Merlin Macro: `Securonomics,’ now you see it, now you don’t

Nine days ago on the 30ᵗʰ of January, Labour issued its policy document for the UK financial services sector, entitled “Financing Growth”. Focusing on “inclusive growth” (Labour’s equivalent of the Tory “Levelling up”) the executive summary provides the gist: promoting growth in regional financial centres; enhancing national competitiveness of financial services but reinforcing consumer protection and enhancing “financial inclusion”; it aims to reinvigorate our capital markets; Labour will collaborate with the EU; it aims to lead the world in sustainable finance (by which it explicitly means funding environmental policy), embrace innovation and fintech; and it will be proportionate in regulation.

It reinforces Shadow Chancellor Rachel Reeves’s new approach to fiscal policy, dubbed “securonomics”. “What we offer is a proudly pro-business, pro-worker government, building on Britain’s strengths” in which “securonomics” are “about offering an alternative to financial instability and economic insecurity.” With an advisory panel made up of City luminaries (including the chairs of abrdn Group, L&G, Schroders, the Pru and, curiously, Sir Ron Kalifa who is the Senior Independent Director at the politically independent Bank of England) it all sounds very reasonable. What is not to like?

Yesterday, on the 8ᵗʰ of February, Labour ditched the financial cornerstone of “securonomics” when it pulled the plug (“stood down” in Sir Keir Starmer speak) on its already watered-down ‘commitment’ to spending £28bn a year over five years on the UK’s equivalent of the environmental element of President Biden’s Inflation Reduction Act in the US. £5bn now remains of the original ambition to be funded part by windfall taxes and the balance by borrowings. Reeves stands by her pledge to be Britain’s first ‘Green Chancellor’.

It might be “onomics” but the “secure” bit seems to have decided it was a hostage to fortune and has prematurely gone walkabout. Flip-flopping at the outset is hardly a reassuring start to burnishing your credentials for providing stable policy.

“Financing Growth”: 26 pages of the Curate’s Egg

Reading the document in detail, there are suggestions which are perfectly reassuring, not least Labour’s commitment to delivering economic growth and competitiveness, concepts which are out of favour not only in left-wing circles but increasingly in centre-left ideology (it’s not much in evidence in current Tory policy come to that).

Others raise eyebrows, notably another heap of proposed environmental regulation burden. Take the UK Green Taxonomy: Labour proposes defining “a clear timeline for completion of the taxonomy, and voluntary and mandatory reporting for all businesses in scope”; Wiki say that “the UK Green Taxonomy applies to companies subject to mandatory Taskforce on Climate-related Financial Disclosures (TCFD) reporting, as both frameworks will be integrated under the UK’s Sustainability Disclosure Requirements (SDR) regime”. Specifically, there will be a higher level of regulatory burden on financial institutions and FTSE100 companies to report on their carbon footprint and to state explicitly how they will achieve 1.5-C aligned transition plans.

As revealing as what it says is what it does not say

But away from the detail, as an exercise in formulating and presenting strategic economic policy, it reveals much about how Labour thinks. It is a series of unconnected policy rabbit holes. For example, at the micro level down among the weeds it highlights how it will re-engineer consumer savings ISAs, overhaul pensions and how they are managed (ugh! Again! I hear you groan), change pensions legislation to include provision for venture capital investment, and insulate your house; then at the macro height of fifty thousand feet, considers how to make Brexit work (which Labour implies is by huddling closer to Europe rather than boldly diverging and setting our own competitive course).

In this warm and fluffy pitch to the City and business communities that Labour is no threat, also revealing is what is not mentioned. Employment law lives in a separate silo. No mention here at all of Angela ‘Angry Ange’ Rayner’s policy to repeal rafts of existing legislation, replacing it with significantly strengthened powers for trade unions to take industrial action, to ban zero-hour contracts, introduce mandatory allowances for flexible working and family-friendly rights, create a new body to enforce workers’ rights etc. While some are conceptually difficult to disagree with, all add frictional costs to employment whether directly in financial payments or indirectly through the compliance burden. Such plans sit uneasily in an increasingly competitive world. When talking in terms of financial services and people taking responsibility for their own futures, as well as the need to stimulate growth through investment, zero mention of tax policy and incentives (though in the post-U-turn media grilling, windfall taxes on oil and gas companies were specifically highlighted). The paper talks of the need for government and the private sector to work together on the growth and investment journey but having since binned the majority its own green spending plan, those reading the document subsequently will be left wondering what the weight of the financial burden and expectation is that now falls on the private sector and what incentives might be offered but also what strings and conditions are attached. This is especially so when there is zero reference to any quantification of the total cost of achieving carbon net zero by 2050 or meeting Labour’s own pledge of 100% of UK energy being supplied from renewables by 2030 (including carbon capture) while keeping us all moving and the lights on.

Do leopards change their spots? It’s not always up to the leopard!

Finally, this policy prospectus is addressed at Mamon, presented at the altar of the UK’s capitalist system. Starmer and Reeves have been at pains to nurture the impression of creating a benign backdrop for business and investment under a Labour government. The document specifically highlights Rachel Reeves’s qualification for the job as Chancellor: “Rachel Reeves spent most of the first decade of her career at the Bank of England; she understands the importance of financial and monetary stability to Britain’s economic success.” She has the public endorsement of Mark Carney, the Bank’s former governor. She may turn out to be a fine and successful chancellor, or she may not; time and politics will tell. However, it is a non-sequitur that because she worked at the Bank which is responsible for monetary policy, therefore by definition she is qualified to be Chancellor controlling fiscal policy. Janet Yellen, former chair of the US Federal Reserve with considerably more senior central bank experience than Reeves, has proved a disaster as US Treasury Secretary, the American equivalent; twice in the last year on her watch she has either wilfully or carelessly allowed the Treasury to run out of money by exceeding its borrowing limits thereby jeopardising government funded public services.

The aspiring prime minister and his prospective chancellor have been schmoozing hard to convince the financial and business communities that Labour is a safe pair of hands, to trust them with the economy. As providers of capital, markets are making hard judgements about Labour’s potential fiscal competence; the tortured unwinding of Reeves’s flagship green investment project over the past few months, the cornerstone of her “securonomics” strategy, is an unconvincing start. Further, Starmer blaming it all on the Tories for having “crashed the economy” is a bit rich: the Conservatives are justifiably blameworthy of many fiscal mistakes but Starmer’s memory fails him if he cannot remember that for no other principled position than opposing Boris and placating the teaching unions, Starmer fought tooth and nail for longer and more draconian lockdown periods during the pandemic with all the massive associated financial costs and economic damage.

However much Starmer has repositioned his party since 2019, it is difficult to overcome the suspicion that at heart, the current Labour Party remains ideologically socialist. It is up to them to prove us wrong. Unlike New Labour, (Peter Mandelson, “I don’t care how filthy rich people are so long as they pay their taxes”), much of today’s party still sneers at wealth and the aspiration to create it. With no indication of reducing the tax burden, the principle that you work for the state first and for yourself and your family second remains intact.

Starmer’s party might be less radical than when led by that venerable, unreconstructed Marxist triumvirate of Jeremy Corbyn, John McDonnell and Seumas Milne, but it still has a powerful left-wing for whom much in “Financing Growth” is probably deeply uncomfortable, if not contradictory to their core principles of redistribution of wealth and the nationalisation of capital and the means of production.

Starmer and Reeves were unequivocal supporters of Corbyn and his manifesto in 2019. They lost. They have reinvented themselves as reasonable and pragmatic moderates. With all the expectation and pent-up demand for more public spending from the Left, and under Shadow Deputy Prime Minister Rayner a big prospective boost to the authority and power of the unions who are Labour’s principal financial backers, it’s not just a question of can we trust Starmer and Reeves as competent stewards, it is can they control the Left sufficiently to prevent themselves making an already poor economic situation worse? With the Tories seemingly unable to close an enduringly stubborn 20pt deficit in the polls ahead of an autumn election, we dare say we will soon find out.

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