A Labour government could cause a run on the pound due to market fears over the party’s stewardship of the economy, a leading economic think tank has said.
Douglas McWilliams, director of the Centre for Economics and Business Research (Cebr), called Labour’s plans to raise £83bn a year through higher taxes by 2023-24 “improbable”.
The party has said that it would raise the money through higher taxes on corporations and the top five per cent of earners.
Among Labour’s most expensive policies in terms of day-to-day spending are the abolition of university fees, costing £7.2bn by 2023-34, and free personal social care for over-65s, costing £10.8bn.
McWilliams questioned whether Labour would be able to raise the cash. He said in a piece on Cebr’s website: “Their maths must have tired near the end because there is a final £5bn of additional revenue attributable to ‘multiplier effects’.”
He said the most likely outcome from Labour’s policies would be a loss of confidence and “capital flight and a falling pound”.
Labour has fiercely defended its policies, however, saying that issues such as crises over the climate and UK productivity can only be solved by government spending.
Mariana Mazzucato, an economics professor at University College London, has said the focus on upfront costs is misplaced as the spending could “stimulate a decade of opportunity and long-term growth”.
A group of economists told City A.M. earlier this month that a Labour victory could send the pound falling to a 35-year low of $1.15. It currently stands at around $1.29.
However, they also said that Labour’s policy for a second referendum would appeal to traders.
Ruth Gregory of consultancy Capital Economics said that “a softish Brexit under a Labour government” could see the pound slip back slightly to $1.25.
Most pundits think Labour’s chances of winning a majority are very slim, however, and so their policies have little chance of being implemented.
Jordan Rochester of Nomura said he thought a Labour minority government, with its more radical instincts limited by a coalition, would likely see sterling fall to $1.25 in the near term.