Friday, March 23, 2018
The prospect of a radical Labour government
Peter Stanyer writes:
'A further apparent threat to UK private investors’ wealth is political and arises from the extent of support for the newly radicalised Labour Party. This can seem a parochial UK concern'
Peter Stanyer is co-author with Professor Stephen Satchell of The Economist Guide to Investment Strategy, 4th edition, Profile Books, 2018. Peter is independent economic consultant to the Financial Planning Corporation LLP. The views expressed are his own personal views, and do not constitute advice to buy, sell or hold any investment.
The Labour Party and the rise to dominance of its socialist wing, propelled by the Momentum group and public sector trade unions, is a far cry from the centrist Labour Party of Tony Blair and Gordon Brown. This shift to mass-movement socialism may in time be judged part of the wider populist shift away from the political establishment in a range of western democracies, but what matters for UK investors is whether this represents a real threat to their wealth and future income.
Today’s Labour party is both old-fashioned in its policy prescriptions and very modern in its social media campaigning methods. The opinion polls currently point to a hung parliament if an election was to be held today – though the experience of the June 2017 election, with its evaporation of the Conservatives’ lead in opinion polls, reminds us that political fortunes can change quickly.
A plausible outcome appears to be the Labour Party governing with the support of the Scottish nationalists. In essence, the wedge of SNP seats in Parliament (possibly a growing wedge) makes it an uphill task for Labour to muster sufficient English and Welsh MPs to win an outright majority at the next general election, scheduled to be held in May 2022. Four years, though, is a very long time in politics.
The election of a majority Labour government would represent a break from the market-oriented consensus economic and financial policies pursued by governments in recent decades. The Labour Party’s policy proposals are presented as if they are mainstream, often being compared to policies already pursued elsewhere in Europe, with apparent backpedaling on vote-risking policies such as a wealth tax, which has parallels in other countries, even if they seem to be a natural fit for today’s Labour Party.
At this stage any assessment is inevitably broad brush. Announced policies include a proposal for a National Investment Bank, higher income tax rates for high earners, higher capital gains tax rates (alignment with income tax rates would be an obvious change), higher corporation tax rates and unspecified ending of some tax reliefs, as well as a major boost for social housing and infrastructure spending.
Other policies include taking into public ownership rail, water and energy companies, as well as Royal Mail; and renegotiating PFI contracts, including NHS services outsourced to private providers. The consequences of these changes will be impacted by the terms on which existing investors and business counterparties are compensated and their impact on funding the national debt.
In aggregate the attitude of the Labour Party to the role of personal incentives, its more relaxed approach to government borrowing and public sector fiscal discipline suggest more general causes for concern.
Investors will need to decide whether and how to anticipate a possible Labour government before they know whether Labour will form the next government. If it does win a majority in Parliament, it seems likely that sterling would depreciate, conventional gilt yields would increase and with it expected inflation (while index-linked gilts might perform well).
There might also be something of a flight to liquidity by wealthy investors, not least because a radical Labour government would be expected to impose a scale of tax demands on those with high incomes and material wealth which would be a clear break from the past.
Private client cash flow plans and projections would need reassessing and cash reserves are likely to be at a premium.
Overseas assets would benefit from sterling devaluation, but investors with the bulk of their wealth in UK property (or other illiquid investments) could find cash difficult to realise. Quite soon, it might be evident that those private investors who are rich in illiquid assets but cash poor would be disadvantaged by the need to meet new tax demands, both on earnings and on assets.