After the beer and sandwiches
Saturday 22 April 1995
Turning back the clock to the late 1970s won't yield many clues. You might as well read Old Moore's Almanac as attempt to infer anything from the last time Labour politicians were in Downing Street.
The party has changed almost beyond recognition from the Callaghan era. Those were the days of beer and sandwiches at Number Ten as ministers decided economic policy in consultation with the trades unions.
Justly or not, it is remembered as a period in which public spending rose sharply, inflation and interest rates soared, and the tax on investment income peaked at a startling 98 per cent.
Today it is so very different. Labour's position on economic issues has moved sharply to the right and many feel the old certainties are going out of the window. But what we can do is examine the challenges that would face Mr Blair if he won the election, assess his likely response to those challenges, and thus establish what life under Labour might mean for British investors.
The party has made clear its intention to boost spending on certain key aspects of the national infrastructure such as the health service, education and public transport.
These are areas which Labour believes have been seriously underfunded since 1979. The party is committed to a reinvestment programme that could run into billions of pounds.
A future Labour administration would also be likely to seek new answers to the looming pensions crisis caused by Britain's changing demographic trends - a growing number of pensioners to be supported by a shrinking number of workers.
Successive Conservative governments have sought to tackle the issue with plans to scale down the state pension scheme, Serps. The Conservatives have encouraged Britons to secure their own futures by taking out tax- efficient private pension plans. It is possible a future Labour administration would seek to alter the tax regime relating to private pensions.
The critical issue is how Labour would find the money to pay for its programmes. Whichever party wins the next election, room for manoeuvre on public spending appears limited.
The simple expedient of adding to the public sector borrowing requirement is now subject to the terms of the Maastricht Treaty, which will restrict government borrowing to 3 per cent of gross domestic product. PSBR amounts to an overdraft facility which is liable to expand or contract depending on the state of the economy.
What other options might another Labour government employ to raise money?
Further reductions in the defence budget are a possibility, although this would be fraught with political difficulties. The rearguard action fought against Conservative plans to merge army regiments and close naval dockyards was fierce enough. Whether Labour would be able to take the so-called peace dividend further is unclear.
Another option would be for Labour to do what the Conservatives have done for the past 16 years - add to the Treasury's coffers by privatising public assets. The Government currently retains small stakes in a number of privatised companies.
The attraction for Labour is that selling these residual holdings would draw fewer accusations of a policy U-turn than would be the case if it selected completely new privatisation targets. The reality, however, is that Labour has stood firm in its opposition to the Conservative privatisation drive over the years. A policy shift does not appear likely in the medium term.
Which brings us to the crunch - taxation.
Conservative governments have been trying since 1979 to shift the emphasis from direct to indirect taxation. This has produced significant reductions in income tax rates, whilst other taxes such as VAT have grown in significance.
Labour is expected to seek to reverse this trend. Some commentators believe the implication is that income tax - for higher earners at least - will rise again if Labour comes to power. Others believe the spotlight will fall on tax shelters such as PEPs and enterprise investment schemes.
The party has chosen not to reveal detailed plans in this respect, and officials have not suggested that proposals to axe such schemes may be a policy option. But it is clear that investors should act now to maximise their tax savings while the opportunities exist.
There is a wide range of opportunities, from single-company and general PEPs, Tessas, Enterprise Investment Schemes to pension plans. Maybe all of these will remain available, subject to the same favourable tax treatment, in the event of a Labour victory when Britain next goes to the polls. Maybe not. Either way investors would be well advised to be prepared.
The author is Business Development director at Barclays Stockbrokers.
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