The microeconomic consequences would likely lower GDP as higher taxation alters the attitudes of firms and households toward saving, spending and investing.
The impact of nationalisation on total economic productivity is also a matter of considerable concern, especially if it deters future direct investment from overseas.
On balance
As for the UK’s government borrowing, Oxford Economics estimates that national debt would be around 6 per cent of GDP higher by 2020 (including nationalisations) under a Corbyn government, and the UK debt ratio an estimated 95 per cent, still well within the better half of developed countries. Of course, this does not assume a collapse in the capital account.
A recent academic paper uses a framework to estimate a country’s maximum sustainable debt: the point at which the government debt position does not just become a drag on growth but becomes unstable.
For the UK, the authors estimate a maximum debt-to-GDP ratio of 126 per cent. Even if tax shortfalls from Labour’s plan are made up with higher borrowing, it is difficult to envisage the total debt ratio approaching anything like that of France or Japan, neither of which pay a risk premium to access the bond market.
So, for all the bluster, there is no major policy that is radically hard left, and no single policy that should make capital head for the hills.
But it may be a case of straws and camels’ backs.
Modestly higher taxes, modestly higher interest rates, significantly higher minimum wages and the threat of nationalisation all add up. And with the threat of Brexit still clouding the horizon, it may be one disincentive too many.
Corbyn’s left-hand man
No doubt many of you will have been muttering throughout this article: “But how do we know Labour will stick to its manifesto?”
Like all great questions, it’s a very difficult one to answer.
Our economic analysis assumes it will because it’s impossible to know what’s in another person’s head. It’s easier to do a bit of qualitative tweaking to the “manifesto scenario” dependent on where you think it is most likely to diverge.
First up, there’s a disconnect between stump expectations and the cold black and white of party planning.
Can we really take the Labour manifesto at face value when its relative mundanity belies the radical rethink that Mr Corbyn supporters suggest he will bring about?
Most strikingly, most of the heavy cuts to working-age benefits proposed by successive Conservative Budgets are kept in place. The Institute for Fiscal Studies estimates that the poorest 10 per cent will suffer a 7.5 per cent fall in annual net income by the end of the next parliament.
