What if? Scenario planning for a Corbyn-led government

There is every likelihood that a Jeremy Corbyn-led government would come under attack from the financial markets as it set out to end austerity and adopt policies that run counter to neoliberal orthodoxy.

These could well include the creation of a national investment bank, bringing public services back into public ownership, ending public-private finance deals and allowing workers to set up co-ops when private enterprises fail.

The assault could take several forms but one probable attack is on the value of the pound by way of heavy selling on the foreign exchange markets. Shadow chancellor John McDonnell and others have already indicated that a run on the pound is a real possibility.

The power of the financial markets can be used against any government, as happened in 1992. John Major’s government was forced to withdraw sterling from the European Exchange Rate Mechanism after a run on the pound which cost an estimated £3.5 billion. Sterling plunged by 10% immediately after the Brexit vote, adding to inflation.

The foreign exchange market’s trading volume, which is bigger than any other asset, is geographically dispersed and trades round the clock. Trading in foreign exchange markets averaged an astonishing $5.09 trillion a day in April 2016. Most of this is speculative trading, with money made on very small movements in currency rates. An attack on sterling leading to higher inflation would create additional pressures on borrowing by a Corbyn government, as lenders factored in a devaluation into the interest they charged.

At present, the UK government’ s budget deficit – the difference between tax revenues and spending – is running at about £55 billion a year. This is funded by borrowing on the global bond markets at relatively low interest rates. The  government issues long-term bonds at guaranteed rates of interest. These are considered a safe bet because UK governments have never defaulted on their debts. Borrowing to fund a budget deficit is added to the UK’s national debt which currently stands at £1.7 trillion. At present, it costs around £50 billion a year to pay the interest on the national debt.

Almost certainly, the bond market would take exception to Labour’s plans and demand higher interest rates or, more drastically, decline to buy UK government debt altogether. This kind of financial strike, which has hit countries like Greece in the recent period, would obviously create immediate difficulties for a Corbyn government.

Scenario planning

Here are some strategies that the Corbyn leadership and people who will vote for him should consider sooner rather than later. Some options will undoubtedly require mass popular support outside of Parliament to be carried through, in the teeth of deeply entrenched establishment political and economic opposition.

Get the people involved

▶ Be upfront with the electorate as soon as possible.

▶ Identify the potential threats to a Corbyn government.

▶ Warn them that the forces of global capitalism have a Corbyn-led government in their sights (which is how it should be!).

▶ Bring voters into the conversation about what this all means and what policies to pursue in response.

▶ Answer the Tory hysteria about Labour policies bankrupting the country head on.

Bypass the bond markets

Pension funds are among the main purchasers of UK government debt. They should be encouraged to buy directly from the government at guaranteed rates of interest in the event that the market is “on strike” against a Corbyn government or forcing up the cost of loans to punitive levels. Ordinary savers could be encouraged to invest in government bonds at a rate that earns them a return above inflation. This happened during the wars of the 20th century. Instead of a “war bond”, you could have a “Corbyn bond”!

Take steps to reorganise the Treasury and the Bank of England

The Treasury historically has been the key state agency promoting the interests of business and finance. Since the onset of corporate-driven globalisation, the Treasury has enthusiastically promoted neoliberalism and so-called free-market economics. Under New Labour, the Treasury saddled taxpayers with an immense PFI burden that will outlast some of the buildings it financed. Gordon Brown’s first act in 1997 was to give the Bank of England control over monetary policy – including interest rates – as part of the revised role of the state as facilitator rather than policy maker. This arrangement should be terminated and the Bank of England returned to public control.

The Treasury’s secretive operations by unelected bureaucrats should be ended. A committee of experts sympathetic to a Corbyn government’s plans should be given overall responsibility for formulating economic and financial policy, subject to the approval of Parliament. Treasury expertise in taxation and other areas must be incorporated into the overall planning.

Reconstruct the financial system

▶ Establish a partnership with people already working in the financial and services sector to transform it to operate for the many.

▶ Encourage financial sector workers to block anti-government actions.

▶ Appeal to workers internationally to take similar action.

▶ Begin the process of creating a parallel banking structure based on mutual ownership and control with a view to replacing the present system.

▶ Labour’s plan for a national infrastructure bank could kick-start the process of creating a democratic alternative to a system driven by profit and speculation.

Block speculation in derivatives

The UK is one of the centres for speculation in derivatives and other financial instruments by investment banks, hedge funds and other operators. Their activities contributed to the global financial crash of 2007-8 which led to recession and endless austerity. These kind of trades, which destabilise the economy, could be banned under UK law.

Call an international conference

We need a new international agreement for the socialised economy to end neoliberalism and move beyond the profit system. This is essential as solutions to the attacks a Corbyn-led government will face cannot be found within the resources of the UK alone. Corbyn and McDonnell have called for a “new economic model”. They should invite like-minded political and community leaders to an international conference to take the new agenda forward.

More scenarios

▶ What if there’s a backlash from the generals and MI5

▶ What if there’s a revolt from within

▶ What if the media destabilises things

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