Some of the economic policies of J.Corbyn ‘Corybnomics’ include:
- Ending austerity / more relaxed rules on budget deficits.
- People’s Quantitative easing ‘Corbyn’s Quantitative Easing’
- Higher taxes on high income earners
- Renationalisation of railways / energy sector
- National investment bank / funded by removing corporate subsidies / People’s Q.E.
A frequent economic criticism of the current UK conservative government is that they place too much stress on reducing the budget deficit. Cutting spending and reducing the deficit is harming economic growth at a time when recovery is weak. Since the start of the recession, UK real GDP is approx 15% less than trend growth. Given low borrowing costs, and weak growth – many economists argue this ‘austerity’ is unnecessary and counter-productive.
The chancellor has recently announced strict rules about a balanced budget (link). Many economists criticise this for being too strict and unnecessary. A law to impose a balanced budget may lead to arbitrary tax rises / spending cuts which can reduce aggregate demand (AD)
Rather than aim for spending cuts and keep public spending low. There is a good case for borrowing to fund public sector investment. Given that borrowing costs are very low, now is a good time to borrow.
It is important to note, that Corbyn has also stated that they will aim for a balanced current budget over the economic cycle, but they favour higher taxes on companies and higher earners – rather than spending cuts to achieve this aim.
2. People’s Q.E
I have previously written overall – perhaps Q.E. has been better than nothing. But, also a feeling it could have been better implemented. Rather than buying bonds which tends to benefit mainly banks and the financial sector, Corbyn proposes to use Q.E to purchase bonds from a national bank to fund useful public investment. This would make Q.E. more effective in driving real economy demand and fund useful investment.
The problem with Corbyn’s Q.E. (both economically and politically) is that there appears to be no discretion over future economic circumstances. Given an ongoing liquidity trap, further Q.E. may be appropriate. But, if the economy recovers and inflation picks up, a commitment to create money to fund spending, could lead to inflation and be very unsuitable. (printing money and inflation) Critics will be able to argue this displays poor economic judgement and a willingness to risk economic stability.
As Simon Wren Lewis writes, Corbyn’s Q.E. has two good elements:
- A better form of Q.E. which leads to public investment rather than driving up gilt prices.
- An investment bank (like Germany), which is a good idea.
But, if you combine the two with a reliance on pursuing Q.E. whatever the circumstances you manage to make two quite good ideas quite damaging. See more detail at: Wren Lewis on Corbyn’s Q.E.
Another problem with Corbyn’s Q.E. is should the government be responsible for putting pressure on Central bank to create money?
At the very least, Corbyn should change his policy, and state very clearly, Q.E. will only be pursued if circumstances allow.
The other point is that if you take a more relaxed approach to deficit reduction, then there is the ability to fund needed public investment without relying on Q.E. and money creation.
3. Higher share of government spending as a % of GDP.
The Conservatives have made it a priority to reduce government spending as a % of GDP. Currently government spending is around 40% of GDP, and years of strict spending rises, may see that fall towards 36% of GDP. Tax revenues are currently 36% of GDP (Sky News)
Proposed fall in Government spending under Conservative plans
Corbyn is likely to want to increase government spending as a % of GDP, arguing that the government can be more efficient in providing public services, such as education, health and public investment missed out by the private sector.
3. Renationalisation of the railways. / socialisation of energy sector.
Corbyn proposes to renationalise the railways and introduce a new model for energy production
“Energy would be socialised from below by the massive expansion of renewable energy production and supply by local communities, local authorities and co-ops on the successful German model, removing the monopoly of the big six energy companies” (Guardian link)
I’m not quite sure what ‘energy would be socialised’ would involve, so it is hard to pass too much judgement.
Of all the privatisations, rail privatisation has been the most controversial. Several private rail franchises have failed, leading the government to step in. When the East Coast main line was run profitably by the government, it could easily have been kept in public ownership rather than sold off so profit is kept by private sector. On the other hand, some private rail franchises have been more successful (e.g. Chiltern railways, funding investment and new lines) Rail nationalisation could enable better management of the railways, but it depends on many factors, such as how the renationalisation is managed.
Higher tax on wealth
The UK has seen a large increase in income and wealth inequality in recent decades. Helped partly by reduction in tax rates for higher earners and rising house prices. The effect of higher tax on the wealthy, high earners and business is always disputed, but it could lead to a fairer distribution of income and wealth without creating major disincentives to invest and work.
Council house building
Corbyn has made plans to increase the number of council houses to reduce excessive rents. The rising cost of housing is one of great social / economic problems of the UK. Politicians often talk about increasing housing supply, but this then fails to materialise in reality. Still in principle, building new council homes and regulation on rent rises is more appropriate than giving government backed lending for ‘right to buy’ to fuel mortgage demand.
On a personal note, I like the personal integrity of Jeremy Corbyn. On social redistribution I tend to support his general philosophy. So, as usual there is the risk of personal bias.
On economics, there are strong grounds for criticising past austerity and opposing the government’s current plans for ‘austerity-lite’. However, Corybn’s Q.E. is a potential problem and does gives his critics grounds for painting him as economically incompetent.
The other thing to bear in mind is that although British press may paint him as a ‘crazy left-winger’ the policies proposed are not as radical as they first appear. Many of these policies, rail nationalisation, energy policy, housing policy, investment bank, higher public sector investment, higher taxes in the rich are quite common in many European economies, who do quite well, e.g. Germany.