London Briefing: City tries to get head around Corbynomics

Jeremy Corbyn’s shock victory in the Labour election leadership contest has unleashed a whole new school of economic thought on the City.

Corbynomics is unlike anything the Square Mile has experienced before. Many are dismissing the man and his policies out of hand – one respected commentator caused a storm when he rather intemperately described Corbyn’s choice of shadow chancellor, John McDonnell, as “a nutjob,” sparking a backlash not only from Corbyn supporters but also the mental health lobby.

But, given the decisive nature of Corbyn’s victory, others in the City are at least making the effort to understand the new Labour leader’s radically different economic policies and how they might work.

At the heart of Corbynomics is the veteran left-winger’s belief, as outlined in his manifesto, The Economy in 2020, that workers and government must “share fairly in the wealth creation process” and that the government should invest in skills and infrastructure “to build an economy that is more sustainable and more equal”.

So far, so laudable. But how would a Corbyn government achieve its dream of a more equal society?

Much of the detail of Corbynomics has yet to be revealed but one key policy has been outlined – printing money to invest in infrastructure, dubbed “People’s QE.”

The Bank of England would be “given a new mandate to upgrade our economy to invest in new large-scale housing, energy, transport and digital projects.” It would be “QE for people instead of banks,” according to Corbyn.

A National Investment Bank would also be established to promote infrastructure upgrades and provide support for innovation.

The new Labour leader believes that the deficit should be dealt with, but not via the current programme of austerity and spending cuts. There would be higher taxes for the rich and on big business and a crackdown on tax avoidance.

There would be “large reductions” to what Corbyn claims are £93 billion of “hidden subsidies, direct grants and tax breaks” enjoyed by big business; cash which would be used to fund the National Investment Bank.

Maximum wage

In the housing market, Corbynomics would see more council houses built to help ease the housing crisis and the reintroduction of rent controls, linking rents to local earnings. Private sector renters would also have the right to buy their own homes. This, he says, could be funded by withdrawing the £14 billion of tax allowances given to Buy to Let landlords.

During the Labour leadership contest Corbyn also floated the idea of a national maximum wage as a way of clamping down on excessive boardroom rewards and increasing equality in the workplace. “Why is it that bankers on massive salaries require bonuses to work while street cleaners require threats to make them work?” he said.

A key player in any Corbyn administration would be his long-time political ally, John McDonnell, who lists his pastime in Who’s Who as “fermenting the overthrow of capitalism”. A controversial figure, the former trades union official is known for his uncompromising views, some of which have come back to haunt him in recent days.

These include his call in 2003 for the “bravery and sacrifice” of the IRA to be honoured and his “joke” a few years ago about time-travelling back to the 1980s to assassinate Margaret Thatcher. Earlier this year, in a Commons debate, he said he would “swim through vomit” to oppose the Conservative welfare bill.

It was Corbyn’s appointment of McDonnell to the key post of shadow chancellor that has proved particularly distasteful to much of the Labour Party – and the City.

McDonnell has in the past argued for the nationalisation of Britain’s banks and renationalisation of other assets, either without compensation for investors or with any undervaluation deducted from compensation. He also wants an end to the central bank’s control over interest rates.

Corbyn wants the railways back under public ownership and has already pledged to renationalise the Big Six energy companies should Labour be returned to power in 2020.

Election 2020

And that, of course, is the key question. Can Labour expect to win an election with Jeremy Corbyn as its leader and John McDonnell as its chancellor?

When Ed Milliband was elected Labour leader in the last contest, shares in the utility companies tumbled in fright at his pledge to impose price caps. But, with an election still more than four years away, and with a general view that Corbyn is unelectable, there was no panic in the City on news of his landslide victory. For the time being, Corbynomics remains a hypothetical concept. Fiona Walsh is business editor of theguardian.com