HOW WOULD CORBYN'S POLICIES AFFECT THE BRITISH ECONOMY?
We are rapidly approaching the 12thof December, the selected date for the UK general election, which will decide the path British politics will follow through the next few years. This general election comes at a crucial moment for Britain, mainly due to the uncertainty Brexit poses for global politics; in which economic policy plays a crucial role. Boris Johnson has been positioned in first place, with a large difference over the Labour Party. But there are also many other important issues to be discussed in British politics apart from Brexit, which has coped the political and media discourse over the last two years. Economic policy; in an environment of great uncertainty and geo-economic instability, appears to be a crucial part of each party’s electoral programme. Conservatives have shifted towards a more nationalistic right-wing ideology, introducing some protectionist policies, specially aimed at gaining a larger share of the countryside vote and be sure to collect all Brexit Party’s left overs from the European election, which they seem to be doing, according to several polls, as YouGov, MRP or Electoral Calculus.
It is fair to say that I expected this shift in the Conservative Party economic proposals, specially with Boris Johnson leading the Tories, as he has always given an image of being much less cosmopolitan and more in search of peripherical votes than his predecessors. Against this Conservative’s move, Mr Corbyn launched a manifesto through which the Labour Party presented its main proposals, containing detailed economic policies they would like to put forward if the polls give them enough power. It is crystal clear that Jeremy Corbyn is trying to unify the British left towards some socialist economic proposals, that are very similar to those presented in other European countries by the radical left, as Podemos in Spain or Die Linke in Germany, and far away from social democratic parties, as PSOE or SPD. These proposals are also radically different from those of Ed Miliband or Tony Blair. The 2019 Labour Party manifesto contains several points that would pose enormous dangers for the British economy, added to the harmful effects that Brexit is causing and will cause.
The Labour Party manifesto concentrates around six different points, which are crucial in nowadays politics: Tax policy, public services management, housing policy, private firms, Brexit and foreign affairs. Corbyn wants a bigger role for the State to play in all of these areas, with larger public expenditure, greater government control and lower political and economic freedom. I’ll now analyse each of these sections one by one, arguing why these policies won’t have any positive effect for the British economy, and how in an uncertainty scenario as the one Brexit poses nowadays, these interventionist policies will just cause greater socioeconomic unrest.
1) Tax policy:
The Labour Party manifesto clearly expresses Corbyn’s desires to increase tax revenue just by taxing “those at the top”, which seems to be a certainly contradictory phrase, as it is followed by several proposals to increase death duties, introduce a tax on second residences (holiday homes) and even restrict private rents through tax hikes. The Labour Party estimates that the tax on holidays will raise a total of 560 million pounds per year, which seems to be a pretty optimistic estimate, taking into account the severe travel restrictions British citizens will sadly have to face after exiting the EU, on top of those which EU citizens will need to confront to be able to travel to the UK, following Boris Johnson’s desire to impose greater restrictions on EU’s goods and citizen’s mobility. A much more important tribute which Corbyn also wants to increment is the income tax. The Labour Party’s leader has proposed a new income tax rate of 50% for those earning above 125,000 pounds per year, apart from lowering the taxable base threshold of the 45% rate from 150,000 pounds down to 80,000 pounds. On top of it, Corbyn wants to tax capital gains at the same level as income tax and eliminate every type of existing deductions for dividends.
Britain has always characterized itself for being a high added value economy, which attracted very highly skilled workers, wanting to work hard for high wages, which later on went into consumption and investment, generating greater economic growth (with a large productivity component). This won’t be possible with such abusive tax rates, which will possibly cause high added-value jobs in the tertiary sector to go to other countries with similar labour markets, but much more attractive fiscal conditions, as Germany. This human capital outflow will not just reduce the taxable base, but (probably) also have large negative effects on productivity indicators for the tertiary sector.
2) Public services management:
Spending in health services will be increased by 4.3%, according to the manifesto, and dental checks and hospital parking will be made completely free, eliminating some of the financing sources the NHS had to cover its expenses, and substituting them with greater public spending. The Labour Party expects this policy to allow for 27 million more appointments per year, greater health care services and around 4,500 more health workers, as for example, NHS nurses in schools.
Just in case the State wasn’t already controlling citizens life enough with the implementation of a sugar tax, Corbyn has proposed to extend that tribute to milk drinks, to ban fast food restaurants as McDonald’s in streets near schools and to prohibit many junk food advertisements. We could say (with sad irony) that he is a tremendous freedom fighter.
For the production and distribution of generic drugs, the Labour Party proposes the creation and certification of a public pharmaceutical company to produce its own generic drugs, selling them bellow the price of the private version ones. This would completely displace private companies from the market, as many of them have to cover huge investigation costs and have a much lower capital base and resources than the public sector has, which will in the end eliminate private competitors from the drug market, creating a very dangerous public monopoly, by restricting competition indirectly.
Corbyn, following his populist line, has also argued for free university tuition fees and has advocated for the restoration of maintenance grants. On top of it, private schools will be charged higher taxes, and a new “social justice commission” will be created with the aim of controlling even more their teaching curriculums.
Corbyn has shown to be in love with nationalisations several times throughout the last couple of years and has definitely confirmed this hidden romance(which is now an open love), by arguing for the renationalisation of Royal Mail, as well as every previously privatized services in local councils, as rubbish collection or leisure activities. Banks won’t be able to charge commissions directly for using an ATM, as Corbyn will supposedly ban this type of charges, which will possibly just cause other financial services’ commissions to increase, compensating for the higher cost this policy will pose to banks.
3) Housing policy:
As every other radical left leader, and opposed to social democratic parties, Corbyn has proposed rent controls for more than 11 million people who are right now renting in the private sector. This would be done the traditional way, by forcing landlords to cap rent hikes at the inflation rate (CPI), and not taking into account supply and demand fluctuations in the housing market. One of the best housing policies in British History; which incentivized property rights, saving and private individual capitalization, the “Right to Buy” policy developed by Margaret Thatcher, has been planned by Jeremy Corbyn to be completely reversed if he becomes Prime Minister.
As I commented in a previous post (written in Spanish), rent controls have always been a failure, and wherever they’ve been implemented they had pretty similar effects, which consisted in a contraction in the volume of houses for rent, a deterioration of houses available in the market (as the renting price level didn’t compensate for maintenance expenses), and a displacement of new residents out of the market. As it is mentioned in the referenced post (with several relevant analysed data and historical cases), the only plausible solution, according to empirical studies and papers which analyse and study the issue, seems to be a lessening of land use regulations and greater incentives for construction, expanding rental housing supply, and consequently lowering rent prices.
4) Private firms:
One of the most surprising of Labour Party’s manifesto promises has been that of introducing a 32-hour working week along the next 10 years. This will clearly cause a great loss in potential future productivity, which could be incentivized by maintaining the actual working week and just adding technological change to the equation. France showed how reducing the working week by decree below 40/35 hours (depending on the country) generates great productivity slumps, which end up deteriorating working conditions and reducing the purchasing power of workers.
Another innovative proposal has been that of the creation of Inclusive Ownership Funds, which will force large companies to give out 10% of its total capitalization to be owned by its workers, which will receive their respective dividends from the owned shares, up to 500 pounds per year, with the remaining destined to a Climate Apprenticeship Fund, which each firm will manage autonomously. Workers will also take control of one-third of the seats in the executive board, with the goal of propping up wages, and for trade unions to have direct control over the company’s decisions.
It is partial take-over of private firms, promoted and enforced by State authorities, once again far apart from those proposals elaborated by social democratic parties in other countries, and which have resulted to be much more economically rational.
The most popular theme this election will obviously be Brexit. That’s what everybody is speaking about, and the issue around which parties are trying to differentiate themselves. You might have noticed that no two parties have exactly the same position on Brexit. This was clear for example when the Brexit Party presented its programme for the European elections. They wanted to differentiate themselves from the Tories, and what they did was advocating for a no-deal Brexit, not just Brexit by the agreed date- which was what Conservatives proposed- but a Brexit without negotiation with the EU.
In this aspect, Labour have concentrated in differentiating themselves from Liberal Democrats, which proposed stopping Brexit altogether. That’s why Labour had to search for a creative proposal, while keeping in mind that a respectable share of its electorate voted for Brexit in 2016 and could even turn towards Conservatives if Labour rejected Brexit directly. That’s the reason why in the Labour Party manifesto we can read: “Get Brexit sorted in six months by giving people the final say”, which is basically asking for a second referendum in a six months term since the general election. They want to put Boris Johnson’s deal to a second referendum, which will amend or confirm the first one. The possible two options, as the manifesto describes them, will be a “sensible leave” or “remain”. Of course, they don’t waste this opportunity, and introduce their socialist discourse in the Brexit debate by arguing: “One [Brexit deal] that protects jobs, rights and the environment, avoids a hard border in Northern Ireland and protects the Good Friday Agreement and the peace process.”, which in this case sounds much more sensible than what other parties have argued for. And definitely much more adequate, rational and intelligent than a no-deal Brexit.
Finally, they ask for a “close alignment with the Single Market” and take a friendly position towards the customs union. Again, a pretty sensible and intelligent positioning on this.
6) Foreign affairs:
In foreign affairs things won’t change much. Not because the Labour Party hasn’t made proposals in its manifesto, but because many of them seem pretty difficult to implement.
For example, they want to introduce a new Parliamentary Act to prevent the PM from going unilaterally to war without previous agreement and permission of Parliament, apart from proposing auditing Britain’s “colonial legacy” and its impact on the world. They also want to suspend weapons’ sale to Saudi Arabia, to promote human rights, while maintaining its compromise with NATO, and reach the 2%/GDP necessary spending on defence that the NATO agreement enforces.
They end up by asking for a one-time 50,000 pounds subsidy to veterans who survived a nuclear test, to help them develop their lives, and make people conscious of the danger these weapons pose. Finally, they also want to spend “at least” 0.7% of GDP in foreign aid, to promote development and prevent poverty-traps in developing nations. Many academics as William Easterly or the economist Dambisa Moyo, and even this year’s Nobel prize winners, won’t agree with Corbyn in the effectiveness of this measure to palliate poverty.
In conclusion, and as I said at the beginning of this article, many of these proposals are typical of far-left European parties, which are not traditionally associated to the British Labour Party. Mr Corbyn is clearly trying to win votes from all the different sectors of the left by monopolizing that side of the political spectrum. If finally, some of his economic proposals are implemented, Britain will suffer severe productivity and growth contractions along with huge losses in external competitivity. But what could we expect from a political leader who supported Hugo Chavez’s economic model?