Corbynomics: that vision of a fairer society, built upon an economy that worked for the 99%, and trumpeted by the likes of Nobel prize-winner Paul Krugman…what on earth has happened to it?
Trouble has been brewing for a while, but things reached a head with the revelations of Corbyn’s inept management of the PLP during and after the failed coup. Notably, TUC economist Richard Murphy delivered an absolutely stunning attack piece on Corbynomics, where he criticises Jeremy Corbyn, John McDonnell, and the Corbyn office as a whole. The formerly fervent Corbynista, described as “the creator of Corbynomics” on the cover of his ‘The Joy of Tax,’ has gone so far as to brand Corbynism as ‘an empty shell that opposes capitalism for the sake of the oppressed but has no clue as to what to yet [sic] in its place.’ 
McDonnell tried to dismiss Murphy as merely an influence on fiscal rather than macroeconomic policy, but considering how Corbyn appropriated Murphy’s ideas beyond merely taxation (namely a National Investment bank and People’s Quantitative Easing – more on that below), this seems to be fairly empty spin that is trying to obscure one simple fact: Corbynomics is imploding in on itself.
Murphy was not the last Corbynomicist to disown the approach as a lost cause, with two senior economic advisers to Corbyn defecting to the Owen Smith camp. In amongst all of this, the Corbyn team has been cleaning up their website, with the deletion of specifics of Corbyn’s policies (eg. on investment and tax justice) only heightening confusion over what exactly Corbynomics actually means.
In amongst these chaotic ruins of Corbynomics, we can still try to salvage some kind of idea of which economic policies Jeremy Corbyn favours ahead of the upcoming Labour leadership contest. Due to the confused subsequent information, and in lieu of a proper manifesto, we will have to have to make do with the broad economic vision that Corbyn outlined in 2015: ‘The Economy in 2020.’
The Budget and Austerity
“Austerity is about political choices, not economic necessities.”
Here is the central thrust behind Corbyn’s entire political platform – and it is a stance that is more or less true. Austerity largely was the result of an emotional appraisal of the 2008 financial crisis as resulting from government spending and borrowing, rather than as resulting from bank spending and borrowing.
“The inheritance tax changes will lose the government over £2.5 billion in revenue between now and 2020.”
Fair point – the inheritance tax cuts were designed to appeal to the Conservative voter base, rather than for sound economic reasons. However, the five year timeline Corbyn quantifies this lost revenue with is misleading; £500 million pa is a relatively small amount in terms of the overall budget.
“Another choice was to cut corporation tax – already the lowest in the G7 at 20%. Lower too than the 25% in China, and half the 40% rate in the United States.”
Corporation tax is a difficult measure to get right. Primarily, a country’s corporation tax rate is a measure foreign firms use when assessing how attractive a country is as a place where you want to set up shop; lower corporation tax attracts more corporations, and the jobs and capital that comes with them.
The threat of a race to the bottom in carelessly cutting corporation tax is real. This cannot be understated – especially in light of George Osbourne’s recent pledge to cut corporation to below 15% in the light of the British exit from the EU, in an attempt to maintain continued investment in our economy; British corporation tax stood at 30% in 2007.  The IFS estimates that, adjusted for 2015-16 prices, cuts to corporation tax between the 2010 and 2016 budgets have cost £10.8 billion pa, whilst FullFact demonstrates that, in real terms, corporation tax revenues stood 21% lower in 2014-2015 than they did in 2007-2008. 
But perspective is needed here. For one, the IFS report highlights that the bulk of this 21% real drop in corporation tax revenues since their 2008 peak must be attributed to declining corporate revenues, rather than corporation tax revenues – a consequence of the Great depression. Furthermore, corporation tax in 2014-2015 was 6% higher in real terms (17% higher absolutely) than in 2009-2010. 
£10.8bn pa is a lot of money, but it is only a small fraction of total GDP – which stood at £1,833,233 m in 2015 – and most of this loss is attributable ultimately to a depressed corporate sector rather than corporation tax cuts.  The question is whether the money that is lost directly from corporation tax cuts is significantly less than the extra money invested into the economy.
As the above slideshow demonstrates, the indicators are clearly that increasing FDI is offsetting these losses. Less may be raised in tax revenues, but more will be invested by foreign investors. Furthermore, all corporations eligible for the tax reduction are likely to spend more, thus generating new jobs and higher wages; the official HMRC and HM Treasury 2013 ‘Analysis of the Dynamic Effects of Corporation Tax Reductions’ posits that reduced corporation tax enables increased investment, and thus higher output – leading to increased demand for labour.  Per the multiplier affect (spending circulates and generates spending elsewhere), generate capital in the wider economy.
Nevertheless, why cut Corporation tax at all, if it is “already the lowest in the G7 at 20%”? There are several reasons:
- Investors see markets such as China as “on the up” ie. growing markets where their investment will reap rich rewards in the future, so there is the need for markets like Britain to provide other reasons to attract investors – competition
- It allows us to consolidate our existing advantage in the financial sector – to stay ahead of the curve
- It may sway Chinese investors who saw a 5% difference between Chinese and UK corporation tax as insufficient to finally make the jump. The same logic applies to investors in other countries with marginally higher rates of corporation tax worldwide, or even investors in countries with lower rates of corporation tax (such as Ireland)
This is all very confusing, but one basic point should be very clear: higher corporation tax does not necessarily mean better economic performance, nor even necessarily higher corporation tax revenues in the long run – and vice versa.
An Economy That Works For All
“Our national infrastructure – energy, housing, transport, digital – is outdated, leaving the UK lagging behind other developed economies.
Modern housing, transport, digital and energy networks are the foundation stone of a modern economy, and we need to ensure they are among the best in the world.
The ‘rebalancing’ I have talked about here today means rebalancing away from finance towards the high-growth, sustainable sectors of the future. “
Corbyn highlights three salient points here:
- Our infrastructure is underdeveloped – especially when compared to that of other leading European economies
- There is a serious housing shortage in this country
- We are too reliant on finance; our economy would benefit from some diversification (a fact which has become even more apparent post-Brexit)
However, as with before, Corbyn struggles both to offer compelling solutions, or to offer credible methods to achieve such solutions when they are proposed.
“One option would be for the Bank of England to be given a new mandate to upgrade our economy to invest in new large scale housing, energy, transport and digital pro- jects: quantitative easing for people instead of banks. Richard Murphy has been one of many economists making that case.”
This suggestion shows Corbyn’s misunderstanding of how quantitative easing currently works in this country and, by extension, why it works in this country. Currently, quantitative easing is conducted by the Bank of England primarily via the medium of government bonds (gilts), ie. the BofE invests the proceeds of the easing into these gilts. The BofE is free to sell these gilts back to the government, or indeed to private investors, at any time, meaning that they remain in control of inflation levels; keeping inflation as close to 2% as possible is the whole mandate for an independent BofE, to achieve price stability.
Conversely, people’s quantitative easing (PQE) by investment is a more troublesome proposal. The suggestion is instead to set up a National Investment Bank (NIB – more on that shortly), which has its own bonds. It sells these to the BofE, with the proceeds invested in real, concrete assets rather than liquid assets. There are some serious issues with this:
Firstly, disinvestment from a half-finished road or power plant is neither desirable nor feasible. In traditional QE, the government does not need to necessarily buy back, as these can just be sold to any buyer – but it is an option, as traditional QE works by increasing the cost on gilts and encouraging private investors to invest elsewhere, rather than by directly “giving the government money.” Why would private investors invest in incomplete infrastructure if there was a need to slow the rate of PQE? In the case of PQE, the NIB cannot buy bonds back from the BofE without borrowing in such an occurrence as the funds would have been spent on the infrastructure investment – why not just finance government spending by borrowing if this is what you want to achieve?
Because of this inability of the BofE to control the rate of QE, this proposal would diminish the BofE’s ability to control the level of inflation, and essentially force them to act in a way that would undermine their primary mandate. Indeed, the precedent that investing via QE would set could and probably would lead to an increasing presence of, and acceptance of, high levels of inflation – as Roger Bootle argues, ‘committing to the permanent injection of more liquidity implies acceptance of whatever inflation rate emerges.’ 
Besides the more mundane risk of unacceptably high levels of inflation (such as under the ERM in the Major years), there are also the more extraordinary risks of stagflation (especially post-Brexit) and even hyper-inflation if too much inflation is carelessly injected into the economy via PQE. Equally, PQE also encourages the financing of pet-projects, funded by the politically expedient act of injecting inflation rather than increasing borrowing or taxes.  To this end, Mark Carney, Governor of the BofE, has broken the BofE convention of neutrality to criticise the idea of PQE, saying that it could “imperil” Britain’s price stability, and highlights that these inflationary consequences would actually hurt the poor and elderly more than any other group – rather at odds with the idea of an “economy that works for all.” 
Furthermore, whilst it is a brief footnote in the post-Brexit world, such a policy of PQE is actually in violation of a Article 123 of the Lisbon treaty.  This could still be problematic, however, if an early election is called, and should not be dismissed as entirely irrelevant.
Finally, it is worth remembering the views of Richard Murphy, the economist referenced here as the source of PQE. He believes that “PQE is a plan for downturns. In up turns you can sell bonds for the same Infrastrxuture [sic] investment goal.”  Why, then, is Corbyn proposing a measure its creator believes is only appropriate in a recessionary environment, at a time when our economy is still growing? Does he believe we will experience a downturn by 2020?
“Another option would be to strip out some of the huge tax reliefs and subsidies on offer to the corporate sector. These amount to £93 billion a year – money which would be better used in direct public investment, which in turn would give a stimulus to private sector supply chains.”
Firstly, the £93 billion figure used here has been robustly challenged. One reason for this is that the paper it is derived from counts state spending on education and the NHS – state spending that Corbyn, and indeed any Labour candidate, would increase – alongside reliefs and subsidies granted to the corporate sector. 
Moreover, as The Economist has noted, measurably more money is invested in research and development resulting from tax credits offered to these corporations than is lost from granting these credits. 
Nevertheless, the observation that investing into infrastructure would help private sector supply chains stands true – so why not achieve this without simultaneously undermining the private sector? Funding this investment through borrowing, as proposed by Owen Smith, would be more credible than inventing figures, whilst also more effective than stripping the private sector.
“These funds could be used to establish a ‘National Investment Bank’ to invest in the new infrastructure we need and in the hi-tech and innovative industries of the future.”
We’ve already discussed how and why a NIB that works via quantitative easing is a terrible idea – there’s no need to repeat this point. However, a more traditional ‘National Investment Bank’ independent of the Government but with a mandate (similar to the BofE) could still be a good long-term recommendation to help address the deficient investment and underdeveloped infrastructure in this country.
Nevertheless, this would be an expensive undertaking – more credible funding methods would be needed than those outlined here – it certainly could not be funded through Corbyn’s proposal to cut corporate subsidies and reliefs. Moreover, borrowing would be an inappropriate way to fund such a bank in the long-term.
Regardless, provisions for the kind of infrastructure investment that is being discussed here should have been made a long time ago, under New Labour – their significant investment in the NHS and education was admirable, but much of this money should have gone to improving our unacceptable infrastructure.
“To invest in infrastructure also requires a clear strategy in the construction, manufacturing, and engineering skills to build and maintain that new infrastructure so vital to sustainable economic growth.
So taking this approach, in the coming days this campaign will set out how we propose to invest in adult education and further education more generally to get the high skill, high pay, high productivity workforce we all want – building on our announcements already on university education”
Once more, there are no proposals of any substance relating to manufacturing – just hot air. In light of Brexit and the economic consequences thereof, it has become clear that Britain needs to refocus its economy into having a more prominent manufacturing element – but this is easier said then done.
However, there are some promising signs regarding the promise of a “high productivity workforce.” Every political party promises massive boosts to productivity via technological innovation and education, yet this is rarely achieved outside of technology-based bubbles. Nevertheless, Corbyn’s focus on higher education, combined with the aforementioned investment in infrastructure, is probably a good place to start. A good specific policy here would be for Corbyn to promise to overturn Theresa May’s measures that mean international students have to return home upon graduation, as this policy will deprive the UK of educated and skilled members of the workforce – two traits essential in boosting productivity.
“The biggest issue facing British politics right now is whether the top rate of tax should be 45% or 50%…
So I make this pledge: Labour must make the tax system more progressive:
Ensuring that those with the most pay the most, not just in monetary terms, but proportionally too.”
Let’s be clear: a more progressive tax system is beneficial to society as a whole, if not the stratified elite of said society. However, you need to take care that your measures to reform tax are not counter-intuitive – that they don’t actually harm rather than help the bulk of society in whose benefit they are being raised.
A 5% tax rise is not a credible way to increase tax revenues. Notably, in 2014, the IFS supported HMRC’s estimate that increasing top rate tax to 50% may net as little as £100 million pa more, with the potential to swing upwards or downwards of this total.  These statistics are contested and the debate continues, but when lost investment is taken into account, the net effect of such a tax increase could be negative.
A more extreme example of the dangers of arbitrary tax hikes for the wealthy comes from France, where top rate tax was increased from 50% to 75%. The tax raised 420 million Euros over two years, however earnings from the tax fell by 38.4% between the first and the second year in which it was collected.  This relatively unimpressive figure was not deemed a good trade-off for the anti-business image it generated; the government, struggling to attract foreign investment, quietly killed this tax off after just two years.
Perspective is of course needed here: The French tax increase failed, however it was an increase of 25%, whereas most members of the left are only discussing a 5% tax rise. Still, in combination with the unimpressive returns of top rate tax increases under New Labour, the conclusion is clear: increasing top rate tax past a certain point adds very little in the way of revenues.
“A detailed analysis last year produced by Richard Murphy suggests that the government is missing out on nearly £120 billion in tax revenues, per year. That’s enough to double the NHS budget; enough to give every man, woman and child in this country £2,000.”
This is first-class economic quackery based upon hilariously flawed estimates – and an equally shameful misunderstanding (or perhaps deliberate misinterpretation) of said estimates:
To begin with, Richard Murphy’s (remember him?) estimates of a £120 billion total tax gap are well above the £38 billion total tax gap HMRC official estimates.  However, despite the huge gap between Murphy’s and HMRC’s estimates of the total tax gap, Corbyn and Murphy both propose to significantly increase HMRC’s funding. Why, then, do they not trust its estimates?
Moreover, Murphy himself conceded his (already excessive) £120 billion estimate relates to the total tax gap rather than collectable funds – only £20 billion of this, per his estimates, is actually collectable.  He tries to defend this by insisting that neither he nor Corbyn claimed that £120 billion was the actual collectable amount – but clearly Murphy is not familiar with the concept of lie by omission.
Corbyn’s document makes no mention of the fact that only 1/6 of this £120 billion can be raised, and very obviously implies that the full amount can be collected (read it yourself). At the most generous reading of this, the absence of this fact can be regarded as a reflection of Corbyn’s fundamentally weak grasp on economics – and thus not deliberate. At worst, it must be regarded as an indefensible lie of omission – and thus deliberate.
On this point, it is worth referring to other estimates by similar mainstream parties. Primarily, in 2015 the IFS criticised Ed Miliband for claiming that even £7.5 billion could be raised through combating tax avoidance, whilst the slightly more conservative Lib Dem (£7bn) and Conservative (£5bn) estimates were also criticised. 
“Therefore I am announcing today that my fairer tax policies will include:
• The introduction of a proper anti-avoidance rule into UK tax law.
• The aim of country-by-country reporting for multinational corporations.
• Reform of small business taxation to discourage avoidance and tackle tax evasion.
• Enforce proper regulation of companies in the UK to ensure that they file their accounts and tax returns and pay the taxes that they owe.
• Lastly, and most importantly, a reversal of the cuts to staff in HMRC and at Companies House, taking on more staff at both, to ensure that HMRC can collect the taxes the country so badly needs.”
Nevertheless, whilst the amount these measures will raise is nowhere near Corbyn’s laughable suggestion of £120billion, the measures themselves are (broadly) good – although rather vague. “Proper anti-avoidance rule” – what about these rules would differ them from current improper rules? Granted, this is not a manifesto – but Corbyn needs to iron this kind of stuff out before 2020 if people are going to take him seriously.
Most of these other measures, again, are theoretically good but conveniently vague – a trend you should have noticed throughout this document that cannot simply be excused in that it is not a full manifesto. Even as policy flavours, these are lacking.What kind of international cooperation? Who with? How will Corbyn ensure that other countries don’t dodge these measures, to create a haven for foreign investors? (eg. Switzerland)
The proposal to reverse HMRC cuts, however, is as specific as can be expected – and is a good suggestion. Corbyn rightly notes that the government has reversed prior cuts, but not by enough. Increasing funding to HMRC would likely not increase tax revenue by nearly as much as Corbyn believes, but, so long as the funding was used wisely and alongside improved measures to combat tax avoidance, it could make a real difference.
Concluding Remarks – How to Make Anti-Austerity Work
What seems to be underpinning this all is a complete lack of any clear vision; Corbyn has a few policy-shaped puzzle pieces, but no idea as to how these slot together to solve the problem of a broken economy. Corbynomics seemingly amounts to a bizarre collection of populist left-wing policies, shackled to a deficit-cutting, anti-borrowing backdrop. The policies don’t work, they don’t fit together, and they actively contradict this negative anti-borrowing backdrop.
Anti-austerity measures do work. Most of the basic areas Corbyn highlights are correct: we should invest more in infrastructure; our economy is too reliant on finance; our productivity is low. However, the actual policies deployed to target these measures unfortunately fall short. Corbynomics must thus be dismissed as fantastical solutions to real problems – but that doesn’t mean that we can’t devise real solutions.
Top rate tax is just a headline-grabber – increasing it wouldn’t raise any significant amount, and would easily be dodged. If fiscal measures were going to be taken, increasing the top rate tax on dividends – which is far lower than top rate income tax (38.1% vs 45%) – would be shrewd, as the discrepancy between the top rate income and dividend taxes currently allows top earners to cut their tax bill by dumping money into their company’s shares. Intriguingly, the government has already taken measures recently to try and close this gap, but there is still room to increase this tax. 
As well as top-rate dividend increases, road tax could also be increased for more expensive vehicles; you can’t dodge a tax on a car you need to get to work
Outside of looking at the rate of corporation tax, Corbyn could likewise look at what the IFS refers to as “corporation taxes” – a group of taxes including petroleum revenue tax, oil royalties, windfall tax on tobacco companies, the diverted profits tax, bank surcharge and the bank levy.
Following on from this, there is case specifically to reform offshore corporation tax – if not in rates then in how it is collected – as seen above. Despite an increase in onshore corporation tax revenues in 2045-15 leading to a net increase in 2014-15 corporation tax revenues, offshore corporation tax revenues did fall.
If the goal is a more progressive tax system, then introducing more tax bands would be a laudable way to achieve this. The UK currently only has three tax bands:
- basic (20%)
- higher (40%)
- additional (45%).
The difference between the higher and additional rates are so low that they barely even qualify as separate tax bands, and thus Britain essentially only has two real tax bands, with a 20% gulf between the two.
Compare this to the US income tax system, where there are 7 different tax bands: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. Reforming our tax system to account for the huge 20% gulf between our rates of basic and higher tax would be a progressive measure of taxation. It would not be a popular with the election-dominating middle classes, but Corbyn has thus far appeared unconcerned with such matters.
Likewise, Corbyn’s suggestions to increase the funding of HMRC and tighten up tax law are credible ways to boost tax revenues. Closing such loopholes are the kind of measures that would work, rather than the entirely-emotional suggestion to increase top rate income tax; the devil is in the detail.
The closest Corbynomics comes to a central thrust is the need to invest – even though this is a case that publications such as The Economist have been making for a long time. Furthermore, even here there doesn’t seem to be any real depth. Its not enough just to invest – investment must be made prudently, and with the long-term as well short-term implications assessed.
Investing in the right areas can resolve other issues. For example, investing in tidal power (and taking advantage of a natural advantage of the UK ie. its large coastline) could give the UK a competitive edge in this area, thus boosting manufacturing (Asia produces cheap, simple goods as Britain produces expensive, complex goods) and equally creating high-skill, productive jobs – whilst also reducing business costs by providing cheaper power (US manufacturing renaissance has been significantly facilitated by shale gas and reduced cost of power). Considering, too, that the pound is unlikely to ever return to its pre-Brexit strength – such measures would help redress our excessive trade deficit and take advantage of cheaper exports.
Bizarre, too, is the demonstrably impossible budgeting Corbyn employs. A far more credible approach would be to employ a prudent short-term borrowing strategy, with these funds sensibly invested into infrastructure and other sustainable areas. Indeed, Owen Smith has put forward a £200 bn investment strategy funded in this way. Smith’s plan is probably too much, too soon. Borrowing, however, is currently cheap, and has effectively been utilised with some success by Canadian Prime Minister Justin Trudeau to invest in Canadian infrastructure – Labour politicians should take note.
As to why this all matters? The point of any Labour government is to help working people. For too long, the left has assumed this is all about expanding welfare and securing workers’ rights, with economic actions only considered in terms of tax hikes for the rich and transferring wealth from the private sector, whilst increasing borrowing finances increasing government spending – without due consideration of the consequences of this. Ultimately, we all comprise the economy, and we all suffer if it suffers.
Jeremy Corbyn understands that we don’t all suffer equally when this happens, and he is right to highlight it. Nevertheless, whilst he may have an idea of how to make our economy fairer, he does not have an idea of how to make our economy stronger. It is not a trade off; we can have both. We cannot and must not elect a government that cannot convert its good intentions into credible economic policies – because a fair economy is worthless if that only means everybody is poorer together.
Conor and Sean Dunwoody
- Most of this article was written in early June – and thus pre-Brexit – with the last few additions and amendments made the week 01/08/16; back-tracking and u-turns are likely from the Corbyn office on some of these policies in the upcoming weeks of the Leadership contest (starting with the Cardiff hustings, today at 7PM)
- Richard Murphy, despite defending Corbyn’s usage of his £120bn tax gap figure at the time, has subsequently expressed annoyance with how the Corbyn team misrepresented the figure (alongside the aforementioned broader attack on Corbynomics – both of which were attacks he made a while after we began writing this article).
- All charts and graphs without a watermark taken from associated footnoted documents
 Institute for Fiscal Studies, ‘The changing composition of UK tax revenues,’ , (April, 2016), p. 18. ; https://fullfact.org/economy/corporation-tax-deficit-and-bedroom-tax/
 HMRC, ‘Corporation Tax Statistics,’ (May 2016), p. 9.
 HMRC and HM Treasury, ‘An Analysis of the Dynamic Effects of Corporation Tax Reductions,‘ (2013), p. 25.
 http://www.taxresearch.org.uk/Blog/2015/09/15/yves-smith-nails-the-critics-of-peoples-qe/ (comments section, September 2015 reply to ‘paulc156’)