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The resignation of Theresa May as prime minister, combined with the poor showing for both Labour and Conservatives in the European Parliament elections, could pave the way for an early general election in the UK. If Labour wins control of the government, what can businesses expect?
What policies might a Labour government led by Jeremy Corbyn introduce?
It’s clear that a Jeremy Corbyn-led government would take Britain in a political direction not seen since the 1970s – one involving far greater government intervention in the economy. As Paul Johnson of the Institute for Fiscal Studies put it in The Times last year, Labour is in effect, offering “an alternative to the form of market capitalism practised in this country for at least the past 40 years”. Policies discussed or floated by Corbyn and his shadow chancellor, John McDonnell, include: renationalising various industries, including water companies, energy utilities, and the railways; putting workers on corporate boards and forcing companies with more than 250 staff to put 10% of their shares into “inclusive ownership funds” for employees and the public sector; and a plan by McDonnell to set up a £250bn national investment fund, which would use government-owned bank RBS to lend to “SMEs, start-ups and co-operatives”. Other ideas under consideration include a proposal for a universal basic income, and a rise in the minimum wage from the current £8.21 to £10 an hour – as well as scrapping the under-18s rate of £4.35.
What would it mean for businesses?
It depends. There’s no doubt that a more interventionist government would make the environment for business less predictable in many ways. Companies that were once part of nationalised industries in particular, would be squarely in the sights of the government. There are concerns over exactly how these industries would be nationalised and whether the current owners would be sufficiently compensated – a recently leaked paper on the renationalisation of water utilities suggested that Labour would pay less than £20bn for assets that water regulator Ofwat values at more than £70bn. That could potentially undermine investor confidence in British property rights, which would be bad for investment. Plans for a much higher minimum wage would also increase employment costs, particularly for certain sectors and employers.
What about the opportunities?
Labour has big plans for spending on infrastructure projects via a £250bn National Transformation Fund. An upgrade of the national rail network, investment in superfast broadband, and more investment in renewable energy, are all on the cards, plus a focus on boosting regional economies and Britain’s manufacturing base in particular. So companies – particularly smaller companies – in related sectors could well see more government-mandated business coming their way, especially as Labour is keen to use the government’s power as a large buyer to reward private companies who meet certain standards on the environment and employees’ rights. A Labour-led government also looks highly likely to result in either a very soft Brexit (one which maintains the Customs Union with the European Union) or no Brexit at all (depending on whether or not a second referendum is called, and the result of any such referendum). That would provide a dose of clarity on the future for every business involved in cross-border trade.
What would this mean for taxes?
All of these policies cost money: Labour’s 2017 manifesto called for an extra £70bn in spending a year, and as Paul Johnson of the Institute for Fiscal Studies points out, that did not include plans to match Conservative spending on the NHS, nor any of the more recent policy initiatives. To pay for this, corporation tax is set to rise, while income tax will rise to 50% on those earning more than £123,000, and to 45% on those on more than £80,000. A financial transactions levy of 0.2% is on the cards, plus potentially a one-off wealth tax on assets over a certain level. Labour has however, pledged not to increase VAT or personal National Insurance Contributions. The party is also “committed to ensuring that the national debt is lower at the end of the next Parliament than it is today,” according to its manifesto.
How could it affect the pound?
In 2017, McDonnell made headlines after discussing “war-game type scenario planning” at a fringe meeting of the Labour Party conference, in which, while considering a Labour Party election victory, he asked: “What if there is a run on the pound? What happens if there is this concept of capital flight? I don’t think there will be, but you never know, so we’ve got to scenario-plan for that.” It’s true that talk of nationalisation and higher taxes could eventually make the UK a less attractive place in which to invest, or cause a mass exodus by “the rich”, which would point to a weaker pound. However, it seems more likely that markets would give any new government the benefit of the doubt, particularly given the fact that political surprises are becoming ever more common, and thus, less surprising. So a great deal would depend on the tone taken by the incoming government, and also what kind of majority it commanded in the Commons. Also, it’s worth remembering that the pound is already “cheap” on many measures (such as purchasing power parity) used by financial markets. That, combined with the fact that a Corbyn government has also indicated that it would seek a soft Brexit deal, would likely be supportive of the pound.
How might an early general election affect the pound?
The uncertainty of a general election alone is likely to hit sterling – even the news of Theresa May making plans for her resignation has been painful for the pound. The problem with a significant drop in the pound is that it could leave the Bank of England stuck between a rock and a hard place. A lower pound would drive inflation up, arguing for higher interest rates. But if growth is struggling amid confusion over Brexit and government policies, then that would be bad news for growth, which argues for lower rates – it’s Catch-22.
What impact could this have on UK businesses?
It really depends – if your business is an importer, then a big devaluation in the pound would be bad news. It’s a different scenario if you’re an exporter and you’re selling into Germany, for example – a fall in the value of the pound arguably makes your goods much more competitive in terms of price from a German business or consumer’s point of view. The tricky thing, of course, is that lots of businesses are both importing and exporting – which makes it harder to estimate the damage that fluctuating exchange rates can do. This is where it can be useful to call on an expert – someone who can tailor your currency management plan.
Is a run on the pound likely?
I don’t think so. The uncertainty caused by a general election would certainly be bad for the pound, and Labour’s policies largely aren’t business friendly, which all else being equal, will have a detrimental effect on sterling. But on the other hand, Labour are pro-Customs Union – in effect, a “softer” form of Brexit than Theresa May’s withdrawal deal – which would probably benefit the pound, particularly if a deal could finally be made that would get through the House of Commons.
How should businesses plan for a more interventionist government?
Not all interventions will be negative for all businesses – governments often talk up “small businesses” and it’s possible that a more interventionist government might try to find ways to divert more money in that direction, although equally this can also have unintended consequences. But it certainly makes the environment less predictable, and so it’s important to ensure that you take charge of any variables that you can exert some control over. If your margins are being squeezed by higher tax rates, for example, then that leaves you with less room for manoeuvre on foreign exchange exposure. So rather than remaining at the mercy of the spot market – which could quite possibly be up and down like a yo-yo, given the uncertainty surrounding any future general election – you should consider locking in an exchange rate. Use a forward contract to purchase perhaps 75% of what you think you will need over the coming year, in order to protect your income and your bottom line.
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