Too good to be true

WITH his promises to introduce a “maximum wage”, nationalise energy companies and even reopen coal mines, one might not expect Jeremy Corbyn to enjoy much support among economists, at least this side of Moscow. But the socialist MP, who looks likely to be elected leader of the Labour Party on September 12th, has been shoring up his economic credentials. His team has produced a letter from “leading economists” (including a former member of the Bank of England’s monetary-policy committee) backing his anti-austerity stance. Some of his less bombastic policies—including reforming the tax system and printing money to boost investment—sound plausible. Should people take Corbynomics more seriously?

Mr Corbyn is not alone in questioning the priority given to cutting the budget deficit, which stands at 5% of GDP. Many economists accept that five years of budget cutting have acted as a straitjacket on growth. Simon Wren-Lewis of Oxford University reckons that a conservative estimate for the cumulative cost of austerity would be 5% of GDP, or nearly £100 billion (about $150 billion). Debate rumbles on as to whether it was, nonetheless, necessary.

Mr Corbyn’s emphasis on boosting investment also meets with approval from many analysts. As a percentage of GDP, Britain’s government investment is the seventh-lowest of 26 countries tracked by Eurostat (though it is higher than in some big economies, like Germany) and lower now than during the financial crisis. Public investment improves the supply side of the economy in the long term, the manifesto points out, allowing businesses to thrive.

But Mr Corbyn’s prescriptions are seriously flawed. To increase investment he wants to set up a “national investment bank”, which would, under government direction, spend on roads, houses and green energy. Nothing wrong with that. But he proposes to fund it by cutting “reliefs and subsidies on offer to the corporate sector”, which he says amount to £93 billion a year, and ending tax evasion and avoidance, which he claims are worth another £120 billion a year. This cash would be enough to propel Britain to the top of the government-investment charts, with change left over to double spending on the National Health Service.

It sounds too good to be true, and it is. For starters, the £93 billion figure is a fiction. It comes from a paper which, unusually, classifies state spending on education and health as sops to corporations. And cutting some corporate welfare might actually harm investment: according to economists at HMRC, the tax agency, for every £1 spent on research-and-development tax credits, British companies boost their R&D spending by £1.53-£2.35.

The £120 billion in missing tax revenues—which is about four times the government’s own estimate—comes from a report by Tax Research, a pressure group. Even if the figure is to be believed—which requires a leap of faith, since the report does not explain its calculations fully—Mr Corbyn’s proposed remedies are wanting. Britain already has one of the smallest shadow economies in the rich world; stopping cash-in-hand payments entirely is impossible (and even if it were not, the extra tax burden would crush some of the economic activity that generates this untaxed income). The Corbyn manifesto vaguely pledges “a proper anti-avoidance rule”.

If the plan to boost investment through reform of the tax system is half-baked, another of Mr Corbyn’s ideas is dangerous. He promises “people’s quantitative easing”, a radical twist on a policy that the Bank of England has pursued since 2009. Instead of using newly created money to buy government bonds, as happens under ordinary QE, Mr Corbyn seems to want the Bank of England to use that cash for more productive purposes, by buying bonds from the national investment bank.

In the short term people’s QE might gee up economic activity without increasing the stock of government debt—currently 80% of GDP—since the Bank of England could write off the bonds it had bought. But it is a risky proposal. At present the bank looks unlikely to embark on a fresh round of QE (instead it is mulling monetary tightening). If Prime Minister Corbyn were to rely on QE to fund public investment, he might be tempted to cajole the bank into prescribing more of it. At the mercy of politicians, the bank would lose its credibility, and confidence would drain from the economy, forcing interest rates up and crimping investment—again, just the opposite of what was intended.