New winter of discontent is blowing in
Economists are bracing for a return to the bad old days of the Seventies if Labour secures the right to put ‘scary’ fiscal plans into practice, reports Anna Isaac
The Winter of Discontent, the phrase that summed up economic hardship for a generation, is on people’s lips again following the Labour Party’s annual conference this week. The term, from Shakespeare’s Richard III play, became the shorthand for describing the dire conditions during harsh winter months at the end of 1978 and the beginning of 1979.
Mass pay disputes, contested by trade unions and James Callaghan, Labour prime minister at the time, led to what is believed to be the largest industrial action since the 1926 general strike. Rubbish piled high in the streets and the dead went unburied. It created a lasting image of a country on the edge.
At this year’s Labour conference, a speech calling for a general strike to bring down the Government reportedly won a standing ovation.
Labour’s economic proposals also raised questions about inflationary pressures, one of the driving forces behind the strikes of the late Seventies. Plans for the minimum wage to be raised were mooted, risks to monetary policy laid bare and a greater tax burden for businesses, which companies claim will force them to pass more costs on to consumers.
“I think the reason that people are reaching back to that sort of period is because it’s the only one that gets close to parallels of what we’re seeing now,” says Andrew Goodwin of Oxford Economics. “We’ve never seen any government aim to have such a large fiscal stimulus [as Labour proposes].
“The real difference between now and the Seventies is that we’re in a very different economic situation now. Inflation, the deficit, were on a very different path then.”
The City’s early estimations of a Jeremy Corbyn-led Labour government were summed up by US bank Morgan Stanley as “more scary from an equity perspective than Brexit”. The party presented plans for mass nationalisation, which might cost as much as £176bn, or £6,500 for every household, according to the Centre for Policy Studies. It also suggested forcing the country’s businesses with 250 workers or more to put 10pc of their equity into what has been termed “inclusive ownership funds” – something one investment manager says is “utterly insane” and likely to make “foreign investors run for the hills”.
He adds that either large companies will simply choose to relocate or find creative ways to keep their headcount at 249, “curtailing job growth”. However, even the spectre of what the shadow chancellor termed “sectoral collective bargaining”, which led to such high pay rises that it exacerbated the inflationary problems of the Seventies, was not regarded as the riskiest proposal on the table. Instead, it is policies concerning the Bank of England that have truly disturbed economists.
“We came to the judgment, having run two scenarios where there is ‘Good Labour’ and ‘Bad Labour’,” says Goodwin. “Under ‘Bad Labour’, the outcome we think is more likely, independence [at the Bank of England] would be compromised.”
Losing its independence could leave the Bank unable to push back against the inflationary force unlocked by massive government spending and sharp wage hikes. Prices could rocket, but interest rates, the chief tool of monetary policy, might not be allowed to keep them in check.
Chief among the reasons economists expect a Labour government to threaten the Bank’s independence is the proposal to give the institution a 3pc annual productivity target. The Bank’s Governor, Mark Carney, says it lacks the means to achieve such a goal. This marks the single biggest threat to Labour’s reputation, hard won under Tony Blair, for being economically trustworthy, one senior banker told
‘Labour policies aimed at businesses would impose costs, cause investment jitters and hamper firms’
The Sunday Telegraph. Granting the UK’S central bank independence was Gordon Brown’s first act as Chancellor in 1997 in order to reassure markets.
“As things stand the Bank wouldn’t have the necessary tools to actually try to achieve a productivity target,” says Goodwin. “Therefore I think the tendency would be to try to run monetary policy much looser in order to try to achieve it and that would probably be inflationary and result in a loss of confidence in markets.”
Dr George Buckley, an economist at Nomura, says plans to try to boost productivity are also counterintuitive when considered alongside the full gambit of Labour plans. “Nationalised companies aren’t as productive as private sector companies,” he says. “Much as everyone hates the railways and thinks they’re dreadful, think back to what they were like when they were national companies. [Nationalisation] presents productivity issues.”
Labour’s planned spending could mean the deficit will be higher in a climate of rising interest rates, Buckley notes.
Stephen Martin, director general of the Institute of Directors, says: “The headline Labour policies aimed at businesses would impose costs, cause investment jitters, and hamper firms’ ability to adapt to changing circumstances.” This is likely to result in a further hit to productivity.
However, Martin also points to a notably absent issue in both Jeremy Corbyn and John Mcdonnell’s speeches: how to create an immigration policy fit for a modern UK economy.
At the Conservative Party conference, Martin says, businesses will be looking for the Government to show it understands that some of the biggest barriers to growth are domestic.
“At the top of the list consistently over the past year has been the stubborn issue of skills,” he says.
“Businesses will want to see ministers recognise economic reality and come up with a flexible and responsive immigration system for the future.”
Labour pledged a 60pc reduction in emissions by 2030, and to create 400,000 skilled jobs in the renewables sector. But, like its plans for renationalisation of power and other services, analysts cannot see where the money would come from
The financial institutions of London would be hard hit by Labour’s controversial policies, with economists particularly fearful of the effect on the Bank of England if its independence was revoked