What's Left to say?

Labour's market-friendly image will not be enough to dispel doubts in the City, writes William Kay
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The Independent Online
The market - to which the Labour and Conservative parties both bow - has spoken. On Friday Ladbroke looked at the local election results and hardened the odds of Labour winning the next general election to 4 to 1 on.

For the uninitiated in the ways of the betting fraternity, that means anyone wanting to have a punt on a Labour victory would have to put £4 on the table to win just £1. By contrast, a successful £4 bet on a Conservative victory would pay £10.

As it became clear on Friday that the Tories had lost more than 2,000 seats the previous night, Jeremy Hanley, the party chairman, was reduced to blaming the disastrous performance on the Conservatives' traditional followers staying at home and not voting. He added: "I wonder if anyone who voted Labour knew what Labour stands for."

In the maximum two-year run-up to the next general election, the City and media will increasingly concentrate on what Labour has to offer.

While there is a greater willingness than before in the City to give a hearing to the economic and corporate plans of the Shadow Chancellor, Gordon Brown, this is still tempered by uncertainties: how they will perform when they are really in government, how big will their majority be, what will be the profile of the new Labour MPs and the influence of the left on a leadership which is avowedly to the right of its party?

KEITH SKEOCH, chief economist at stockbroker James Capel, believes that the political factor could trim more than 300 points off the FT-SE 100 by the end of next year, when the election could be imminent.

He said: "We forecast it will rise from the present 3,251.7 to 3,700 by the end of this year, and 3,860 at the end of 1996. But if you were looking simply at the performance of the UK economy, and there were no political factor, I think it could be 7-10 per cent higher. The risk premium negates the improvement in the economy."

However, it is clear that the analysts are deeply divided over the political impact on the stock market in the next 18 months.

The controversial Nick Knight at Nomura, who has in the past startled the investment world with his bold forecasts, believes that the bigger influence on shares up to the end of 1996 is the likelihood of a series of increasingly desperate measures to boost the economy by the Major government as it tries to cling to power.

Mr Knight is predicting a flat market for the rest of this year, with the FT-SE 100 closing at 3,200 and rising to no more than 3,600 by the end of 1996.

He explained: "You will get somewhat of a move up because the Tories go for broke. But they might not last that long, and the negative impact on the bond market of the Tories cutting loose could constrain equities. You could see sterling going to hell in a handbasket, bonds falling and shares taking fright."

Conversely, according to Mr Knight, if Labour were to be elected tomorrow with a big enough majority to give it a five-year term, investors could afford to be more optimistic. "You could see initial nervousness over the first Labour Budget or two, then a rise in confidence running up to the third, and a stock market boom."

The weight of expectation is one reason that Mr Brown and his leader, Tony Blair, are wary of being too specific about their economic proposals. They are acutely conscious of the play the Conservatives made of the detailed shadow budget that Mr Brown's predecessor, the late John Smith, published a few months before the 1992 election, and they are determined not to repeat the mistake. However, that tactic has had to be balanced against the risk of damaging Labour's credibility with the electorate if it stays too silent for too long.

Consequently, the party's plans for the economy and the corporate sector are longer on rhetoric than they are on hard commitments. Ian Stewart, market strategist for the stockbroker Smith New Court, said: "The leadership is acutely aware of the need to avoid giving hostages to fortune on tax and spending. Thus Labour has sought to give greater prominence to issues such as constitutional reform, which can be implemented at relatively small cost."

Last week, Mr Brown embarked on the first of a series of four speeches intended to set out Labour's thinking on the economy, welfare, unemployment and taxation. He made it plain that the market is a cornerstone of New Labour.

Setting the tone, Mr Brown said: "We intend to move our country from a low-investment, low-growth, low-skill and low- productivity economy to one characterised by high investment, high growth, high skills and high productivity. The central challenge of modernisation is to overcome the long-standing problem of under-investment in people, industry and our social and economic fabric."

So far, so traditional. But then Mr Brown made a commitment that would have been unthinkable even at the last general election. He said: "To achieve this in the new global marketplace, the job of government is neither to suppress markets nor to surrender to them but to equip people, companies and countries to succeed within them."

"The main point about that speech," said Mr Skeoch, "was the lengths he went to embrace the price mechanism."

This was underlined by Alistair Darling, Mr Brown's spokesman on the City, when he was asked about Swiss Bank Corporation's bid for SG Warburg, the UK merchant banking group. He said: "I don't think a government can stop takeovers and mergers, especially not just because the acquirer is foreign. The correct policy is to ensure that British industry, and banks in particular, remain competitive. There isn't an easy answer, and it's wrong for anyone to suggest there is."

Arguably, the detailed proposals in Mr Brown's speech amounted to doing very much the same as the Government has been trying to do in the economic and corporate area, but doing it better: making markets fairer; keeping a tighter rein on utilities; taking a tougher stance on takeovers, mergers, monopolies and restrictive practices; providing more information for consumers and investors.

There was no call for the renationalisation of privatised utilties, no new bureaucracy - just greater incentives for long-term finance, opportunities for small businesses and more incentives for investment in skills and infrastructure.

But earlier pronouncements suggest that Labour wants to shepherd individuals and companies to behave in what are deemed to be appropriate ways. Firms that do not train people to a certain standard will have to pay a training levy, while there will be tax breaks for those who take on the long-term unemployed.

Said Mr Stewart: "In many areas, Labour's analysis of the economic and social problems facing the UK has not changed significantly. Underlying many Labour policies - and a great deal of the party's political appeal - is the view that the UK suffers from widespread market failure and substantial public sector under-provision."

However, as Mr Skeoch pointed out, the Brown speech did appear to contain the outline of a comprehensive attack on City short-termism, through reviving the two-tier system of higher taxes on short-term capital gains than profits from holding securities over a longer period.

MR BROWN's speech contained a passage in which he appeared to flirt with an idea briefly floated last year by Stephen Dorrell, the Heritage Secretary, for limiting dividends in favour of investment. This could involve a return to the original Callaghan corporation tax of 30 years ago, in which distributed profits - dividends - were taxed more heavily than those retained within a company.

Perhaps a stronger flavour of a Brown chancellorship comes from his specific tax proposals made ahead of last November's Budget. These included attacking tax relief on private medical insurance, limiting executive share options, and closing inheritance tax and offshore investment loopholes.

Said Mr Skeoch: "We have no idea of their tax and spending plans. In view of what Brown said about what he called his 'iron commitment to macroeconomic stability and financial prudence', we can assume that once we know the tax plans, we can guess the permissible rise in spending - or, once we see how much they want to spend, we will know how much tax has to go up."

The other great unknown is how a Labour government will respond to calls for the UK to join the European Union's social contract. The signs are that it will, for it opposed Mr Major's insistence on Britain opting out. But the City will be watching closely to see how the pound reacts to the possible threat from foreign companies that have invested in this country because of its low labour costs compared with those in other EU countries.

Mr Stewart concluded: "The smooth reform and promulgation of new Labour policies is not ensured, especially as Mr Blair's media honeymoon comes to an end. Against a background of further falls in unemployment, rising incomes and steady growth, this may mean that Labour's strong poll lead is rather more vulnerable than is widely thought."

Tell that to the bookies.

Selling points

"Socialism is an ideology often more successfully caricatured by our enemies than defined by our friends."

"Just as old left solutions cannot answer Britain's economic problems, nor can those of the new right."

"Nobody should doubt my iron commitment to macroeconomic stability and financial prudence."

"We now have an economy which is too small, with too narrow a technological base, with too few successful firms - all because there has been too little investment - to provide the increase in wealth, job opportunities, living standards and public services that we all want."

"Competitiveness abroad often begins with competition at home."

"Competitive markets, made efficient by proper standards and consumer rights, are one key ingredient of a dynamic economy."

"Labour is the party of the ordinary consumer as well as the efficient producer."

"... the growing importance of international co-operation and new theories of economic sovereignty across a wide range of areas - macroeconomics, trade, the environment, the growth of post neo-classical endogenous growth theory and the symbiotic relationships between growth and investment in people and infrastructure; a new understanding of how labour markets work; and the rich and controversial debate over the meaning and importance of competitiveness at the level of individuals, the firm or the nation and the role of government in fashioning modern industrial policies which focus on maintaining competitiveness."

The measures the Shadow Chancellor would introduce to provide a more equitable economy

q Create a stable framework of monetary and fiscal discipline for sustainable growth. q Continue commitment to an inflation target, a managed exchange rate and international co-ordination of economic policies.

q Introduce measures to encourage a high-productivity, highly skilled workforce.

q Protect consumers from unscrupulous firms by publishing performance tables.

q Hold public hearings on utilties' prices, service standards and profits.

q Pass new anti-trust laws.

q Replace the MMC and OFT with a Competition and Consumer Standards Office.

q Outlaw certain anti-competitive practices.

q Make the banking ombudsman statutory.

q Concentrate investigative and disciplinary powers in the SIB, and make it easier to punish insider traders under civil and criminal law.

q Reward long-term investment through the capital gains tax system.

q Reform takeover code, shifting burden of proof to show that takeover will raise efficiency and serve the public.

q Create regional development agencies.

q Stop tax relief on private medical insurance.

q Limit executive share options.

q Close offshore investment loopholes.

q End inheritance tax fiddles.