Business groups slam John McDonnell's pledge for state intervention as "wrong plan at the wrong time"

Catherine Neilan
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Labour Party Conference 2017- Day Two
This is "not a recipe for future economic success", said BCC (Source: Getty)

Business groups have slammed Labour's proposals to nationalise several industries announced by the shadow chancellor today as "the wrong plan at the wrong time".

Speaking today in Brighton, John McDonnell said under a Labour government "ours will only become an economy for the many," because the party would "significantly broaden ownership".

"That means supporting entrepreneurs, small businesses, the genuinely self-employed and massively expanding worker control and the co-operative sector," he said.

He also confirmed what he had said during interviews earlier in the morning, saying he would bring "ownership and control" of several industries "back into the hands of people who use and work in them".

Those industries included rail, water, energy, construction and the Royal Mail. "We’re taking them back," McDonnell said.

A Labour government would also bring PFI contracts "back in house", he said, describing the system as creating "huge, long-term costs for tax payers, whilst handing out enormous profits for some companies".

But Carolyn Fairbairn, director general of the Conferedation of British Industry (CBI), said his speech "raises a warning flag over the British economy at a critical time for our country’s future".

She added: “The Shadow Chancellor’s vision of massive state intervention is the wrong plan at the wrong time... Forced nationalisation of large parts of British industry will send investors running for the hills, and puts misplaced nostalgia ahead of progressive vision.

"The trickle of stalled investments caused by Brexit uncertainty could become a flood if these plans were to become reality. This would threaten the living standards of the very people that need help, from pensioners to students," she added. Fairbanks said she was seeking an "urgent discussion with the Labour leadership" in the hope "better solutions" could be sought.

Adam Marshall, director general of the British Chambers of Commerce (BCC), was equally unnerved by McDonnell's words.

“Business communities around Britain will welcome Labour’s recent efforts to deepen engagement on the big issues around economic growth, trade and Brexit.

“However, with the UK’s departure from the EU on the horizon, businesses will be concerned by the shadow chancellor’s proposals for widespread and deep intervention across the economy. Proposals to nationalise key industries would put business investment in the deep freeze at precisely the time that it is needed most," Marshall said.

“While we can agree that we want a productive and innovative economy, and better infrastructure, the role of government is to get the fundamentals of the business environment right – not to direct every aspect of economic life in the UK.

“The domestic business environment matters hugely, particularly with the economic change of Brexit still ahead of us. As we’ve said repeatedly across Westminster, the best Brexit deal in the world won’t be worth the paper it’s written on if we don’t have the right policies in place here at home. Our message to the shadow chancellor is that a high-cost, high-tax, high-regulation UK is not a recipe for future economic success.”

Mark Farmer, chief executive of Cast and author of the government-commissioned Farmer review into the construction industry, said: “Among the many problems facing the construction industry, private ownership is not necessarily one of them. The shadow chancellor’s suggestion of nationalisating the construction industry is potentially a commitment to further wholesale inefficiencies unless it is also proposing a ‘root and branch’ modernisation of the basic construction delivery model, which it appears is not the case."

He added: "We need healthy competition between a multiplicity of actors, with a renewed focus on innovation and positive market disruption is what our industry needs at this pivotal moment. Nationalisation could stifle this innovation by supporting only a handful of technologies and systems, disincentivising new disruptors from entering the market."

Liz Jenkins, partner at law firm Clyde & Co, warned that the cost of breaking PFI contracts in order to bring them back in house would involve "very significant compensation"

"Renationalisation is certainly possible but it may not be sensible," she said. "There is no doubt that PFI is in need of a face-lift but other measures should be considered before renationalisation."

Sam Bowman, executive director of think tank the Adam Smith Institute, added: "Behind everything John McDonnell promised was an unspoken, but unavoidable, price: to pay for all this, we’re going to face big tax rises.

"The tax avoidance ‘tax gap’ exists because beyond a certain point it costs more to pursue tax than it actually raises, not because of some clever conspiracy at the Treasury. So you can’t hope to raise revenues just by ‘getting tough’, because ‘getting tough’ is expensive and difficult in itself. It’s dishonest to suggest that this can pay for the sort of policies McDonnell is proposing, and people should be aware that Labour’s extra spending will mean higher indirect taxes for most workers."

Bowman added: "Nationalising big swathes of the economy will likely mean higher prices, worse service, or higher taxes, or some combination of the three.

"In the case of rail and energy, costs are high for users because wholesale prices are high and we have chosen to make users pay instead of forcing others to subsidise them. Nationalising these industries will end up starving them of investment, just as they were before they were privatised in the 1980s. That could mean a return to energy shortages and an underserved train network that barely anyone rode."

John O'Connell, chief executive of the TaxPayers' Alliance, added:"Labour’s proposal to seize control of rail, water, utility and construction companies without paying the market rate for the shares is daylight robbery.

"Far from being “for the many” McDonnell would be helping himself to the pension savings of the 17.5 million private sector workers who have had the temerity to save into a pension for their retirement. It’s difficult to see why anyone would invest in the UK if the government was going to misappropriate private property like a South American dictator. This seems to be of little concern to the opposition front bench who will have the luxury of retiring on taxpayer-guaranteed pensions."

Mark Littlewood, director general at the Institute of Economic Affairs, added: “Shadow Chancellor John McDonnell’s speech today shows little understanding of how markets work, let alone how they can help to solve economic and social problems... Further state intervention in the labour market, which would restrict the choices available to businesses and workers alike, will hold back the ‘possibilities of technological change’ rather than embrace them."

Littlewood said the shadow chancellor was "heroically ambitious if he believes politicians are in a position to accurately predict the market value of commodities such as water and energy once nationalised'.

"History has taught us that nationalised industries are costly and inefficient, place a massive burden on taxpayers as they will require a huge amount of state support and typically provide terrible services. The key to bringing down costs for consumers is to deregulate and reduce government intervention in the market, not put them in the driver’s seat. Labour’s agenda of tighter regulation, renationalisation and higher taxes will discourage investment and job creation, rather than promote them.”

The City has already spoken out against Labour's plans for a Robin Hood tax, warning it would would hit consumers and cause job losses.

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