Sunday, October 01, 2017
Lessons in how to wreck an economy
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

This is the way economies descend into chaos and failure. A weak and divided government, out of energy and ideas, capitulates to the most left-wing Labour government in recent times. The difficulties of Brexit are compounded by an anti-business, anti-enterprise agenda.

Two years ago this would have been the stuff of fantasy, a “what if?” scenario that had no chance of becoming reality. Voters, we thought, would never support anything like this. Now, it is becoming a serious possibility.

There is clearly a direct link between Brexit, and the way in which in last year’s vote unfolded, and the fact that Labour could talk confidently at its Brighton conference about forming the next government without being laughed off stage.

Without Boris Johnson and Nigel Farage, we would not be talking about the prospect of Jeremy Corbyn and John McDonnell getting their hands on the levers of power, not so much Little England as Little Venezuela.

Fake news has a lot to answer for, as well as misuse of statistics. But so too do the warnings of an immediate and damaging economic fallout following the referendum and, indeed, a Donald Trump victory in last year’s presidential election. The negative economic impact of the Brexit vote is, of course, already apparent but the danger is that people will take with a pinch of salt warnings of the adverse consequences of a Labour victory.

This is despite the fact that McDonnell, the shadow chancellor, has rather cleverly said that Labour is “war-gaming” the run on the pound that would follow an election victory for his party. By doing so, he was following a Labour tradition. In 1964, George Brown and Harold Wilson, secretary of state for economic affairs and prime minister respectively in the 1964-70 Labour government, criticised the “gnomes of Zurich” who were selling the pound. By pitching himself against the speculators, the shadow chancellor has pitched himself into a battle in the court of public opinion which he can win.

That is not the only problem. A few days ago I attended a conference at Nottingham University with Sir Vince Cable, the Liberal Democrat leader, at which we both spoke.

He recounted his frustration at talking to young people about Labour’s economic policies, reminding them of the importance of fiscal discipline. He would tell them there was no magic money tree. They would insist there was and that he was stuck in the past.

In this respect quantitative easing (QE) has a lot to answer for. It is no magic money tree – the money created is matched by the assets purchased, mainly government bonds – but many people think it is.

Labour would borrow more, issuing apparent limitless quantities of government bonds (gilts) just to fund its part-compensation plans for its renationalisation programme and taking PFI (private finance initiative) contracts back into the public sector. Borrowing to spend more would come on top of this. With the public finances still in a shaky enough state to warrant a further downgrade of Britain’s sovereign debt rating a few days ago, this would be testing the appetite of investors for UK government debt to destruction.

There was a time when the trade unions lobbied the Labour leadership in vain on policy. Not any more. The unions’ cups runneth over. They are getting things from the current leadership they were not bold enough to ask for. And we should remember in all this that fewer than a quarter of employees, and fewer than a fifth of all workers, are union members.

Could it happen? There was a time when , faced with the risk of a lurch to the left, you would not expect Tories to be as ill-disciplined and stupid as to hand power on a plate to Labour. True, it happened before, in the 1992-97 parliament under John Major, when divided Tories made a Tony Blair landslide inevitable. Blair, of course, was no Corbyn and today’s Brexit-obsessed Tories are, if anything, even more ill-disciplined than they were two decades or so ago.

The important thing with Labour’s programme is not to assess the individual policies, troublesome though they are. Everybody can find things to criticise with individual PFI programmes, though there have been cost-savings and refinancing in recent years. Five years ago, the Treasury launched a revised version of PFI. Similarly, everybody can find things to criticise in the performance of some privatised industries.

But none of this should suggest a blanket and wasteful “taking back control” of PFI projects and wholesale renationalisation, even if ideology blinds you to the central logic behind all this; bringing private sector efficiency to the delivery of public projects and public services.

Even this, however, is not the real danger, Assuming that at some stage the stalled Brexit negotiations get started again, it is still the case that Britain will end up with a worse deal when it comes to doing business with the EU than we have now. Near-membership of the single market and a customs agreement can never be as good and frictionless as the real thing.

I do not blame the new, conciliatory Theresa May for this, though it has taken her time to come round to a sensible view on transition. I do blame those in her cabinet and party constantly snapping away at her ankles.

Brexit will make plenty of international businesses wonder whether Britain is still the best place to locate. Against the loss of single market and customs union membership, Britain can offer low corporate taxes, generally low personal taxes, and the most lightly-regulated economy in Europe.

Now replace that with a government that wants to put up corporate taxes, increase personal taxes, particularly for higher-earners and re-regulate the economy. Replace it with a government which wants to greatly extend the size of the state, taking industries back into public ownership without offering full compensation to shareholders.

As a business, would you want to invest in a post-Brexit Britain of this kind? As a business currently invested in Britain would you want to stay? The only thing flying in Britain would be a tattered red flag.

The combination of a messy Brexit and Labour’s economic agenda would be highly toxic. If it comes to pass, we will have a lot more than a run on the pound to worry about.