The Political Impact
If a snap election in the UK made Jeremy Corbyn prime minister there would be a deep polarisation of British politics as Corbyn alienated centrist and conservative voters. There would also be a radicalisation of the British right. This would be a disaster as it would likely see the rollback of some of Thatcher’s reforms that got the UK moving again. But the biggest question would be in regards to foreign policy. Corbyn has trucked with some genuinely disturbing figures, which many in the West would consider anti-Semites, terrorists, and so on. He is lukewarm on Britain’s ties to Europe and the US. I wonder if he would consider leaving Nato. At the very least, Britain would likely retrench from the Middle East, and the special relationship with the US would be over.
There are people all over the political spectrum saying you need to do something about council tax and there’s a possibility Corbyn might introduce a mansion tax. It’s crazy that a billionaire in a £70 million house pays the same as somebody else in a house in London that is now worth £1 million.
It depends on the flavour of the government he brings with him, how many moderates he has, and whether they moderate their policies. Assuming they rose to power in a fairly solid way, you would then have a more left-wing government at odds with Nato – and that would be at odds with the US, especially at the moment, and even with the rest of the EU. Corbyn’s criticism of Europe has always been from a left-wing perspective, so that’s unlikely to provide much solace for fans of the EU at this point. Britain would also reduce military spending with the aim of playing a smaller part within Nato, if not outright withdrawal, and that would leave the UK isolated from a lot of its key allies across the globe.
The Economic Impact
There would be a slowdown as foreign capital seeped away in anxiety and as Corbyn pursued a traditionalist 1970s-style leftist economic programme. There would be inflation as the costs of the socialist programme kicked in.
Generally, there would be anxiety about rates of economic growth. To be honest, it’s almost certain that, regardless of who wins the next election, taxes will have to go up in Britain to pay for public services. There would be a boost to the economy from more spending on public services in the short term, but then potentially more inflation as money is pumped into the system and public debt increases. It really would be uncharted territory. Politics would be very polarised, with the mainstream media becoming almost hysterical. The question is how would Corbyn and McDonnell actually govern. The young would be pleased, the old less so, but how this evolves over time would be fascinating.
If you see a slowdown in economic activity, if growth takes a hit, then confidence suffers, particularly in the service industries. Finance obviously would be a prime target, in terms of tougher regulations on banks. Then you might see a rise in job cuts, more companies moving overseas and some banks moving to Europe, particularly Ireland, and the US. So that would be the first hit and there’d be knock-on effects from that. The risk is that higher taxes would discourage further economic growth among businesses and further spending in investment. That, in turn, would see a reduction in consumer spending and incomes hit, and the cycle would then take off from there.
The Financial Impact
There would be a dampening. Capital flight would occur and worsen the more Corbyn pursued a real socialist platform. Combined with Brexit, this would push the financial capital of Europe from the City of London to Frankfurt.
The expectation would be that sterling would fall. Of course, sterling falling is actually generally good for the stock market as the companies mostly earn money abroad. There would be a short-term confidence shock in the markets, with shares of industries to be nationalised rising or falling depending on the proposed mechanism.
You’d see quite a bit of money moving out of UK government bonds, on the expectation of high government borrowing, and people selling sterling, moving to the euro and the dollar. People expect UK growth to stall, higher taxes will add to that pressure, and you can then start to see how the feedback loop begins to play through. That would hit sterling and you’d see people leaving UK government assets, as well as looking to sell the pound. This will then continue to bear down on the pound. Weaker economic growth tends to leave the Bank of England needing to cut rates, or leads to further quantitative easing, and that will also tend to be negative. So you can see how all these things tend to join together and impact each other.
Obviously there would be tax rises, but there also would be more public spending, so he would presumably take all the caps off public sector pay. So there might be positive effects, but there would almost certainly be quite a lot of turbulence.
It depends on the economic policies but you’d likely see higher taxation. The higher-earning segments of the population would find they would face higher taxes as a result of a Corbyn government, which would be likely to hit consumption across the board and in key areas. This would have a short-term benefit of increasing the tax take, but would slow economic growth in the long-term. In a similar way to what we had in the 1970s, the high tax rate would discourage economic activity and that would be the risk over the long term, that you’d see that feeding to the broader economy.
There would be widespread confusion in Britain as an old-school Marxist became PM. The whole world would wonder what happened to the reliable UK after both Brexit and Corbyn.