-style stagflation is very unlikely.
Transferring power to workers: Labour wants to give workers seats on boards and force companies to transfer shares to workers. Dilution is never good for existing shareholders, but it also happens, for example, through exorbitant executive pay. The glaring flaw is that it would also be a big disincentive to headquarter in the UK.
The infrastructure card: Labour’s plans for increased infrastructure spending could be very positive, by raising the productive capacity of the economy. But the high target for investment could lead to waste and misallocation.
Nationalisation: Labour’s nationalisation agenda has grown bolder since its 2017 manifesto, but also less justifiable. Claims that this would be “costless”, alongside promises to cut bills, are not credible. Although, controversially, we do actually think the plans are “affordable”. Loss of business confidence and higher risk premiums for UK stocks would be likely.
Could this actually happen?
At the time of writing, the betting markets suggest just a 3% chance of a Labour majority, and there is a 14-point gap between Labour and the Conservatives in the average of the last five polls. However, the Conservatives had a 17-point lead at this point before the 2017 election, and in the end they didn’t get a majority.
Financial markets are not sending a clear signal about Labour’s chances. The pound has rallied strongly as the Conservatives’ lead extended, but the historical correlation is non-existent and the rally is unlikely to have been driven by the polls. Indeed, although the rally coincided with the Brexit extension granted by the EU, it can actually be explained largely by the return of “risk-on” sentiment in global financial markets across the board – in other words neither Brexit news nor the polls were the major driving force.
Where would the pound trade if Jeremy Corbyn were to get the keys to No 10? We are highly sceptical of any short-term currency forecasts, especially when they involve unprecedented political scenarios. But the way to approach it involves first adjusting the exchange rate up for the near guarantee of either a customs union Brexit or no Brexit at all. Using our Behavioural Equilibrium framework, our long-term target is around $1.55 in the case of the former, 20c higher still in the case of the latter. Only then should we adjust it back down for the risks to business confidence, investment and the long-term effects on Britain’s productivity and savings profile.
We suspect the market will place more emphasis on the downside risks. This could takes us back to around $1.00-$1.25. Of course, currency markets have a tendency to overreact, but the downside in the event of a Labour minority government aided by the Lib Dems may not be much at all. Remember that the French franc staged a 25% rally in 1983 when François Mitterrand moderated his policies just a little.
Ed Smith is head of asset allocation research at Rathbones.