The shadow Chancellor can not be accused of timidity. A speech yesterday in Liverpool provided some real meat on the bones of earlier economic proposals from Labour. It is certainly radical and, unsurprisingly, has been greeted with scepticism by the business community.
This was probably as John McDonnell intended. He is too clever and measured a character to use the intemperate language of the Prime Minister about business, but he makes no secret about where he sits on the capital vs labour spectrum.
His promise this week, in a speech that gave us a sneak preview of many of the measures that will appear in tomorrow’s manifesto, is to ‘rewrite the rules of our economy’ and to enable workers to ‘take back control’, in a neat appropriation of the Leave mantra from 2016.
So, what did Mr McDonnell say? Here are the key points of interest to investors:
He made clear Labour’s opposition to the ‘shareholder model’ which prioritises shareholder returns over other stakeholders such as workers and consumers. This is important but not out of line with much current thinking on both sides of the Atlantic, including among leading business figures who accept that a more holistic approach, including for example considering the impact on the climate, is a key marker of a sustainable business model.
On regulation, he announced a new business commission that would have three separate watchdogs, covering companies, finance and enforcement. Every new government revamps the regulatory framework, so no surprises here. However, it is clear that a Labour government would be considerably more interventionist - the proposal to delist companies that do not demonstrate adequate climate change credentials is notable (if slightly odd - why should listed companies be singled out when it comes to global warming?).
When it comes to corporate governance, there are some far-reaching proposals, including the possible creation of German-style two-tier board structures, with a supervisory board having oversight over a company’s executives. Companies could be forced to have worker representation on their boards. Again, some of the details look difficult to implement in practice, such as a reference to all stakeholders (including customers) having a say in executive remuneration.
On corporate pay, Labour is proposing a move to an effective pay cap, with a limit to the ratio of the highest to the lowest salaries within a company hoping to benefit from public sector contracts. A 20:1 ratio, for example, would mean that a company employing workers on the minimum wage would see its bosses’ pay capped at less than £350,000.
Taxes would rise under a Labour government, with the headline rate of income taxes rising to 45% for those earning above £80,000 and to 50% for salaries above £150,000.
For investors, perhaps the most significant change is the proposal that larger companies would be obliged to set up what Labour is calling an ‘inclusive ownership fund’. This would force businesses to set aside up to 10% of their shares (over a 10-year period) which would pay dividends to employees, up to £500, with the rest going to the Treasury. Already, this radical measure is being watered down, with foreign earnings now apparently excluded from the proposal. With one analysis of the benefit to the Exchequer being no more than the equivalent of 0.5% on the rate of corporation tax, it is not clear that there wouldn’t be much simpler and easier-to-administer ways of raising the same amount of money.
The complexity of the last measure illustrates that many proposals at election time are dressed up as economic but are really political. The point about the inclusive ownership fund is not really the money involved but the message it sends about the pecking order of priorities for Labour.
Labour is proposing a radical reworking of the way the economy works so that it benefits, in its words, those who create the wealth rather than those who currently own it.
This has the merit of being philosophically different from the Conservative position. For the first time since the 1980s, the major political parties are at least offering voters a choice in the way in which the economy is managed.
There will be much more detail on all of this in Labour’s manifesto, which is due to be published on Thursday. We will analyse that, and the proposals of the other main parties, in due course.
What is clear, however, is that for the first time in many years, it really will matter to investors which of the two likely Prime Ministers we get on 13 December.
The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.