Strip out the crazy QE plan and Corbynomics looks mainstream

As the election of Jeremy Corbyn as the next Labour leader draws closer, the focus has rightly been on the impact the decision will have on his party. The fears of the impact of Labour’s electability have been analysed forensically on Disclaimer with a negative overtone here and a more positive one here.

But what will Labour’s economic agenda be on the morning of 13 September? As if to prove the old saying about economists’ ability to have two opposing views on any issue, so far one bunch has come out in favour of his plans and another strongly against.

Usefully the Islington North MP has published an economic manifesto, The Economy in 2020, that sets out both his vision - “to create a balanced economy that ensures workers and government share fairly in the wealth creation process” - a detailed critique of George Osborne’s 2015 Budget, and some specific proposals.

There are five key elements of Corbyn’s proposals:

  • A brake on the Conservatives austerity programme

  • Closing tax loopholes to raise £120bn to spend on the NHS

  • A more progressive tax system i.e. those with the most pay the most

  • Re-nationalisation of key industries such as energy and railways

  • Massive infrastructure investment funded by the Bank of England printing money in what he called the “people’s QE” [quantitative easing].

While it is clearly a left-of-centre manifesto, it is probably best to take them one by one before getting too hot under the collar.

EVERY CHANCELLOR PROMISES TO CLOSE LOOPHOLES

The idea of paying the deficit off more slowly is fairly mainstream. Many serious economists believe the government policy of delivering a balanced budget over the course of this parliament cannot be achieved without serious pain.

When the Conservative-controlled Local Government Association warns of the impact of cuts to council spending of £10bn by 2020 it is clear concern has gone mainstream.

Every Chancellor in living memory has embarked on a crackdown on tax avoidance and evasion. While some have had some success they generally miss their targets, so there’s little controversial here.

Tax policy is the one clear divider between right and left in British politics. Corbyn does not say what tax levels he believes are correct but clearly thinks that a top rate of income tax of 45% is too low. Likewise corporation tax at 18%.

Let’s see what numbers his shadow Chancellor comes up with in 2019 but remember that economist Anthony Atkinson is calling for a progressive tax regime culminating in a top rate of 65%.

Bringing the railways back under state ownership has the support of the majority of the electorate. The network is already publicly owned so taking each franchise as it comes up for renewal should not be too painful.

On the other hand spending billions of pounds paying off shareholders in BG and Centrica and the largely foreign owners of the electricity industry appears to be massive misallocation of resources. A state-owned industry might treat consumers better but would probably be less efficient.

But it is the QE proposal that has caught people’s attention. The country has a major shortfall of existing infrastructure and will have a big bill to meet the needs of a growing population.

The critics have two main worries. The first is that QE or printing money is potentially inflationary as orthodox economics tell us this means there is more cash chasing round after the same volume of goods and services. Secondly, if the government orders its central bank to print money (QE was decided by the monetary policy committee) this will undermine people’s confidence in the latter’s independence which could push up interest rates over the long term as investors worry about politically driven changes to monetary policy.

LONG-TERM INVESTORS ARE CRYING OUT FOR LONG-TERM INVESTMENTS TO MATCH THEIR LIABILITIES

On the first point it is worth remembering that the UK has had QE for six years over which time the Bank of England had created £375bn to buy up government debt in order to push down interest rates. It could be argued that Corbyn’s QE would be more likely to deliver economic benefits than the existing QE that has pushed up asset prices without leading to the hoped-for surge in bank lending.

The second point is trickier. Corbyn is suggesting the creation of a National Investment Bank, which rival candidate Andy Burnham supports. The issue of funding it through QE does risk higher inflation and a weaker pound as Yvette Cooper, another candidate has pointed out. Corbyn is right that QE has benefited the banks but that does not mean a different form of QE is the answer.

The obvious compromise is for the Treasury to finance the infrastructure programme by borrowing money at the current historic low levels of interest. Long-term investors such as pension funds are crying out for long-term investments to match their liabilities.

In March the Debt Management Office sold £1.5bn of 53-year debt at an annual interest rate of 2.6%. Taking on long-term debt that is taken out to fund infrastructure that will deliver long-term benefits is compatible with reducing the deficit in day-to-day spending.

So cut the QE idea and a package of infrastructure investment, renationalising the railways, closing tax loopholes and ensuring that the rich pay a fairer share of the tax bill could be both economically sound and a vote winner.

More about the author

About the author

Phil has run Clarity Economics, a London-based consultancy, since 2007 and, before that, was Economics Correspondent at The Independent.

Phil won feature writer of the year Work Foundation Work World media awards in 2009, and was commended by the Royal Statistical Society in 2007.

He is the author of Brilliant Economics and The Great Economists.

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