What can investors learn about Labour’s economic policy from the Mais Lecture?

Anneliese Dodds, the shadow chancellor of the exchequer, on Wednesday, 13th of January delivered the Mais Lecture, regarded as the leading event for the banking and finance community for the City of London to the Business School at City University. This year’s lecture was titled, ‘The challenges of the post-Covid, post-Brexit UK economy – a response.’

 

The shadow chancellor outlined an alternative economic plan, Labour’s framework for the economy and signalled that the Labour party is backing away from the hard-left economic policies of former leader Jeremy Corbyn. The chancellor emphasised that Labour was focused on economic competence and protecting the UK’s recovery from the damage caused by the COVID-19 pandemic and the steepest recession seen by the UK in 300 years.

 

She emphasised the need for a more resilient economy, achieved through responsible economic, fiscal and monetary policy. There was emphasis placed on maintaining the independence and integrity of the central bank, stating that the clear division in responsibilities must continue.  Ms Dodds also talked about the monetary policy adopted over the last 12 years since the financial crisis. Extremely low-interest rates mean that central banks have turned to quantitative easing in a scale never seen before to boost cashflow within the economy. Quantitative easing is set to continue, with asset holdings having doubled in the last year and its balance sheet is set to represent half the stock of the UK’s total outstanding debt, consistent with the inflation target.

 

Ms Dodds argued that monetary policy was insufficient, and that should it be all that is implemented, it would ‘exacerbate inequality and concentrate economic gains in the hands of those who were already asset-rich, at the expense of those who rely on income from their labour.’ She claimed that a truly responsible macroeconomic framework required independent monetary policy to go with a much more strategic use of fiscal policy. Before the onset of the current crisis, the Institute for Fiscal Studies provided a useful analysis of fiscal rules and how they might most appropriately be set. It suggested a forward-looking target of current budget balance which also allows the government to borrow for heightened investment spending when the interest rates are low at the same time providing flexibility in times of economic shock. It was also suggested that in a crisis scenario, it was crucial for a fiscal anchor to be implemented so as to ensure that debt burden lowers and also to limit the amount of permanent tax cuts or further increases in day-to-day spending that is announced.

 

Given that the current regime has overseen increased government spending uncharacteristic of the Conservative Party, its continuation under Labour would not greatly affect investors. The hope is that this fiscal policy will stimulate the economy, creating jobs and consumer spending. A healthier economy will boost investor confidence. However, there is currently a disconnect between the stock market performance and the economy. The FTSE 100 is approximately 29% higher than its March lows, despite the obvious effects of the pandemic on company earnings. The market has been propped up by QE and low-interest rates which decrease the cost of capital for companies. Moreover, low-interest rates mean equity returns do not need to be very high to sustain the equity risk premium relative to bonds, so investors rotate towards equities. Dodds implying QE is set to continue should buoy the market further. A long-term risk for investors is that the market, so inflated by low-interest rates and government spending, is beginning to resemble a bubble.

 

Overall, investors should not expect short-term risk to increase with a Labour government, but Dodds’ calls for a more ‘resilient’ economy will need to be reflected in the future by a market correction based on fundamentals.

 

By Veena Tadikonda

Sector Head: Jackson Philips

 

 

 

 

 

 

 

 

 

 

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