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With the latest national opinion polls showing Jeremy Corbyn’s Labour party eight points ahead of Theresa May’s Conservatives, investors and business leaders are increasingly worried about the prospect of a leftwing UK government that would overturn decades of economic orthodoxy.
The next general election is not expected for five years. Still, many in the City of London are now preparing for the possibility of a snap general election that could bring Mr Corbyn, his self-described Marxist shadow chancellor, John McDonnell, and their policy agenda to Downing Street.
The Labour manifesto from June promised £48bn a year of additional public spending — partly funded by £19bn of extra corporation tax and higher income tax on top earners, an “excessive pay levy” and a fresh clampdown on tax avoidance, among other measures.
A Corbyn government could wreak havoc on stock markets and the pound, Morgan Stanley predicted last month, while CME Group, a US exchange operator, sent a paper to investors predicting a “nightmare scenario for the pound”. During a private equity conference in Amsterdam, Bobby Vedral, a banker partner at Goldman Sachs, said a Corbyn win would make the UK like “Cuba without the sunshine”.
In response, Mr Corbyn labelled the financial sector “speculators and gamblers who crashed our economy”, warning global banks that operate out of the City that he would be a “threat” to their business if he became prime minister.
But behind the scenes, Mr McDonnell has been meeting City officials and financiers to reassure them that Labour can be trusted with the economy. Some seem persuaded. Should they be?
Many investors took notice of Mr Corbyn only after June’s general election, when Labour gained 30 seats in the House of Commons and denied Mrs May’s Conservatives of their parliamentary majority.
Some have since moved hundreds of millions of pounds’ worth of investments outside the UK, while others have accelerated fundraising ahead of any drastic changes to the political landscape.
“The rise of Jeremy Corbyn has not made me feel that relaxed,” said Edi Truell, a private equity investor who has already taken his entire £250m family fortune out of the UK and moved it to Switzerland. “I would be devastated if he got into power. It would be disastrous.
“I’ve heard from investors who say ‘we don’t want to invest in the UK, not because of Brexit but because of Corbyn’,” Mr Truell said.
One manager of a UK private equity fund agreed, saying a Corbyn government would make Brexit seem like “a minor issue”, and make it difficult for funds to raise money from overseas investors.
Garry Wilson, managing partner of Endless, a specialist private equity group, made a similar point, saying investors “won’t send some money to the UK but will also think about how to get their funds out” if Corbyn becomes prime minister.
“A lot of investors are just hoping and praying it doesn’t happen,” he added.
William Jackson, managing partner at Bridgepoint, the private equity owner of Pret A Manger, said that while he “absolutely” understood Mr Corbyn’s “broader appeal”, higher taxes could drive top earners out of the country, reducing the tax take for the Treasury and slowing growth.
“The caution in my mind has to do with the fact that the UK is so dependent on a restricted tax base,” said Mr Jackson. “[This] makes the country very dependent upon those earners staying in the UK and vulnerable to the impact changes in taxation rates have on the total tax take. History shows that there’s a tipping point beyond which enterprise stalls and the tax take actually falls.”
One manager of a UK private equity fund said a substantial increase in income taxes for the wealthy would “make it not worth earning the money to pay the tax”.
Ajit Nedungadi, a managing partner at TA Associates, a Massachusetts-based private equity group with $14.1bn under management, was even more direct in his assessment. “Corbyn will be bad news for the industry,” he said. “It’s black and white. There is no question. How can it be good news?”
Not everyone in the financial community views a Corbyn government in such grave terms. Dean Turner, an economist in the UK investment office at UBS Wealth Management, believes investors have exaggerated the threat posed by Mr Corbyn, saying a government led by the Labour leader would not turn Britain into “Venezuela overnight”.
“Taxation as a share of gross domestic product would be at 1985 levels, and spending as a share of GDP at 1984 levels,” Mr Turner said, adding that it would be a “dramatic shift from where we have been for the last 30 years”.
He said, any change would be “gradual”.
“There is a lot of talk about becoming Venezuela overnight,” said Mr Turner. “That’s extreme.”
Mr Turner said many of Mr Corbyn’s policy proposals, such as renationalisation of the railways, would be seen as mainstream in other EU countries. He also said that Mr Corbyn’s pledge to reverse cuts in corporation tax — raising the headline corporation tax rate from 19 to 26 per cent — was also relatively conventional. Even under Mr Corbyn’s plan, for example, the UK would still have the lowest corporate tax rate in the G7.
Mr Turner also dismissed speculation about a run on the pound and the imposition of capital controls, even after Mr McDonnell said that Labour would have to prepare for both possibilities.
“If we do see a weaker pound, the change would be gradual,” Mr Turner said. “I doubt we would see the kind of falls we saw post-Brexit vote.”
Mr Turner’s colleague, Karan Sejpal, head of UBS Wealth in the north-west and Yorkshire, said some private wealth management clients were concerned about the prospect of a Corbyn government. “Quite a few are getting apprehensive,” he said.
But Mr Sejpal added: “It has been relatively subdued. His rhetoric has softened as he has become more probable as a prime minister.”
Additional reporting by Jim Pickard