It’s time for investors to prepare for a Corbyn government

This is a dangerous time for the UK Tory government. Three trends are accelerating rapidly that collectively could destroy it. The chance of a Marxist government running the UK (unfettered by Brussels) within four years is now above 50 percent.

Tories in trouble

Trend 1: The prospect of a disorderly (and unpopular) Brexit is getting more likely

Brexit Trains regrets to announce the late running of this service…

Psychologists probably have a technical term for a syndrome we all understand. Waiting on a station platform for an uncertain train is psychological agony. Boarding that train when it finally arrives is euphoric…so long as the train doesn’t then break down in the station…

The Brexit train is coming, but the platform is crowded with rude and unruly passengers. Some wish to board even though they still don’t know where the train is headed. Others are obdurate that they will stop the other passengers boarding for their own good.

Parliament has decreed that we are leaving the EU. The EU Bill went through parliament last week – and it was mandated that Parliament will have to approve any deal (if there is one) that Mrs May brings back from Brussels. If there is no deal, then the Bill does not give Parliament authority to send Mrs May and her team back into the breach. Parliament could craft a motion that the government should seek a deal against the odds – but it cannot compel it.

On 26 June the EU Withdrawal Bill passed into law having received the Royal Assent. Article 50 is coming home. But if it is now certain that Britain is leaving, this is also the moment of maximum uncertainty about the shape that Brexit will take. That is why big business – led by Airbus and others – is getting restive.

Most commentators assume that things will become clear as the months unfold. The EU summit which began yesterday (28 June) may result in progress (Mrs May has left early this morning while the EU27 discuss Brexit without her). But the odds on a no-deal outcome, which I discussed three weeks ago, have been shortening.

The problem for Mrs May is that almost any outcome will pose dangers for her.

A soft Brexit, involving the UK remaining in the Customs Union, will severely disappoint the Brexit Ultras. They will say that all their efforts have been for naught. Britain would not be able to conclude trade deals with third parties. Freedom of movement may be effectively retained. There will be accusations of betrayal – that this outcome is worse than having stayed in. Mr Trump will fire off rude tweets. Mr Farage will re-materialise and carp. Mr Rees-Mogg will get even terser. There will be plotting to unseat the Prime Minister. On the plus side, foreign investment will probably pick up as global capital decides that it is business as usual.

A hard Brexit, by terms of which Britain will leave the Customs Union, will create the prospect of frictions in trade flows across the UK’s borders. Airbus and friends will issue all kinds of threats. Mr Corbyn will be pushed by the Remain tendency within his own party to oppose the deal. Indeed, Labour will probably pledge to re-negotiate the treaty – just as Harold Wilson did on 1973. That would mean that no prospective partner (Australia?) would sign a trade deal with us, knowing that it would be binned in 2022. The forces of Remain, generously financed by the likes of Mr Soros, will swear to overturn the deal.

And in the event of a no-deal outcome, the BBC and the rest of the mainstream media will whip up a frenzy of hysteria which will only feed upon itself. The M20 will succumb to gridlock overnight; Tesco will immediately run out of Marmite (again); Mr O’Leary will ground his aeroplanes; the ravens will be found dead in the Tower…

Whatever outcome now, the fingers of blame will point towards the Tories and their unfortunate leader.

Trend 2: The Tories are becoming Tax-and-Spend Lite

Last week the Prime Minister announced that the National Health Service (NHS) in England would receive an additional £20 billion a year by 2022 as a seventieth birthday present. This equates to a 3.4 percent increase in funding above existing levels while the UK economy grew last year by 1.7 percent and will grow this year at well below that.

For some time now, everyone has known that the NHS was under severe strain and that, just to stand still and to offer existing levels of care to the population of England and of the UK as a whole, it would require budget increases in excess of economic growth. The figure of an annual increase in funding of 4 percent has been widely touted, so it was already widely agreed amongst the chattering classes that the NHS would have to take an increasing slice of the national cake. The overwhelming question, of course, is: how is this spending hike to be financed?

The answer is: by higher taxes (plus a little more opportunistic borrowing if the national finances continue to improve). But very little detail was offered as to where these taxes will fall. Mrs May invited the contumely of her adversaries by suggesting that this would be partially financed by the Brexit dividend. But even staunch Brexiteers know that there will be no material Brexit dividend before 2025. There will be the Brexit bill of nearly £40 billion to pay – plus huge additional costs in setting up a radically new agricultural subsidy scheme (itself a political minefield which I shall discuss soon).

The main reasons why demand is growing so rapidly for the services of the NHS are: a) growing life expectancy; and b) evolving (and, in my view, unrealistic) expectations.

Increased life expectancy – which should be a cause of rejoicing – means that older people remain around for longer. (We now have, for the first time, more pensioners than teenagers.) As they transition from moderately old to very old they fall prey to the many degenerative diseases of senescence – both of body and mind.

Furthermore, people expect that a full range of treatments should be offered gratis under the NHS, even if they are not, strictly speaking, healthcare – from fertility treatment to gender re-assignment surgery…

No doubt future tax rises will be announced in the November budget by Mr Hammond (if he is still Chancellor), having been approved by Mrs May (if she is still Prime Minister). But there is a glaring inconsistency here. The Tories were re-elected (or rather, hung onto power) at last year’s general election having vaunted themselves as the party of low taxes and a smaller state.

Pragmatic Tories (as I call them) believe that Mrs May is simply responding to overwhelming public demand. The NHS in the UK is not just a healthcare service provider, but an article of faith. Failure to respond to such imprecations may invite the electorate’s revenge.

Other Tory-supporting types, like Robert Colvile, Director of the Centre for Policy Studies (CPS), question whether unlimited additional funds should be pumped into an obviously deficient healthcare model. His think-tank, the CPS, has published studies that suggest that as more money is allocated to the NHS, its productivity tends to decline. Gordon Brown, when Chancellor under Mr Blair, increased the budget for the NHS by 60 percent – but its utility did not increase by 60 percent. Rather, wages in the NHS rocketed.

Thus we now have the highest paid doctors in Europe while the NHS falls down in the European league in terms of cancer survival rates. One report ranks the UK’s rate of survival from pancreatic cancer at 46 out of 57 countries[i]. Not to mention that certain hospitals (Gosport) have criminally dubious mortality rates. In a normal country people would get angry about this: but the NHS is a sacred cow which may not be questioned.

Evidently, more money does not necessarily mean better health. Life expectancy is a key metric of both economic well-being (of which healthcare is part) and quality-of-life. And I note that the USA, which spends nearly 20 percent of its GDP on healthcare, as against our humble 10 percent, has a lower life expectancy than we do[ii].

No other country apart from the UK has a healthcare system which is free at the point-of-demand (meaning that anybody can turn up and demand healthcare). In New Zealand, which has the nearest analogue to the British NHS, as I observed recently, citizens have to pay for doctors’ appointments. But in the UK it is anathema to suggest that patients who fail to turn up for their GP appointments (an increasing problem) should even be fined. And in most countries, rich people freely pay inflated prices for well-appointed hospital suites, the profits from which are used to subsidise the costs that most of us incur in healthcare economy class.

Given the trend to increasing longevity – the prospect of armies of centenarians by 2050 – this might be a good moment to re-engineer the model. If people are going to live longer and get ill, they should expect to put more money aside for healthcare (and social care) just as they are currently expected to build up personal pension pots. And if people are going to live longer and stay healthy (as in our Chairman’s Brave New World of Juvenescence) they should spend more on maintaining their physical fitness and mental health.

I find it strange that middle-class (and not-so-middle-class) people in the UK seem to have enough cash to pay masseurs, osteopaths, chiropractors, mindfulness practitioners, personal trainers (guilty, m’lud!), life coaches, chakra-enhancers, nutritional consultants and any brand of persuasive quack trending on Twitter – yet can’t afford to contribute more to the NHS when they urgently need its services.

My simple spreadsheet model informs me that, assuming that the NHS budget is about 10 percent of GDP currently, if you increase it by 3.5-4 percent annually while growth is languishing at 1-1.5 percent the share of GDP accounted by healthcare will rise to over 20 percent by 2042. And to over 50 percent by 2073.

In Mr Corbyn’s Labour we have a putative Chancellor who does not believe in a limit on borrowing and a putative Home Secretary who does not believe in a limit on immigration. But not even Labour voters believe in the mythical Oozlum birdthat could fly up its own orifice.

The end of austerity?

The NHS is one thing but there are numerous other major government departments which crave a pay rise. Defence is one of them. Mr Williamson, the energetic defence secretary, is reportedly demanding a significant increase in the armed forces’ budget on pain of punishment for Mrs May. Right now, the UK’s standing as one of the top four military powers globally is in question. Those of us who want to retain our seat at the top table argue for an increase in budget at least equal to that of the NHS.

Then there is local government, which has been most afflicted by the regime of so-called austerity post-2010. How many pot holes do you have to negotiate on your drive to the station or school run in the morning? Not forgetting teachers, who will tell you that schools need much more money. And policemen…and so it goes on.

Meanwhile, The Chief Secretary to the Treasury, Ms Truss, has decided to re-interpret her role. Traditionally, the Chief Secretary is a horse-trader who discreetly brokers late-night, back-room spending deals between departments in the bowels of Whitehall. Ms Truss, instead, believes that her role is to provide a public running commentary on her cabinet colleagues’ foibles. All very entertaining: but it doesn’t inspire confidence that the government has a keen set of spending priorities.

Of course, Labour, under Mr Corbyn, will always promise to outbid the Tories on spending – while keeping their tax plans close to their chest. That is the privilege of Opposition.

The fiscal horizon

No economist thinks that the UK’s national finances, even in the most unfavourable Brexit scenario, will snap back to the crisis levels of 2008-09 when the budget deficit reached 10 percent of GDP. Given positive spending data this fiscal year, Mr Hammond could increase borrowing – but at the price of abandoning the prospect of a balanced budget by the late 2020s. Our debt-to-GDP ratio would creep inexorably towards the psychologically significant 90 percent level.

Ultimately, he will have to raise taxes. And one recalls that his first attempt to raise taxes – by raising NICs for the self-employed in the November 2016 budget – had to be scuppered. Although the great British public will tell pollsters that they don’t mind paying more tax if that is the price of a better NHS, in practice, every penny of additional tax paid will be deeply resented.

One of the most progressive achievements of the Cameron-Osborne pantomime horse was to increase personal allowances significantly in real terms, thus liberating millions of the low-paid from the clutches of the taxman altogether. It is now suggested that personal allowances will be frozen henceforth. So the low-paid will end up paying for Mrs May’s largesse towards a failing NHS.

On the present compass, the next election will be a choice between Labour Tax-and-Spend Max and Tory Tax-and-Spend Lite. If there you have a choice between the authentic and the fake, which one do you choose?

Trend 3: Changing demographics are tipping rapidly in Mr Corbyn’s favour

Housing woes have consequences

Last week Mrs May was warned by the think-tank Onward that the Conservative Party will not win the 2022 election unless the government reverses falling levels of home ownership[iii]. The proportion of renters relative to home-owners is rising fastest in the marginal seats that the Tories need to win in order to restore their majority. Private tenants are increasingly likely to vote Labour while home-owners tend to vote Tory. In 2017, 54 percent of private renters voted Labour – up from 39 percent in 2015.

The number of constituencies in which private renters made up more than one fifth of households is likely to reach 253 in 2022. This compares with just 18 in 2001. In the 20 most marginal seats held by opposition parties the proportion of renting households is likely to reach 22 percent in 2022.

While Mrs May has set housing as a priority, with a target of building 300,000 new homes per year, it is very unlikely that this trend can be reversed by 2022.

The “Sharing Economy”

Yannis Varoufakis (one of the few big ticket economists available to the international left) recently said that the capitalist system, given its extraordinary innovative dynamism, had created precisely the tools that will undermine it.

He was talking about the internet-driven sharing economy. One tangible manifestation of this phenomenon is that car ownership by the under-30s in the USA is in free-fall. In the age of internet shopping, Uber, Deliveroo and countless car-sharing and rapid car-hire portals such as Zest, the millennials think that owning a car is no longer cool. Besides, cars are expensive and create CO2 emissions. The car you own is no longer your key emblem of social status – at least amongst the young.

But they also believe that the sharing economy is about much more than optimal asset allocation. They believe that society should be fairer – by which I understand that there should be not only equality of opportunity, but that there should be equality of outcomes. So, however clever or talented someone is, however hard they work and however unique their contributions, they should never be egregiously more wealthy than Joe Bloggs.

This reflects a prevailing disenchantment with capitalism that has arisen largely because wages have hardly risen in the UK and elsewhere for ten years or more, despite – or perhaps, because of – new technology. There has been a spate of articles by economists recently on the theme of what is really going on in the economy. If unemployment is at a record low, why aren’t wages rising? (I intend to write something on that theme soon).

Suffice to say here that youngsters are leaving tertiary education with huge debts while many have little prospect of the escalating salaries and benefits (such as pensions) enjoyed by their parents – and little prospect of ever owning their own homes.

A Marxist government unfettered by Brussels

A Corbyn government will nationalise the railway operators and the utility companies. His government will control investment. It would be interventionist.

The rules of the European Union are opposed to state intervention in industry because it potentially creates unfair competition with EU businesses. Rigid implementation of EU rules would severely curtail any future Labour government’s freedom of action. But the next Labour government will be outside of those EU rules (as Messrs Corbyn and McDonnell always truly desired).

Brexit will demolish the greatest obstacle that Labour radicals would have encountered. As the new Labour Prime Minister glides down the Mall from the Palace in his black Daimler, Chancellor McDonnel will announce the imposition of exchange controls. Because, as he will argue quite rightly, they will be the only way to forestall a run on the pound.

I shall explain how dire consequences of a Corbyn government will be soon. The nearest analogue to Corbyn-McDonnell is Hugo Chavez – their hero who destroyed one of the richest countries in South America.

A doughnut government

At the very centre of the current Tory government is an ideological hole. I have described the Prime Minister as a sphinx because it has been so difficult to disinter what she really believed about anything. Now we know that the vicar’s daughter, though a thoroughly decent and principled person, just doesn’t have any ideological lode star by which to navigate the ship of state.

In historical hindsight, it will probably seem that Mrs May accepted a poisoned chalice from the tragic Mr Cameron. But the ultimate consequence of that transition was unexpected: that the triumph of Corbynomics, once derided as a fantasy, is becoming more likely by the month.

It’s time for investors to prepare for that eventuality.

[i]See: https://pancreaticcanceraction.org/news/worrying-report-ranks-uk-pancreatic-cancer-survival-47th-56-countries/

[ii]See, for example: https://en.wikipedia.org/wiki/List_of_countries_by_life_expectancy

[iii]Reported in the Sunday Telegraph, 24 June 2018. War spirit needed to fix housing shortage, by Edward Malnick.