; Ohh, Jeremy Corbyn! | Wise Funds

Ohh, Jeremy Corbyn!

Written by Tony, 10 October 2017



Blog October 9th 2017

‘The absolute boy, Jeremy Corbyn’ - Shelly Asquith

‘(People look at Corbyn and see) a very kind, very earnest vegetarian who makes jam’ Sirena Bergman.


Mr Corbyn’s Labour Party stands on the threshold of power, according to his conference speech. He aims to tackle inequality in this country with a wide-ranging package of measures, not all of which can be described as investor-friendly.


I thought it might be useful to take a detailed look at Mr Corbyn’s proposals, and ask three questions of each one – is it a good idea, can it be done, and how much would it cost? I have attempted to do this below, after a couple of introductions, the first to our national finances, and the second to Mr. Corbyn himself.


The UK’s national finances – debt, the deficit and austerity


When talking about our national debt, two figures are mentioned more often than any others. These are, net debt to GDP, and the deficit.


Net debt to GDP divides the total amount of net government debt, which is all its borrowings less any cash it has, by the value of all the economic activity that takes place in the country in a year.


At the moment, the net debt figure is around £ 1.85 trillion. This number is so huge that it is quite difficult to comprehend, and most calculators don’t have enough digits to accommodate it. £1.85 trillion would buy you a very nice house in the south of England, with a decent-sized garden, around two million times over. It’s equivalent to £30,000 each, for all of the sixty-two million people in the country. £1.85 trillion would pay the UK’s average salary for 80 million years. It is, in other words, a hell of a lot of money, and it has been rapidly increasing in recent years. In 2005, before the Crisis, the UK’s national debt was £500 billion, only just over a quarter of what it is today.


The net debt to GDP ratio depends partly on the amount of government debt, but also on the amount of economic activity, so if the two are growing at the same speed, even though the amount of debt is going up, the ratio will stay the same. The history of the ratio is an interesting one. The national debt began in the late seventeenth century, under King William the Third. Net debt to GDP spiked in the two world wars, to 150% in the First, and 240% in the Second, before falling back to 25% in 1990. It was only just over 30% fifteen years ago, and is now over 80%. This level is almost the highest it has ever been in peacetime, despite almost a decade of austerity.


As well as the £ 1.85trn of debt, there is an equally large amount in future liabilities, payments which are due to be made in the years ahead. These include student loans which won’t be paid and will be written off, and payments under the Private Finance Initiative, the PFI, of which more later, but by far the largest liability is pensions for the UK’s 4.2 million government employees.


 There has been a pensions revolution over the last two decades. In the 1990’s, all large companies offered their employees a final salary pension scheme. However, a combination of factors have killed the schemes off. These include low returns on the assets pensions invest in, fact that people are living a lot longer, and the way in which liabilities are calculated, which has become so penal as to put all but the very best schemes into deficit. However, while private sector pensions have all but disappeared, public sector pension entitlements remain intact.


Including future obligations already incurred, the UK government’s debt  comes £3.7 trillion, or £ 60,000 for every living soul in the UK. On this measure, net debt to GDP is around 150%, back to its level at the end of the First World War.


The deficit is the difference between what the government spends and what it receives in taxes. If the government’s revenues were to exceed its spending, there would be a surplus, but this has not been the case for many years. In 2016-7, the deficit was a little under £ 50bn, well below the record amount of £152bn in 2009-10, but a deficit nevertheless. The Government likes to say that it has ‘got the deficit down by three-quarters’. This is true if you divide the deficit by GDP (the level of economic activity), because since the crisis the deficit has been falling while GDP has been rising. So, in 2010, the deficit was around 10% of GDP, and it’s around 2.5% now. But the fact remains that, despite record employment, a low level of unemployment, and a decade of austerity, the state is still borrowing a new £50bn every year. The cost of paying interest on the government’s debt comes to an annual £37bn, equal to the entire defence budget, or nearly half of what is spent on education.

Jeremy Corbyn


Jeremy Bernard Corbyn, born May 26th, 1949, aged 68. Labour Party leader.


Began his career as a representative for a number of trade unions. Was elected to Haringey Council 1974, aged 25. MP for Islington North since 1983. National Chair of the Stop the War Coalition 2011-15. Became Labour party leader 2015, following Labour’s General Election defeat and the resignation of Ed Miliband. Survived a vote of No Confidence and a fresh leadership election, September 2016. In the June 2017 General Election, his party made a net gain of 30 seats, polling 40% of the vote, up 9.6%, the highest percentage gain for Labour since 1945.


Mr Corbyn has been married three times and has three sons from his second marriage.


He has been vegetarian since the age of 20, is almost teetotal, cycles but doesn’t own a car, and has won the Parliamentary ‘Beard of the Year’ award no less than six times.


As an MP, Mr Corbyn was seen as a rebel, frequently voting against the Labour whip.


A long-standing anti-war and anti-nuclear activist, he supports a policy of military non-interventionism and unilateral nuclear disarmament. He has been much criticised for his support of the dictator Hugo Chavez, the man responsible for turning Venezuela, one of the most richly-endowed countries on earth into a morass of starvation, violence, and anarchy. Of Chavez, Mr Corbyn said ‘he made massive contributions to Venezuela, and a very wide world’.


It is impossible not to like Mr Corbyn. He is clearly a principled man, who has dedicated his life to fighting for the underdog. But he has never been in a senior enough position to make the important decisions that change people’s lives, and he has never had to make the kind of hard compromises that are necessary for those in high office, having already passed the state retirement age before becoming the Labour Party leader.


The Policies

1)          Renationalise the railways

Is it a good idea?


Possibly. The privatisation of the railways wasn’t well handled, with the network chopped up into too many small parts. The current system relies on charging commuters high prices for an overcrowded and uncomfortable service, and the operating companies vary from efficient (in the case of our local Chiltern Railways) to inefficient (GWR) and extremely inefficient (Southern). Mr Corbyn attributes the inadequacies of the current set-up to the profit motive of the operating companies. How he would improve the charging structure and the level of service once the railways are renationalised, has not yet been explained.


Is it possible?


Yes. Network Rail is already a public company, having been renationalised a few years ago. The train companies have time-limited franchises, and on their expiry the Government could easily return them to public ownership. Most of the franchises expire before 2021, with the outliers being East Coast (2023) and Essex Thameslink (2029). At one time Mr Corbyn proposed to bring all the companies back into public ownership together, which would have incurred the cost of breaking the franchises, but now he favours the more gradual approach.


There is a potential problem in that the EU is committed to opening up national railway networks to private competition. This could be a complication, while we remain in the EU.


How much would it cost?


Up-front cost, nothing, assuming that the policy is to bring the franchises in-house as they expire.


Ongoing cost. It’s unlikely that this would be nothing, as under previous public ownership, the railways were always loss-making, and always subsidised. Mr Corbyn isn’t going to run his people’s railway to make a profit, so it is very unlikely to do so, and the shortfall will have to be met from somewhere.


2)         Renationalise the Post Office


Is it a good idea?


Probably not. You might think that the Post Office is ideally placed to grow. We are in the age of internet shopping, with hugely increased levels of parcel delivery, and the Post Office is the incumbent carrier. However, the sector is fiercely competitive and there have been several casualties, including a couple of years ago City Link, the company with the distinctive green and yellow vans. Royal Mail’s job is to be competitive in this market. The current industrial action concerns the staff pension scheme. Employees are reluctant to accept that in order to be cost-competitive in the private sector, the company needs to abandon the all-singing, all-dancing final-salary pension scheme which they enjoyed while in public ownership. The government of Mr Corbyn, who appears to be unaware of the new reality with regard to pensions, is not best placed to persuade the Post Office’s work force of the need to accept it.


Is it possible?


Yes, the Government simply has to buy all the company’s shares from the existing shareholders.


However, this simple process could be far from straightforward. In relation to all the companies he wishes to renationalise, Mr Corbyn has said that Parliament will put a value on them, and that shareholders will be paid for their holdings in government stock. It is hard to see how Parliament can value any company’s shares below their market value, and if they do, they are likely to encounter endless legal challenges. Thus far, the threat of a Corbyn-led Labour government has sent the prices of the nationalised utilities down, but imagine what would happen if the government agreed, let’s say, in the middle of March, to buy the Post Office’s shares at the market price on the last day of May. Wouldn’t there be a frantic scramble to buy, pushing the price up to previously-unseen highs? The government would be committed to pay that higher price, whatever it might be.


How much would it cost?


Up-front cost. The current value of Royal Mail is £3.8bn. The cost to a future Labour government could be less or more than this.


Ongoing cost. None, unless the company needed to be subsidised, which is not impossible in view of the market in which they operate, and the Labour Party’s view of pensions.


3)         Privatise the nationalised utilities.

Is it a good idea?


No, though Jeremy Corbyn certainly thinks so. He made a strong case in his conference speech, pointing out that in the water industry, of which only three of the nine companies remain listed on the UK stock market, with the other six owned ‘by private equity or foreign sovereign wealth funds’, ‘executive pay has soared as the service deteriorates’.


Over the summer, we did some in-depth research on the listed water companies, enough to be able to confirm that executive pay hasn’t soared and the service hasn’t deteriorated. Water company service levels are closely monitored by the regulator OFWAT, and the standards required of the companies are continually being raised. Companies are fined for failing to meet the targets met, on water quality, leakage, interruption of supply, flooding, and so forth, and paid bonuses when their targets are exceeded. The companies we looked at received as many bonuses as they paid fines.


The truth is there was almost no investment in water infrastructure during many decades of public ownership. The privatised water companies have spent the last two decades catching up, replacing ancient, leaky pipes, and improving flood defences everywhere. The upgrading of infrastructure has cost  billions, and would not have been possible had the companies not been allowed to make profits, a fact that OFWAT understands well, but Mr Corbyn apparently doesn’t.


Is it possible?


No. The cost would be prohibitive (see below), but there are other difficulties too. Pennon, for example, consists of the former South-West Water plus Bournemouth Water, both regulated companies, but it also owns Viridor, an unregulated waste-management company. It’s hard to see how you could renationalise Pennon without taking Viridor into public ownership as well.


More generally, the UK is already at a high level of indebtedness, and would become far more indebted under Mr Corbyn. It will increasingly need private finance to help plug gaps that it cannot fill itself, which means offering that finance an acceptable return. A government which tears up existing contracts and ignores the legal basis which underpins our society, is going to find it difficult to attract partners, and may find its own borrowing considerably more expensive than has been the case in the recent past.


How much would it cost?


Upfront cost. A very large sum. The combined market value of the six publicly-listed utilities (Centrica, National Grid, Pennon, Severn Trent, SSE and United Utilities) is around £ 75bn. That doesn’t include all the others, including the six privately-owned water companies referred to above.

At a guess, the whole sector might cost £120bn.


Conclusion on renationalization


Renationalising the railways would be cheap, and might result in an improved, though possibly subsidised network. The Post Office is small enough to be do-able, but renationalisation is unlikely to cure its problems. The renationalisation of the utility companies is a vast project, fraught with legal complications, expensive and unworkable.


Maybe Mr Corbyn understands this too. On the desk in front of me is a pamphlet called ‘With Labour there is hope for a better future’, which was handed to me in Stratford last weekend. It mentions ‘publicly-owned railways’ but is silent on the other sectors.


4)         End the cap on public sector pay


Is it a good idea?


Yes, but a slightly qualified yes. Nurses aren’t adequately rewarded for the vital work they do in an ever-more-stretched NHS, and it is a national scandal that their pay is being eroded year after year by not being kept up with inflation. Unless the issue is addressed, good people will leave the public sector, which they have already started to do.


However, I would mention two facts. One is that, though public sector pay has lagged behind that of the private sector over the last seven years, it rose much faster under the previous Labour government, so the comparison depends very much on when you start the clock. The other is that, as previously noted, most public servants can look forward to an index-linked final-salary pension scheme, a benefit which has vanished from the private sector.


It would seem that there are grounds for a negotiation, in which proper salary increases today are exchanged for the rationalisation of a pension structure which is no longer affordable. Such a deal would be unpopular, as it would exchange increased current spending with reduced future obligations, but it would solve two problems at the same time.


Is it possible?


How much would it cost?

 The average pay for the country’s 4.2m public sector workers is £26,300. To give a pay rise of 2.5%, in line with inflation, would cost £ 2.8bn a year, with no up-front cost.


5)         Abolish tuition fees, reintroduce maintenance grants


Is it a good idea?


It depends on your point of view. The state wants as many people as possible to benefit from higher education, but can’t afford to pay for them. The current system is a flawed compromise. The average student leaves university with £ 52,000 of debt. Once she earns above £ 21,000, 9% of all earnings are deducted at source, and used to pay interest and reduce the debt, until it is repaid. After 30 years, the loan is written off.


This arrangement favours the higher-earning graduates, who will pay the loan off more quickly, accruing less interest, and the low earners, who may never pay anything at all. There is general agreement that the system needs to be reformed.


But there are more fundamental questions. The country needs graduates, but does it make sense to put people who aren’t academic through three years of higher education? What is education for? Is it to produce people with the skills needed to make the country a good place to live in, or is it to encourage people to be good citizens, with a strong sense of community and a wide range of interests? Do we need more graduates, or better ones?


Is it possible?




How much would it cost?

Upfront, nothing.


Ongoing charge (net of offsets, such as the loans that aren’t going to be repaid) £7.5bn a year for tuition fees, and £1.5bn for maintenance grants, total £ 9.0bn.


6)         Cancel existing student debt


This is ‘an ambition’ rather than a policy, according to Angela Rayner.


Is it a good idea?


Maybe, though some see it as a form of tax relief for higher earners.


Is it possible?




How much would it cost?

Upfront cost, £100bn. Ongoing cost, nil.


7)         Increase funding for the NHS

Is it a good idea?


Yes. The NHS is struggling to cope with an ever-increasing workload. Funding has grown, but at a far slower rate during the years of austerity than before. Parts of the NHS are in crisis.


There is no doubt that the NHS would benefit from intelligent reform from within, which could lead to improved staff morale, lower sick leave (the NHS’ sickness level is well above the national average) and many other improvements. But in the short term, the NHS needs more cash.


Is it possible?



How much would it cost?


Upfront cost, nil. Ongoing cost - Labour’s own figure is £ 37bn over the lifetime of a parliament, or around £ 7.5bn a year.


8)         Take Private Finance (PFI) Schemes back into national ownership

Is it a good idea?

Yes, and no.


The PFI was a good idea badly executed. As a new idea in the 1990s, it was felt important to make sure that the capitalists had a good return on their money, or else they wouldn’t invest, and the mistake that was made, as with the privatisation of the railways, was to give the capitalists too good a deal.


The idea of the PFI was to keep the cost of developing new infrastructure off the Government’s balance sheet. Instead of building a new hospital or university campus, the Government outsourced it to a consortium, who would put up the building and then maintain it for a period of perhaps 30 or 40 years, for a pre-agreed, index-linked fee. The fees have proved extremely attractive to income-seeking investors in an age of zero interest rates, and many of the schemes have been sold off by the original contractors to external, often Jersey-based, investors, a practice of which Mr Corbyn strongly disapproves.


Political bias paid a large part in decisions as to whether developments should be PFI-funded or not, with PFI-funding always preferred. The result was a cosy gravy-train for the consortia. Many of the proposals were so complex that it was impossible for local authorities to work out whether they were getting value for money or not.


The eventual cost of the PFI schemes far exceeds the original build cost. An example is Barts Hospital in London, where new facilities on two sites cost £ 1.1bn to build, but the total cost to the Trust will be £7.1bn.


In 2007, BBC Radio 4 conducted an investigation into the Balmoral High School in Northern Ireland, which cost £17m to build in 2002, but was closed in 2007 for lack of pupils. But the PFI contract was due to run, at a cost to the taxpayer, for another 20 years.


In 2010, the National Audit Office accused the government’s PFI dogma of ruining a £ 10bn defence project, the Future Strategic Tanker Aircraft project, which had to be delayed for five years. Edward Leigh, Conservative Chair of the Public Accounts Committee, commented ‘By introducing a private finance element into the deal, the MOD managed to turn what should have been a straightforward procurement exercise into a bureaucratic nightmare’.


An improved version, PFI 2, was introduced in 2012. The newer version addresses some of the shortcomings of the original one, but hasn’t done anything to reform the earlier schemes.

We are now approaching the peak of PFI payments, which cost around £10bn a year currently, and have hugely increased the strain on the budgets of hospital trusts. The total remaining obligation is in the region of £ 265bn.


The problem is that the government can’t take these schemes back without paying the investors the money it owes under the long-term obligations to which it has signed up. In other words, while getting into many of the PFI schemes can be seen, with the benefit of hindsight, to be a terrible mistake, getting out of them could prove so costly as to be another terrible mistake.


Is it possible?


Yes, but only if a Labour government is prepared to buy the existing investors out.


How much would it cost?


Up-front cost. John Appleby, CEO of the Nuffield Trust, estimates that the cost to the government of buying the PFI schemes in the NHS would be £ 50bn, so an estimate for the whole PFI might be in the region of £ 100bn.


The full monty


We are now in a position to estimate the full cost, both up-front and annual, of Mr Corbyn’s proposals. The up-front cost looks like £324bn, which would increase the total debt of £1.85 trillion (not including future obligations) by 17.5%. The annual cost, including an estimate of £3bn a year to subsidise the railways and the Post Office, comes to £22bn, which would increase the current £50bn deficit by 44%.


These figures are on an ‘all other things being equal’ basis. It can be argued that these measures would stimulate economic growth, and pay for themselves in higher taxes, however such a calculation is well beyond my competence to undertake.


It can also be argued that the social benefits, which can’t be expressed in money terms, of a more fair and equal society, would be worthwhile in themselves.

How will the spending be paid for?


Labour tells us that it has the whole plan costed ‘down to the last ha’penny’. The idea is to pay for the reforms by making the wealthy ‘pay their fair share of tax’ and increasing Corporation Tax, the tax on company profits, which has been lowered to 19% in the current tax year.


One wonders if these measures would really balance the books. Already the top 1% of earners pay 27% of all the income tax, and the top 10% pay 59% of it. Corporation Tax raises around £56bn a year, so a 50% hike in the rate ought to raise another £ 28bn a year – except that in practice it wouldn’t, because companies would find legal ways of reducing their taxable profits.


Tentative conclusion on Corbynomics


After the Second World War, the world had two main political systems – Capitalism and Communism. Communism always seemed to turn into dictatorship, accompanied by corruption, resulting in poverty, and has been largely abandoned, leaving capitalism at centre stage.


But capitalism itself is deeply flawed, the more so now when there is no real alternative. Capitalism is a system in which it easy for rich people to become richer, while for most poor people, there is no escape. Quantitative Easing has given the wheel of inequality an extra spin. Mr Corbyn’s policies are aimed at tackling the situation head-on, and should be welcomed for that reason.


But I remain nervous. The capitalist world we live in needs to be reformed, but it would best be reformed from within, by people who understand it. For Jeremy Corbyn, business equals big business, always rapacious and greedy, happy to pay the lowest possible wage while keeping the profits for itself. This is an unhelpful caricature.


One way to increase the tax take in this country would be to improve the tax system by radically simplifying it, creating something fair that everyone could understand. Why do we have to have two taxes on income, Income Tax and National Insurance? The two had different purposes once, but the differences have been eroded to the point of meaninglessness. There are far too many tax loopholes and exemptions. We wealthy pensioners receive a ‘winter fuel allowance’ because of a Gordon Brown sound-bite of 13 years ago. This, and much else, needs to be abolished. A simpler system would reduce avoidance and be less counter-productive than a penal assault on wealth-creators.

And finally, there is a chance that the new government might lose the trust of those who lend it money. The policy of Austerity was born out of a fear that this might happen, in the aftermath of the financial crisis, leading to a situation where the government either couldn’t borrow money, or had to pay a very high rate of interest to reflect the higher risk to the lender, as happened to the government of Jim Callaghan and Dennis Healey in the 1970s.


Our rulers have overspent consistently over the last few decades. Any incoming government will be saddled, with almost £2 trillion of existing debt, as well as an equivalent amount of future obligations. Rational politicians need to consider, not only what they think is right, but also what their many creditors are prepared to allow.




I always welcome your comments and questions, and particularly on the current very large subject which affects all of us. I am about to go on holiday for three weeks in a remote part of Asia, and will reply to emails on my return in early November.


Tony Yarrow

October 10th 2017


Please note – this blog contains the views of Tony Yarrow as at October 10th 2017, and should not be taken as financial or investment advice.

Sources – the Economist, The New Statesman (from which the two quotations at the top were taken), various broadsheet papers including the Times, Telegraph and Guardian, Wikipedia, and a number of specialist websites.

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