Among executives it is fashionable to say that if you think Brexit is bad enough, wait until you see what happens when the markets focus on the risk of a Labour government. While I have concerns about the overall fiscal framework of the opposition’s policies, I am not overly concerned by some aspects of a prospective Jeremy Corbyn administration. Indeed, in at least six policy areas, which Corbyn and his shadow chancellor John McDonnell are treating as priorities, businesses and the government need to catch up.
Dealing with Brexit is obviously the most pressing task facing Theresa May’s government. But it remains a matter of grave concern that the UK prime minister has virtually no time for anything else, including the few ideas that the previous Conservative government introduced, such as devolving powers and responsibilities to the urban regions. The Northern Powerhouse and Midlands Engine schemes now receive almost no attention.
The first area on which Labour sees clearly is Britain’s productivity crisis. For all the apparent self-inflicted damage caused by Brexit, improving wage growth will be considerably more challenging. The largest estimate for the decline in real gross domestic product following a hard Brexit is about 11 per cent over 15 years. Stark as this sounds, it is still less than the accumulated 15-20 per cent decline stemming from weaker productivity since the 2008 financial crisis.
While some of Labour’s ideas, such as imposing a productivity mandate on the Bank of England, are unconventional, their readiness to explore new ways of shaking up the status quo is admirable.
Second is the orthodox belief that lower corporation tax will magically boost investment spending. This is not just a failure of imagination. It is also not backed up by the post-2008 data. In theory, cutting corporation tax should lead to more investment.
And from the 1980s through to 2000, the evidence appeared to back this up. But that was in the days of more rigid labour markets, and a world in which companies could not shift their domicile to minimize taxes.
Modern company structures and practices suggest that the historical forms of corporate taxation are no longer sustainable. We need a tax overhaul to link government revenues to business revenues in the country of sale. Or, at a minimum, we should stop cutting corporation tax to increase profits with little societal gain. Here again, Labour is on the mark.
Third, risking large amounts of money on fixed investment no longer appears attractive. It was once assumed that, when unemployment fell below a certain level, wage growth would accelerate. Yet in an era of flexible labour markets, it has not happened. Reintroducing the unionized pay cartels of the 1970s is not sensible. Shifting the cost and risk of wages, however, is an appropriate thing for governments to do.
Fourth, businesses need to rediscover profit with purpose. Often modern enterprises are driven solely by the aim of maximizing sales revenues, with price/earnings ratios massaged by chipping away at fixed costs in the interests of enhancing quarterly earnings. And of course executive remuneration is directly linked to this. It often has very little connection with investment risk or productivity.
Businesses are seemingly unaware of or indifferent to the consequences of reported profits continuing to rise. Chief executives need to realize that rising profits are, at some point, supposed to make markets more competitive and greater benefits for employees.
Changes to risk-versus-return incentives are needed, and McDonnell is right to explore them. Why not make it less easy for companies to make profits if they are not creating future economic value?
The Labour Party plans to nationalize railways and utilities. That may be a step too far. But we need more from these industries that most people have no choice but to depend on. All they are asking for is that their daily commuter train arrives on time or that their water supply is affordable. Yes, government monopolies were wasteful and inefficient in the bad old days. But that does not make today’s market failures acceptable.
Finally, there is the housing crisis. It is hard not to think that the market is broken. The decline in social housing has greatly contributed to the growth of the low-income rental market. Yet conventional approaches to remedying the problem focus on boosting home ownership, even when this requires a large subsidy, such as the help-to-buy scheme.
Surely we need a market where owning a home is more affordable and in which social housing no longer carries with it a stigma? As with the other challenges of our time, the government likes to brandish solutions (and Mrs May’s pledge on Wednesday of £2 billion for new social homes was certainly welcome), but it rarely explores how to tackle the core supply and demand issues.
There are undoubtedly other serious policy challenges. And it continues to surprise me that the jolt of Brexit has not woken up businesses and those in the centre ground of politics to do more than merely try to reverse the result of the 2016 referendum and keep Britain inside the EU.
Dealing with the UK’s deep-seated economic problems requires sustained thinking and attention, not just occasional lip service. The Labour Party has stepped into the vacuum left by the government and appears to be offering the radical change that people seek.
Jim O’Neill, Chair, Chatham House.
This article was originally published in the Financial Times.