Merlin Weekly Macro: Labour conference marks a socialist turn

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It has been another punishing week in global sovereign bond markets. Yields are still being pushed up relentlessly to three-decade highs while prices are simultaneously heading south. Major western economies are rapidly locking themselves in a negative feedback loop: over-indebted, fiscally incontinent governments with gaping budget deficits are now faced with resurging conflict-related inflation; knowing central banks will have to respond with higher interest rates, the bond markets mitigate their risk by pushing up lending costs to cash-strapped governments all of which simply add to the deficit and piles on the debt. The current diesel pump price crisis affecting consumers and industry alike is merely the latest problem masking a much deeper-seated structural economic deficiency: the inability of all governments to match income and expenditure.

Which in the UK segues neatly into party conference season. Labour arrived in Liverpool (well, it had to be up North, obviously) to worship at the feet of the Messiah. Andy Burnham didn’t disappoint and the faithful faithfully lapped it up. They could not do otherwise: having defenestrated their former leader only three months ago and parachuted in his replacement from outside the Parliamentary membership, to have appeared miserable, truculent or critical of the new incumbent would have been electoral suicide.

But this was Labour talking to itself in an echo chamber; almost entirely absent in Burnham’s speech was any reference to engendering prosperity through growth and private sector investment. Economic reform to address the real-world crises of deficits and debt? Barely a nod. Instead, it was standard socialist fare of political red meat: digging up his vision for a “National Care Service”, an idea that went nowhere when he mooted it as health Secretary in the Brown Labour government nearly two decades ago; central government intervention in, and control over, utilities and transport; the need for social housing etc. Pensioners will be bemused but not surprised that they are in the firing line again:  having been targeted by Rachel Reeves with the abolition of the winter fuel allowance, Burnham is now minded amending the Triple Lock to save £50 billion to fund his NCS pipe dream while diluting the protection on state pensioners’ incomes.

For all that Labour has at least temporarily recovered its mojo, it remains riddled with insecurities. Why else announce a desire for electoral reform? First Past the Post has just delivered Labour a thumping majority and yet here is Burnham suggesting there must be alternatives. As the polling guru (and potential electoral reform commission head) Sir John Curtis said, the fundamental question is not what do you want to change in the voting system, but why do you want to change it? Is it to do with fairness of representation? Or is it motivated by wanting to stay in power? Burnham and his party are extremely aware of the twin threats to his electoral prospects posed by Reform and the Greens; so much is obvious. Electorates are right to be cynical and to smell a rat. When presented with reform to the means by which plebiscites are conducted all too often it is the political interests of the reformers which are superior to those on the receiving end. 

But while Chancellor John Healey juggles finances and politics in the run-up to the Budget on October 28, Labour’s war on property ownership is in full swing. Healey has already mooted that the hurdle for Reeves’s mansion tax should be lowered: separate from Council Tax, the £2,500 levy to central government on houses worth more than £2m should be reduced to those valued above £1.5m. Agents Savills reckon there are currently around 140,000 UK dwellings valued at over £2m; reducing the hurdle to £1.5m would potentially double the number being captured. As we have reported before, official HMRC government valuers would have statutory authority to enter any household to assess the liability for tax. It is obvious that direct government intervention will start to warp the property market. Attacking from another angle, at its own conference, the Green Party calling for mandatory private sector rent controls (which it saw enacted in Scotland) will find much sympathy also among Left-wing Labour MPs.

Labour has also announced the extension of Empty Dwelling Management Orders. EDMOs allow councils to take over the management of “long-term empty homes” and return them to occupation for up to seven years; ownership remains with the property owner. EDMOs were enforceable if a property was uninhabited for a minimum of two years; that is being reduced to six months. Ostensibly EDMOs are designed to curb the behaviours of “rogue” landlords. The new regulation becomes a significant infringement on property ownership: as one correspondent in a national newspaper argued, such is the inefficiency in the government’s Probate Office that probate can often take up to a year to be granted; if the deceased’s property is vacant but thanks to probate delays the beneficiaries of the estate are unable to do anything else with it and it remains empty through force of circumstance, the property could be appropriated by the state under an EDMO. Given the new tenancy laws, potentially it could be unsellable for seven years.

Much is still being “socialised” in the Treasury about what and who to tax and to what extent. This is as much an ideological principle as a means of attempting to balance the books. Rachel Reeves has already established the precedent of breaking the continuity of capital in private businesses and agriculture through her ill-judged changes to IHT reliefs; the damage caused will take years to be evident but it will be significant and enduring. Up for discussion again is the imposition of wealth taxes and/or the potential to tax unrealised capital gains, as well as additional taxes on “unearned” income. When it comes to taxes on assets, Healey should take note of what has just happened in Holland: in the wake of a big public backlash the Dutch government has been forced to abandon a flagship policy taxing wealth through levies on unrealised gains.

Whatever it decides, it is increasingly clear that Labour is determined both to extend the reach and to tighten the grip of state control. Whether through nationalisation, promotion of the public sector, taxation, regulation and active intervention, the ideological and strategic direction of travel is incontrovertible: the interests of the individual are inferior to those of the State. For all his wanting to present himself as the ordinary football-loving bloke from next door with his informality, his flat vowels, his fashionable spectacles, sharp suits and the black tee-shirt, new leader Andy Burnham is at heart a driven, conviction socialist. It is a marked shift of ideological emphasis for which the muscle memory has been lost in how to deal with it over the half century since it was last practised in the UK. It potentially has profound implications for how the economy behaves and how capital is allocated, how it flows and how it is priced.

This author’s Granny had a pithy observation of Labour governments in the 1970s: “in this land of freedom you’ll do as your ruddy well told”. As we go back to the future, get used to being ruddy well told what to do. Granny was a Wise Woman.

As a parting shot, and back to the top of this article: travelling the length of the country by road in the last week from Berkshire to Inverness, the most expensive diesel I found was at the misnamed “Welcome Break” services at Leicester Forest East on the M1: managed apparently by a descendant of Dick Turpin, they would cheerfully relieve you of 219.9p a litre for diesel and 198.9p for bog-standard unleaded. Can anyone top that? Answers on a postcard.

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