• The Invisible Hand

Election Special: Labour

This article examines the economic policies of the Labour Party before the UK General Election on the 12th December 2019. There will be a new article each day of the next week so please subscribe for updates.


Election coverage tends to treat economic policy as a separate affair from the NHS, Brexit and the environment. However, economics links all of these policies together and therefore economics must be the driving factor behind anybody's vote. Economics looks at welfare and how to maximise our living standards and that is fundamentally the most important consideration for any voter. Keep on reading to learn more about each party's specific policies...


Front and centre of Labour's manifesto is their idea for a new green industrial revolution. The climate issue seems to have really risen to prominence in this election. It is debated much more now, but it still seems far from the most important factor for the majority of voters. Jeremy Corbyn was not an early adopter of the climate change message but it seems he has pragmatically engaged with the issue.


Labour like with most problems have decided that the best solution to the problem is money, money and more money. It is right to be ambitious about climate change but a 2030s target is totally unrealistic for net zero. Independent groups have set the 2050 target and even this is unlikely to be attainable under current levels of consumption. Furthermore, Labour's claims would be much more credible if this embraced nuclear power and fracking as these can be some of the most carbon efficient methods of energy production. Nevertheless, Labour plans to achieve this by planting 2 billion trees by 2040, investing heavily in new solar, tidal and wind and introducing a windfall tax on oil firms. None of these plans are individually not credible and Labour has clearly thought hard about their policies and created some clear and innovative ideas. However, they cannot achieve their climate target, but nothing short of going to a hunter-gather society can.


Labour have also decided to create a £400bn national transformation fund of which all investments have to comply to strict environmental criteria. £250bn of this fund is dedicated to energy, transport and the environment while £150bn is allocated to schools, hospitals and housing. The idea of large scale investment is appealing because the UK has persistently lagged behind other countries. However to tackle our productivity deficit Labour should have concentrated more on transport infrastructure and R&D. Their idea for free broadband is a modern and forward-looking policy which would be effective at improving productivity. Sometimes when technology like broadband exists it takes too long for it to spread via the private sector, so many people could benefit if the government can do this, probably decades before it would occur otherwise. Productivity is the biggest problem for our economy and the private sector cannot invest in the public goods which are necessary to fix this problem. If the government can improve productivity there can be big payoffs since government tax receipts would surge.


Accompanying this investment Labour have made plans for significant nationalisation. While this level of investment is vital, nationalisation is not. In recent years nationalisation seems to have become a sort of curse word in politics associated with the 'loony left'. Perhaps it is because the last major nationalisation was of British Leyland in the 1970s, therefore, it has never been in the political sphere. At face value nationalisation sounds extremely expensive, however, it differs in several important ways from ordinary spending so comparing them is misleading. If the government spends £10bn on the NHS or on building bridges, they do not get this money back as the services which are being offered are provided for free. However, a nationalised railway company would generate revenue for the government on an annual basis, so in net terms is costs less. Ownership of a company is also an asset. This means that it could be sold at a later date. For example, in ten years the government could sell the railway company. There is no guarantee of the price, however, the government might even profit if it has gone up in value. Often it is better to look at the government's net asset position than its budget deficit as this better reflects the wealth of the government. Therefore, Labour plans for nationalisation may not be massively costly and in some areas of natural monopoly they could generate efficiency savings and lead to lower prices for consumers.


Despite these progressive investment plans Labour have still made a few crucial flaws in their strategy. Notably in pensions and taxation. They have pledged to resist the changes to the retirement age which are already fairly moderate. We need a much higher pension age (approximately 70) to support an ageing population and sustain the government's finances. Lowering pension costs could be a key saving for the Labour Party and it is disappointing to see that they are not seizing this opportunity.


They have also failed to provide an adequate means for affording their policies via taxation. It is justifiable for the UK to have a higher corporation tax rate given that the only comparable countries are the small states of Switzerland and Singapore. Approximately 25% is much more inline with the European average. However, there should not be such a top heavy income tax system as Labour have proposed. It can distort incentives and it seems morally wrong to tax the most successful people such as doctors, lawyers and other professionals. Instead the government should borrow to fund investment and find savings in pensions and defence. Therefore, it also disappointing to discover that Labour plans to maintain spending 2% of GDP on the military. This should be halved to 1% which is the level Japan has maintained for many years despite being in a much more volatile region in the world. Spain only spends 0.7% of GDP on defence. We must accept that Britain is not and does not need to be a global power. We do not need widespread global military operations and the whole structure of the military should be refocused. In his heart Jeremy Corbyn would like nothing more than to do this, but he has sold out and made a pragmatic judgement.


Overall, some of the Labour pledges were pleasing to hear about and they have the biggest plans to tackle the productivity problem. However, they have found the wrong ways to fund these policies and have descended too far down the ideological path of nationalisation. Labour did not need to be so radical and they probably would have performed much better if they had been more moderate and strained the top 5% much less.



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