Hello. Are you looking forward to having a Marxist in No 11?” It was an unusual welcome from the shadow chancellor to a senior executive visiting his office. But while John McDonnell had a jokey glint in his eye, the phrase highlights the chasm that remains between the opposition Labour party under Jeremy Corbyn and those who own and run businesses in the UK.
With Theresa May’s grip on power looking ever more vulnerable, business leaders are starting to realise they need to take the prospect of a “hard left” UK government seriously. Should the prime minister’s minority administration implode, perhaps under the weight of Brexit, it could trigger a snap election that delivers Mr McDonnell into the Treasury, deciding all fiscal and economic policy for a G7 nation.
Mr McDonnell has been at pains in recent months to suggest that the relationship between his party and the country’s business community has improved, while industry bodies say Labour has stepped up its engagement. Yet despite shared interest in a softer Brexit deal and higher infrastructure spending, business remains wary primarily over taxation and demands for greater state intervention.
“Clearly they [senior Labour leaders] have got their act together,” says one business figure. “But I think there’s a combination here of McDonnell and Corbyn appearing to be more moderate than they are in order to catch more of the centre ground of the voting public which business is a part of.”
Mr Corbyn, now firmly in control of Labour after its surprise gains in the June general election cemented his position, has more in common with the US’s Bernie Sanders or Jean-Luc Mélenchon, the veteran French politician, than predecessors such as Tony Blair. He wants a decisive break from what supporters call the “neoliberal” consensus.
Before the election Labour trailed the ruling Conservatives by 20 points in some polls: now it is slightly ahead. Its offer of extra money for health, education and the police is hitting home with voters tired of austerity. Policies once derided as a return to the 1970s are proving hugely popular: including the nationalisation of the railways and utilities. This is not the Blair “New Labour” which pursued a “third way” between free markets and socialism. Instead, Mr Corbyn unashamedly backs much higher taxes to fund better public services, along with greater state control of industry.
Iain Anderson, founder of the public affairs company Cicero, whose clients include big banks, says that when he gives boardroom presentations he uses a slide projection featuring Mr Corbyn in Downing Street. “The first time I did it was August, and back then you’d have a few smiles, you’d see people laugh,” he says. “They aren’t laughing now.”
There sometimes appear to be two people who go by the name John McDonnell. The first has in the past called for “insurrection”, joked about “lynching” a female MP and praised a worker for spitting in her boss’s tea. In Who’s Who he lists his hobby as “generally fermenting [sic] the overthrow of capitalism”.
This version spooks some executives. “Our clients tend to think: ‘Oh. My. God.’ They think the combination of Brexit, McDonnell and Corbyn together would be unimaginably, catastrophically terrible,” says one corporate adviser.
The other John McDonnell cuts a more considered figure. He resembles an old-fashioned bank manager, or maths teacher, and claims to be a moderate pragmatist. Yes, he says “I believe there’s a lot to learn from reading Das Kapital”, but he plays down the idea that he is still a firebrand Marxist.
Some business lobbyists speak of Mr McDonnell’s “supreme” communication skills. In an echo of Mr Blair’s “prawn cocktail offensive” in the 1990s, designed to reassure the corporate world before Labour took power in 1997, Mr McDonnell is on what he calls a “tea offensive”, meeting business people for frank exchanges of views. (He only takes tea because he believes “there is no such thing as a free lunch”.)
To some extent Labour has a fair wind, with many business leaders terrified of a hard Brexit — leaving the EU without a trade deal — while others are still stinging from Mrs May’s first year in office, when she froze out executives for fear of looking too elitist.
Yet the courtship is characterised by mutual suspicion. Adam Marshall, director-general of the British Chambers of Commerce, says engagement is constructive and is proceeding at a higher tempo than before. “But in some cases, is it possible to feel that people are hearing but not necessarily listening to business concerns? Yes.”
“There’s definitely a change in tone,” adds Josh Hardie, deputy director-general for policy and campaigns at the CBI business group. “In terms of substance, I think we’re waiting to see.”
Executives are worried about many of the promises in the Labour election manifesto from June, with its multiple nationalisations, a higher minimum wage and hint of a land tax. The document promised £48bn a year of additional public spending, partly funded by £19bn of extra corporation tax and higher income tax on top earners, an “excessive pay levy” and a new crackdown on tax avoidance. Mr McDonnell says he would only borrow more money for infrastructure, which would amount to about £250bn over 10 years.
While business might welcome the thought of billions of pounds going into roads, railways and power plants, there is unease about the impact of that further borrowing on Britain’s credit rating. The CBI has warned that plans to nationalise the rail, energy and water industries — as well as Royal Mail — would “send investors running for the hills”. Furthermore, no one knows if the manifesto is the threshold of Mr Corbyn’s ambitions or whether it is a prelude to an even more radical approach when in power.
Richard Angell, head of the Blairite think-tank Progress, says the manifesto was more idealistic than ideological, or “less Leninist and more John Lennon-ish”. But he warns: “They are growing in confidence and the ideologues run the show. They are going to start asking fresh questions, such as, why stop at three big nationalisations?”
Morgan Stanley predicted in November that a Corbyn government could play havoc with stock markets and the pound, which has fallen more than 10 per cent since the eve of the EU referendum vote. CME Group, a US financial company, sent a paper to investors warning of a “nightmare scenario for the pound”.
Labour-controlled Camden Council in London has been advised by its own pension manager, CIV, to shift investments abroad because of the “political risk” of a Labour election victory. Meanwhile, Mr McDonnell admits the party has been “war-gaming” scenarios around a Labour win, including a “run on the pound”.
Danny Blanchflower, a former member of the Bank of England’s Monetary Policy Committee who advised the shadow chancellor between September 2015 and June 2016, expects some market “volatility” if the party wins. “If they say idiotic things, the Bank of England could have to act,” he says.
Yet there is still a scattering of moderates in the new look, Corbynista Labour party: for example Keir Starmer, the shadow Brexit secretary and a former director of public prosecutions.
Labour’s preparations for government are being led by Sir Bob Kerslake, previously co-head of the civil service. His advice to executives is to forget the idea that Corbynism is a “reincarnation of old Marxism”. Instead they should see it as a political manifestation of serious societal concerns, such as wage stagnation and out-of-control executive pay. “You don’t have to be a Marxist to see this,” he says. He argues that some Labour policies, allowing the state to run the railways or offering free university tuition, are standard for the European centre-left.
Support for Labour in June’s election surged among educated, white-collar workers under the age of 45. Allen Simpson, a banker who runs the party members’ group Labour in the City, says: “City people looked at the Labour manifesto and saw a traditional social democratic offering, it wasn’t radical in a negative sense, whereas the Tories now seem closed-doors and nativist.”
Ahead of June Mr Corbyn was told by everyone — polls, the press, his MPs, even his own advisers — that he would fail at the ballot box and possibly lose control of his party. It seemed impossible for a leftwinger to win on a platform of nationalisation and higher taxes.
Mr Corbyn didn’t win; in fact, Labour fell 64 seats short of an overall parliamentary majority. But having won 40 per cent of the vote and gained 30 seats, Mr Corbyn is in no mood to listen to sceptics. Just days after the Morgan Stanley warning, he released a video saying that City “speculators and gamblers” who paid themselves billions in bonuses faced a day of reckoning: “When they say we’re a threat, they’re right.”
In targeting a rich Wall St bank, Mr Corbyn is confident he is on the side of a public sick of “austerity” and in tune with the resentment displayed across the globe to political and business elites in the past two years.
Soon after becoming shadow chancellor, Mr McDonnell created an advisory panel of seven economists, including Ann Pettifor and Mr Blanchflower. Several quit in the wake of the EU referendum, leaving just Ms Pettifor, who predicts that a Corbyn government would be good for business because it would be “economically expansionary”.
The leadership will ultimately turn out to be pragmatic, she suggests. “You just have to look at past Labour governments. The party is prepared to work with business and the City of London.”
The Labour team has made a positive pitch to business, especially small business which has been singled out with the offer of a lower rate of corporation tax, no quarterly reporting and action on late payments.
But above all Labour’s pursuit of a softer Brexit — it wants the UK to stay in the single market and customs union for a two-year transition — is what many, if not most, in business want. Some business leaders would prefer Labour to go further and endorse staying in the single market and customs union permanently, but the Corbyn team fear this would alienate millions of Leave voters in its traditional regional heartlands.
The CBI’s annual conference in November gave some credibility to this line. At a gathering which normally sees a Conservative prime minister received with enthusiasm, Mrs May received only polite applause. The welcome for Mr Corbyn, who confidently strode across the stage while aiming jokes both at himself and the audience, was distinctly warmer.
“Business is pragmatic,” says one lobbyist. “They are adept at having to adapt their modus operandi to the political climate to try and ensure their companies are not damaged.”
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One business adviser says that in the New Labour era, international conglomerates had “sensible conversations” with the leadership. “I don’t know whether the current leadership would be pragmatic or diplomatic enough to hold those talks,” he says. “In the old days, they would have just picked up the phone . . . and asked for a meeting. But now, getting meetings one to one is very difficult.”
The Corbyn team believes New Labour got far too close to business, allowing companies to foist damaging private finance initiative contracts on the public sector — which Mr McDonnell now wants to unravel — dodge their fair share of tax and nibble away at the welfare state.
The attitude of many business people is less love for Labour and more a frustration with the fractured May government. At a recent event watched by the FT, there was a lack of enthusiasm for Labour, with one person present saying he was “scared” of the party. But afterwards, one attendee said he was open to listening to Mr Corbyn’s party on the basis that the Conservatives no longer stood for him: “The Tories have become a one-issue party, on Brexit, where I don’t agree with them at all.”
Labour and business
Labour says it will set out plans for a sharp increase in corporation tax — from 19 per cent to 26 per cent — for big companies while keeping it relatively low for smaller ones. “Our new settlement with business will ask large corporations to pay a little more while still keeping UK corporation tax among the lowest of the major developed economies”.
Election manifesto 2017
Business says: “If to fund [Labour’s spending plans], business is seen as a bottomless pit, that will damage growth and investment . . . This is not the time for business to be shouldering a whole new wave of costs, because that will ultimately impact the very people Labour is trying to help.”
Josh Hardie, deputy director-general,
Public-private finance deals
Labourhas vowed to nationalise some private finance initiative contracts as part of plans to roll back private sector involvement in UK public services. Shadow chancellor John McDonnell said in September that “We’ll bring [PFI] contracts and staff back in-house”.
Business says: “It isn’t a bad idea. Most would be perfectly happy to renegotiate over cost and timescale. Renegotiating where appropriate is no problem and that kind of sounds like what McDonnell was suggesting. But if there was to be a wholesale ripping up of contracts there would be a huge amount to pay.”
Labour says it will introduce an Excessive Pay Levy on companies where staff earn “very high” pay. It will also introduce a 20:1 pay ratio between the highest and lowest paid earners in the public sector and in companies bidding for public contracts.
Business says: “Even though we think companies should be doing more, we don’t think the government should be intervening like that. It’s just not the kind of thing government is good at doing or should be doing . . . The EPL seems like a stick to beat unpopular companies with.”
Edwin Morgan, interim director of policy, Institute of Directors
Labour says it will privatise the rail companies, the energy and water utilities and Royal Mail. “More democratic ownership structures would help our economy deliver for the many and lead to a fairer distribution of wealth”.
Election manifesto 2017
Business says: “The relatively modest renationalisation programme would likely be the start of widespread nationalisation and the undermining of liberal regulated capitalism that has brought so much prosperity to this country.”
Terry Scuoler, former chief executive, EEF, the manufacturers' association
Labour says it will raise income tax for the top 5 per cent of earners. “We will not ask ordinary households to pay more.”
Election manifesto 2017
Business says: “I’m personally of the belief that high marginal rates of personal tax tend to raise less money and blunt the climate for entrepreneurship. Look at the 50p versus the 45p rate in recent years. We’ve actually seen more income come in with lower rates.”
Adam Marshall, director-general, British Chambers of Commerce