Editorial

The Corbyn Rate

John Royden, Head of Research

What interest rate would you charge to lend money to Corbyn? Imagine that Jeremy Corbyn managed to push Labour and its allies past the parliamentary majority of 321. What would happen to the UK gilt market?

Well, let’s step back and ask if it could happen? The Tories and the DUP hold a thin five seat majority driven by their combined 326 seats, over the key pivot point of 321 seats. 

In the 2010 to 2015 Parliament there were 21 by-elections due to six deaths and 14 resignations and one re-run. That’s a rate of approximately four by-elections per annum. 

If Labour won all four of the expected by-elections each year, Labour could climb from 262 seats to 282 over the next five years. At that point a Labour + SNP (35 seats) + Plaid Cymru (4 seats) coalition could perhaps get them across the 321 line by the time of the next election. That assumes that all by-elections are caused by Tory deaths and resignations with Labour wins; which is unrealistic. 

But at that rate of four by-elections per annum, in just over one year, the Tory / DUP alliance could fall to a hung parliament if opposition parties won all the by-elections; with the Lib Dems and their twelve seats then being in the position of king maker. The question then would be, at what point the hung parliament drives another general election? 

A general election driven by a mid-term hung parliament looks like being Corbyn’s best chance. Would he win? Corbyn appears to have Momentum (capital “M” intended) on his side. He surprised everybody with a result that was, in my opinion, partly driven by Momentum’s clever use of soft social media posts. These emphasised the softer side of Labour’s policies and ignored the economic impact: for example, free university education without working out who was going to pay for it. 

The question then would be, at what point the hung parliament drives another general election?

The next step in this process is to work out what the effect of Labour policies would be. My reading of others’ assessments of the impact of Labour’s unfunded electoral promises seems to point to the national debt rising from c£1.75 trillion to c£2 trillion. I am uncertain of Labour’s own funding calculations given that in a meeting between a CEO of one of our preferred major utility companies and a prominent Labour politician, the Labour man said that they could nationalise the utility company without the use of debt. When pushed on the matter by the CEO, the Labour man said that they would use bonds. It appears that Labour do not consider bonds to be debt. Perhaps if they were irredeemable, zero interest rate bonds, he might have a case.

I have distant childhood memories of the previous hard-left socialist government of Harold Wilson. The internet tells me that the top rate of income tax was 83% on income above £20,000, but I recall my parents’ friends complaining that the unearned income tax surcharge took the rate to 101%. From what I remember, the tax and spend policies alienated investors who then found themselves unable to take their money out of the country due to tighter capital controls; the foreign currency allowance for my 1976 holiday in France was only £15. Attempts to transfer assets were also thwarted by the wide scope of the Capital Transfer Tax (basically a tax on gifts) with a top rate of 75%. 
  

The foreign currency allowance for my 
1976 
holiday in France was only 
£15


I conclude that a Corbynist government’s higher taxes, and the more likely threats of inflation and capital controls, would raise the returns demanded by investors. So interest rates would rise and gilts would fall. Whilst the probability of this is less than likely, it encourages us to stay with our current call of short dated bonds. 

 

Illustration by Adi Kuznicki/Graphic Alliance 

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