By Cormac Lucey
There are many economic risks currently facing Ireland. In terms of media airtime, Brexit would seem to be the biggest. Yet, as Irish Fiscal Advisory Council chairman Seamus Coffey warned last September, the EU’s plans for corporation tax harmonisation “pose a bigger threat”. Then there are the dangers posed by the game of chicken that the US president Donald Trump is playing with China over tariffs.
While Labour is behind the Conservatives in the most recent opinion polls, the party enjoyed an eight-point lead at one point over the past 12 months. And, when it comes to opinion polls, one must remember that the results are highly sensitive to pollsters’ assumptions about the rate at which different demographic voters will turn out and vote. Labour’s support is strongest among Britain’s younger and poorer voters, who traditionally have poor turnout rates.
What if a Labour campaign theme or some extraneous event — such as the tragic Grenfell Tower fire in London — were to galvanise those voters and propel Corbyn into office ,and shift the UK economy significantly leftwards?
Relative to its history, the British economy is run in a centrist/soft-left style today. Government spending as a percentage of national income (GDP) may be in a downward trend, but this is more the consequence of the cyclical economic recovery since the peak of the global financial crisis, in fiscal terms, around 2012. The downward slope in spending is shallower than that experienced under prime ministers John Major and Tony Blair in 1992-2001.
And the Conservative government of the day has big plans to loosen the purse strings. It has been reported widely that the prime minister Theresa May is considering tax rises to fund Britain’s creaking health and social care system, and a group of high-powered MPs called on Monday for a new commission to recommend money-raising measures. Any leftward shift from the current starting point would leave the UK very left of centre on the economic spectrum.
Labour’s 2017 manifesto set out £48.6bn (€55.5bn) in annual spending hikes on a range of popular initiatives, including scrapping university tuition fees, a public sector pay rise, 10,000 additional police officers and more money for schools and the health service. The party undertook to pay for the greater spending with an income tax rise for high earners, an increase in the corporation tax rate and a new “excessive pay levy” on companies with a large number of highly paid employees.
These proposed taxes should, Labour claims, raise exactly enough to cover its spending commitments. Others are less certain. The Institute for Fiscal Studies says the revenue-raising assumptions are “highly uncertain”. While higher tax rates may increase tax receipts on paper, they also spur taxpayers to change behaviour so as to escape the tax hike: they might incorporate, retire early or reduce their taxable income by making additional pension contributions.
Labour also claimed it would raise an extra £6.5bn a year by doing more to tackle tax avoidance and evasion. But this is a wholly speculative figure. The assumption that future performance by the tax authorities can be so improved implicitly assumes that they are significantly underperforming today. It also has the feel of a figure simply plucked out the air to fill a deficit gap that might otherwise occur.
The stimulus of extra public spending would boost economic activity in the short run, but it could be associated with greater uncertainty and lower business confidence that would affect Britain in the medium term.
Carolyn Fairbairn, director-general of the Confederation of British Industry, has warned that Corbyn’s anti-market rhetoric is already raising fears among investors about whether it is safe to invest in the UK. During last year’s UK general election campaign, Labour’s extravagant spending plans were hardly scrutinised. Most people probably believed they had little prospect of ever being implemented and that the key election question was the eventual size of May’s parliamentary majority.
A report by investment bankers Morgan Stanley concluded that a Corbyn government would pose a greater risk to UK markets than Brexit. In a video message released on social media, Corbyn responded saying: “When they say we’re a threat, they’re right. We’re a threat to a damaging and failing system that’s rigged for the few.” He added: “These are the same speculators and gamblers who crashed our economy in 2008 and then we had to bail them out. Their greed plunged the world into crisis and we’re still paying the price.”
What would all this mean for Ireland? There are really two channels by which a very left-wing Labour government could affect us: changes in economic activity levels would have a spillover effect on Ireland, both upwards and downwards; and the more unattractive Labour makes the UK as an investment location, the more investment refugees might look to Ireland as a safe haven.
It is hard to estimate how much damage a Corbyn government might do to the UK economy. That would depend on how fast it moved and how much time in office it was granted by the electorate. Corbyn’s key advisers — John McDonnell, the shadow chancellor, and Seumas Milne, a key political adviser — are both keen students of Karl Marx and the Russian revolution. This suggests Labour would try to move very fast to implement its policies and consolidate its political position.
Lightning could strike twice: the sharp drop in sterling that followed the Brexit vote could happen again. That would cause significant disruption to Irish businesses exporting to the UK but invoicing in sterling. With their costs in euros and their revenues in sterling, they would be squeezed again by any large fall in the pound against the euro.
For low-margin commodity producers the danger is that the currency swing would exceed their profit margin and that profitable commercial activity would become loss-making as a result. As happened within the Irish mushroom-growing sector after Brexit, that may cause companies to mothball their operations and lay off workers.
The UK’s difficulty with Corbyn could be Ireland’s foreign direct investment opportunity. British vulnerability exposed as a result of Brexit would be starkly compounded by a Corbyn government using the UK economy as a petri dish to try out the economics of Hugo Chavez in Europe. Foreign companies, which might have previously located in the UK, could be expected to arrive on our shores. More UK citizens may also head this way.
An unbalanced Irish economy risks becoming even more unbalanced. It may not be a present danger, but it is certainly a risk.
Published in The Sunday Times (Ireland edition)
April 1st 2018