It looks like Jeremy Corbyn and John McDonnell’s plans to nationalise energy network companies are already starting to have a negative impact on the economy.
As the Financial Times reports, a £2 billion auction for Electricity North West has fallen through, with Labour’s policy cited as the reason. This follows on from shares in listed energy companies falling heavily since the plans were announced in 2017. What is more, the chief executive of Scottish energy company SSE has claimed that the company has struggled to attract new investors because of the manifesto pledge.
Although deeply worrying, it is not surprising. The prospect of a Corbyn led government has long been considered the biggest risk facing the UK’s economy. For example, in November 2017 Morgan Stanley warned its clients that a government enacting Corbyn’s policies would pose a bigger threat to British business than Brexit.
The fact the official opposition is seen as a significant danger to investors should trouble us all.
Corbyn’s die-hard supporters will doubtless bleat about big corporate interests protecting themselves from the “radical” change offered by “JC”, of course. But the reality is that a failure to attract foreign investment would be disastrous for the UK’s economy due to the impact that it would have on the current account. The value of the pound would tank, leading to higher prices in the shops.
Just as importantly, a decrease in investment leads to lower productivity. This is important because, as the Nobel Laureate in economics Paul Krugman pointed out:
“Productivity isn’t everything, but in the long run, it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker”.
So why have the nationalisation plans produced such a reaction from investors?
Comrades Corbyn and McDonnell have indicated that they will refuse to pay the full market price for the companies. As such, there is a very real threat that investors will have their property expropriated from them at a rate far below what they paid for it in the first place. With that prospect, it’s hardly surprising that some people are reluctant to invest in Britain – under a Corbyn government, they could wake up one day to find out that their assets have been snatched for a fraction of their real value.
It is not just the lack of direct investment which is concerning. There is also the cost associated with Labour’s proposed nationalisation programme, which would cost at least £176 billion in borrowing – the equivalent of 10 per cent of the national debt – according to research from the Centre for Policy Studies . What is more, if Labour sought to nationalise the whole energy sector rather than just the networks, the overall cost of nationalisation would rise to an eyewatering £306 billion.
The knock-on effects for the economy of such a debt splurge would be serious indeed.
For a start, the yields paid on UK sovereign bonds would increase, as investors would fear the UK defaulting on its debt or might try to inflate them away. The only way to incentivise investors to buy our gilts would be to raise the yields on them.
A bigger national debt would also crowd out other investment, as investors loan money to the government, rather than the private sector, starving firms of much needed capital. That would not only been less business investment, but also lower wages and, probably, higher unemployment.
That cocktail of woe would inevitably mean lower economic growth. Nations tend to see economic growth slow down when their debt levels reach 90 per cent of GDP, with the median growth rate falling by one per cent and average growth falling by even more. Again, lower economic growth means that living standards do not improve.
Beyond the technical economic arguments, there is also a moral dimension to all this.
Under Corbyn’s plans, the state will, in effect, be extorting property from investors. Of course, investors would get some money in return, but they would have no choice other than to sell their shares, likely at a price which does not reflect their market value.
It is also helpful to remember what we mean by investors. Corbyn and his cronies hope that the word will conjure up images of greedy hedge fund managers in the minds of the public. However, it is pension funds which are some of the biggest investors in energy companies.
And the money borrowed to fund this extortion will eventually have to be paid back, perhaps by people who are yet to be born. This means that it will be our children, grandchildren, and great-grandchildren who will be left footing the bill for Corbyn and McDonnell trying to get their hands on the UK’s energy network.
Perhaps the strongest counter-argument of all is the complete lack of evidence that Labour’s policy will achieve its stated aims. For example, the party has argued that the profits will be used to cut household bills by £220. However, they have also claimed that nationalisation will be cost-free as the profits will be used to pay debt interest. It is difficult to see how they will achieve this, to say the least.
Corbyn’s plans are already damaging the UK economy by discouraging investment. If they were put into action then the consequences for the economy would be dire, with lower productivity and stagnating living standards as the morally reprehensible act of expropriating the property of investors is carried out.
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