Demise Of The Labour Party

Labour is still a bigger threat to Britain’s economy than Brexit

28 October 2016

Labour is still a bigger threat to Britain’s economy than Brexit


Yesterday, John McDonnell gave a stark warning to the British public about the Government’s upcoming “chaotic breakfast”.

Of course, breakfast – or as McDonnell meant to say, Brexit – does pose challenges for the UK economy in the short term. However, it pales into insignificance when compared to those posed by McDonnell himself.

The fact that there has been little to no scrutiny of the Shadow Chancellor’s plans for the economy is quite understandable. A majority Labour government seems like a very distant prospect.

But we are living through unprecedented times – and it is notable that the bookmakers have not completely written off Labour. Odds on a Labour majority stand at 6/1, which is by no means a “no hoper”. The party is still the official Opposition, and its economic plans still need to be scrutinised carefully – not least given that the implications for the UK economy could be very severe indeed.

At the Centre for Policy Studies, we have analysed Labour’s current commitments in five areas: infrastructure, employment legislation, welfare, tuition fees and shale gas.

The cost of measures in these areas alone is simply enormous. It comes out at £17,500 per family over just one parliamentary term. And, of course, many of the commitments have spending implications that last well beyond five years.


Labour’s centrepiece spending commitment is a £500 billion infrastructure programme. Of this, just £150 billion is set to come from the private sector, while £350 billion is intended to originate from the state. And McDonnell has made his preference clear about the way this should be funded – borrowing.

There are two big reasons to believe that this programme could be a disaster.

First, throwing large amounts of cash at infrastructure is in itself is a highly questionable economic strategy. The UK does, of course, need investment in areas such as airports and broadband. But a vast state-run programme would not have the effects intended.

Where infrastructure investment is set above growth-maximising levels, capital ends up being diverted away from other, more productive, areas.

China, which spends the highest proportion of GDP on infrastructure, has realised this to its detriment: it is now estimated that over half of its infrastructure projects are actually destroying economic value. The same would be true of a similarly massive programme in the UK.

Then, of course, there are the implications for Britain’s debt, and its deficit.

McDonnell’s £350 billion is an enormous sum of money. It is equivalent to around seven times the amount spent on the Armed Forces’ budget. And the interest payments will add to Britain’s structural budget deficit every year – which cannot be wiped away via economic growth.

John McDonnell argues that borrowing while bond yields are trading at record lows (just over 1 per cent) makes sense.

However, today’s record-low bond yields are unlikely to stay for long. Yields have typically been between 2 per cent and 5 per cent in the recent past, and inflationary pressures mean that yields will likely return to these levels by 2020.

If yields return to around 3 per cent, £350 billion of borrowing over the parliamentary term would add £10.5 billion to the UK’s annual structural deficit by 2024/5.

And remarkably, McDonnell’s plans on employment legislation could be even more damaging. He’s seeking a £10 an hour minimum wage by 2020, a ban on zero hours contracts and “French-style” employment legislation.

The problem here is that France has an unemployment rate that is double the level of the UK – and much of this is attributable to its burdensome employment laws, the strictest in the developed world.


HSBC, the IMF and the OECD have all pointed to restrictions on firm-level bargaining along with costly and uncertain dismissal procedures as major reasons why so many French employers are reluctant to offer full-time contracts.


McDonnell’s plans on employment legislation could therefore lead to huge job losses. Under our central scenario – which assumes that unemployment is 1.25 percentage points lower than France’s current unemployment by 2024/5 – 1.3 million jobs would be lost.

Not only would this be devastating for those losing their jobs, but the Treasury would be £10 billion a year worse off by the end of the parliamentary term.

Labour’s anti-business attitude also extends to energy policy, in the shape of its proposed ban on fracking for shale.

Elsewhere on CapX
Celebrate the Industrial Revolution – and the fossil fuels which drove it
The worst thing about Jeremy Corbyn is that he keeps bad ideas alive
Could Britain get a truly liberal party?

Ernst and Young estimate that around 65,000 relatively well paid jobs could be created as a result of the fracking industry – most of which would be based in the north of England, where the majority of Britain’s shale reserves lie.

Jeremy Corbyn’s ban on fracking would kill this job-creation, which could play a role in rebalancing the UK economy away from the south east.

And, of course, the ban on fracking will lead to the UK becoming even more dependent on gas imports (around £9 billion more over the parliamentary term) – some of which, incidentally, will be from US-produced shale. This will add to the UK’s already considerable trade deficit.


Labour has also pledged a series of welfare reforms. That will cost another £4.5 billion over the parliamentary term. And, of course, Corbyn and McDonnell want to abolish tuition fees and reinstate maintenance grants. That would be another £50 billion over the parliamentary term.


The cost of these commitments in just these five areas is mind-blowing. All in all, they would cost every household in the country £17,500 over just one parliamentary term.

This does not even include pledges to nationalise the railways, end private-sector involvement in the NHS or any other spending commitments that may be in the pipeline.

From an outside observer’s perspective, there seems to have been little or no thought put into the fiscal implications of all this spending. Yet this plan for government would cause real chaos for families up and down the country.

It’s quite understandable that we are all preoccupied with the potential impact of Brexit. But we must not ignore Labour’s proposed programme for government in the process.

As it stands, the election of Corbyn and McDonnell is the real threat to our economic security, not the prospect of Brexit.

Daniel Mahoney is head of economic research at the Centre for Policy Studies.


Content retrieved from:

Leave a Reply