Why a Labour government might mean a fall in sterling

By The Economist online

THE British Labour Party is in buoyant mood at its annual conference, expecting to be in power very soon. And it has already started to think about the consequences, including a possible run on the pound if it takes office. But not everyone thinks this is likely; Simon Wren-Lewis, an economist, challenged people to think of “a serious economic reason why stering would fall on the election of a Labour government”. Well, this blogger can think of several.

1. Labour plans to increase the rate of tax on corporate profits from (what will be) 17% to 26%. That means the profits available to overseas investors will be reduced accordingly. They will demand a lower price to compensate for this lower return—this will either come in the form of a fall in the stockmarket or in the pound, or probably a bit of both.

2. Labour plans to nationalise various utilities (railways, water, the Royal Mail and some energy) and to cancel some private finance initiatives (PFI), by bringing them back into the public sector. It will compensate shareholders and PFI contractors with government bonds. It is safe to say that most investors will try to offload those bonds in the market. Overseas investors will demand a higher yield, or a lower pound, or a bit of both, to compensate for the risk of holding more British bonds.
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Read more here: Why a Labour government might mean a fall in sterling

Category: Business and finance, Buttonwood’s notebook

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