The Labour Party’s grand bargain with business

EARLIER THIS year the Labour Party hosted business leaders for a day of hobnobbing at the Oval cricket ground in London. A representative from Skanska, a construction company, challenged Jonathan Reynolds, the party’s shadow business secretary. Problems with big infrastructure projects had dented Britain’s attractiveness, she said. What could she tell her board in Sweden to make them re-evaluate? Mr Reynolds’s reply: he would go to Stockholm himself to make the pitch.

That moment captured the Labour Party’s striking courtship of business under the leadership of Sir Keir Starmer. Between them, Sir Keir, Mr Reynolds and Rachel Reeves, the shadow chancellor, have now met almost all the FTSE 350, Britain’s largest listed firms, in a cycle of breakfasts that the party has dubbed the “smoked salmon offensive” (a nod to the “prawn cocktail offensive” that saw Sir Tony Blair court the City before taking power in 1997).

For most firms, the objective behind the glad-handing is simple. A set of dire local-election results for the Tories on May 2nd confirmed that Labour is extremely likely to form the next government. “It’s better to engage early to influence policy,” says one FTSE 100 chief executive. As for Labour’s motives, Sir Keir identified fixing its relationship with business as one of three “proof points”—along with support for NATO and confronting antisemitism—by which voters would judge whether the party had changed from the tenure of Jeremy Corbyn, his leftist predecessor.

That strategy has worked better than many could have imagined. The Labour Party is now regarded as better for business than the Conservatives by a margin of 46% to 32%, according to a recent poll of 1,005 executives by Savanta. “It is beyond decontamination,” says one senior Labour figure. “The political risk is now with the Tories. That is an extraordinary thing to be able to say in one political cycle.”

Yet many executives interviewed by The Economist still have worries. “When you engage with them, it’s all great and helpful, but you have this constant nagging feeling that you aren’t entirely sure where Keir and Rachel are on free markets and the role of the state,” says one. Angela Rayner, the deputy leader in charge of Labour’s proposed employment reforms, excites particular suspicion. “It’s been a remarkably good PR job,” says one FTSE 100 boss. “The question is: is it real? Who are we really dealing with?”

The answer to that question is not entirely knowable until and unless Labour gets into power, not least because some policy details have yet to be worked out. But it is clear that the party is not seeking to rehash Sir Tony’s approach. In a big speech in March Ms Reeves set out a clear break from both Thatcherism and the New Labour era. Although the Blair administration saw rapid increases in incomes, she said, the embrace of globalisation and new technologies could widen inequality, see regions pull apart and produce insecure work. “Too many ceos treat Starmer’s Labour Party as though it was a Tony Blair tribute act or a Jeremy Corbyn burial society,” says Jim Murphy, a former cabinet minister under Sir Tony and now head of Arden Strategies, a consultancy. “It’s neither of those things: the party has now been shaped by a different generation.”

It makes more sense to think of Labour’s approach in more businesslike terms. What Sir Keir proposes is a grand bargain. To spur private investment, the party promises competence, consultation and reform. In return firms can expect tighter labour-market rules and more interventionism. It is a compact, Sir Keir told the February shindig, that will come with “new expectations on your business…We all have to change—business included.”

Labour’s offer to business has three broad elements. The first is political stability. The party says it will fix corporation tax at its current level of 25% for the parliament; retain investment allowances introduced by Jeremy Hunt, the current chancellor; and cut back budget statements to one per year. The Office for Budget Responsibility, a reassuringly independent fiscal watchdog, will be given greater powers to review the Treasury’s homework.

The second element is access and influence. Sir Keir talks of “sleeves rolled up” co-operation with businesses to zap obstacles to growth; it will not be “every quarter with coffee and croissants and everyone says the same thing as they said three months ago”, he told investors recently.

The third element is a programme of supply-side reforms, most notably ungumming Britain’s planning regime. Planning reform will be the “very centre of our economic and our political argument”, said Ms Reeves recently. Although questions remain about how radical it will really be, party leaders boast that its electoral coalition, which is younger and more urban than the Tories’, will liberate it. “We don’t have the same Nimby culture,” says one. Labour supporters are also more positive about the EU, which bodes well for a more constructive relationship with Brussels.

Many executives say that a new government with a large majority and a dose of planning reform would see the case for investing in Britain revised. “They don’t need to set the world alight,” says one FTSE 100 executive. “They simply need to calm the horses.” One private-equity figure, just back from seeing investors in New York and Singapore, echoes that. “I was struck by how much they needed reassurance that Brexit was settling down and also that there’s no more experimentation coming. The Truss tornado had a big impact.”

What does Labour want in return? Most obviously, labour-market reform. Britain has one of the most liberalised job markets in the rich world, according to the OECD, a club of rich countries. Sir Keir argues that this model is precarious for low-income workers and reinforces low productivity growth by discouraging investment in plant and training.

Less than a quarter of British workers are unionised. The party wants to make it easier for trade unions to organise workers and to initiate industrial action. The result, says Alan Bogg, a labour-law expert at the University of Bristol, would be to reset the clock to around the time of Sir Tony’s reforms of 1998, which supported the right of workers to join a union if they wished, rather than the closed shops of the 1970s.

More radical, says Mr Bogg, are plans to tighten up individual workers’ rights. A long list of measures includes getting enhanced rights over dismissal and sick pay from their first day in work (currently it is a two-year wait to accrue them—the longest such trial period in the OECD, at least where they exist). In an attempt to regularise zero-hour contracts, under which a worker has no guaranteed hours each week, staff would have a right to regular hours after 12 weeks’ employment. The legal categories of employees, workers and the self-employed would be reviewed.

Ms Reeves plans to change the mandate of the Low Pay Commission, which advises on the statutory minimum wage, to account for the cost of living. Since 2000 the minimum wage has gone from 40% to 61% of median earnings, catching up with France (see chart 1). This has seemed like a free lunch for policymakers: more money for voters with few consequences for unemployment. Yet go much further and hard trade-offs will emerge, say Nye Cominetti and Hannah Slaughter of the Resolution Foundation, a think-tank.

Hospitality and retail bosses worry, for example, that all this will hurt businesses characterised by thin margins and seasonal demand. “We have a mixture of hope, cynicism and fear,” says one supermarket executive of Labour’s plans. “We don’t have the money down the back of the sofa.” Some law firms have warned clients that by granting workers more extensive day-one rights, they will need to be more cautious about hiring them in the first place and to run tighter performance-management processes to avoid unfair-dismissal claims.

Senior party figures stress they will consult with firms. Some plans have already been diluted. At one stage, for example, the party had talked of rolling out collective bargaining across the economy; now that is limited to social care. The initial plan to give workers protections on day one, insiders stress, does not stop businesses from using probation periods or dismissing workers for legitimate reasons.

But the tussle over workers’ rights is a reminder that Labour politicians and voters are interventionist by instinct. Polling of the party’s current 204 MPs by Ipsos on behalf of Apella, a consultancy, shows they are much more likely than their Tory colleagues to think business is under- rather than over-regulated. Gambling, oil and gas, and social media are viewed with particular disfavour. An analysis by Apella of the backgrounds of Labour candidates in 100 winnable constituencies finds that two-thirds of them have worked most recently in the public or non-profit sectors.

Labour voters are 16 percentage points more likely than Tory voters to say that the government should set stricter rules on businesses in areas such as workers’ rights, Ipsos found, and 19 points more likely to say business taxation should rise to fund public services (see chart 2). They place more emphasis on environmental responsibility, tax compliance and human rights.

Labour’s plan is not laissez-faire, then, but better seen as a programme of state-led industrial policy. It is working out the detail of a £7.3bn ($9.2bn; 0.3% of GDP) “national wealth fund”, intended to spur private investment in green industries. It plans to nationalise rail operators as their franchises expire and to create a state-run energy operator. Ms Reeves is thought to want to shake up the audit market.

An instinct to intervene gives rise to several worries. One is whether Labour will have a tendency, also visible under the Tories, to pick out corporate villains. “At what point do they say ‘We like business but not you, and not you, and not you?’” says one lobbyist. Another is whether the party might try to press firms on pricing. The current government has succumbed to that temptation, too, but Labour voters are 12 percentage points more likely than Tories to think “business making excessive profits” was a cause of inflation.

Tax lurks in the background. The party’s plans include a promise to end non-domiciled tax status, to close a tax loophole for private-equity types and to levy value-added tax on private schools (it will not reimpose a cap on bankers’ bonuses). Executives worry that this is a foretaste of a wider squeeze if growth does not pick up quickly. “It’s a courting exercise at the moment. Everyone’s getting along just fine,” says another FTSE 100 boss. “But once you’re in Downing Street, you’ve got important decisions and you have to prioritise some things over others.” The outlines of Labour’s grand bargain with business are clear. The true test is to come. ■