The UK’s exit from the EU represents a tearing up of the informal contract that exists between multinationals and the UK government. Companies put their money into Britain based on cheap, tariff-free market access to 300m EU customers. Whatever happens in the UK general election this week, the question of how to retain and attract corporate investment will loom large for the prime minister.
The two main parties have set out very different visions with different risks. Both promise more financial and in-kind assistance to business, but whereas the Conservatives are competing on familiar territory (cheap labour, low regulations) Labour is trying to forge an alternative, but no less risky, path of higher taxes, higher wage costs and better skills.
The UK’s sales pitch to investors was forged in the early 1990s when the country was actively promoted as a low-cost gateway to Europe. It offered an unrivalled pro-business environment, a skilled and flexible workforce with lower production costs, and non-wage costs below those of nearly all other EU countries.
This set the tone for UK investment strategy ever since. And it worked. In GDP terms, the UK has been one of the most successful countries for attracting inward foreign direct investment. Companies like Tata Steel, Toyota and Nissan bought themselves access to Europe on the most favourable terms.
Revising the Offer
Outside the EU, the UK loses a central plank of its pitch. In response, firms from the finance sector to auto industry have openly discussed shifting investment, or seeking some form of compensation. Deutsche Bank, JP Morgan and others have warned that Brexit means that they will have to move some operations to mainland Europe. Other companies have sought reassurance from the government. Nissan was encouraged enough to reaffirm its investment in Sunderland, but is still keeping its options open.
The Conservatives have pushed various measures to compensate businesses for what amounts to a broken promise with Brexit. They have a new emphasis on industrial strategy, mentioned no less than 40 times in their manifesto, which takes them closer towards ground that has tended to be occupied by Labour.
However, the promise to deliver a modern industrial strategy in order to “get the economy working” is rather vague and light on detail. A relatively modest promise (given the enormity of the challenge) is to fund a £23 billion National Productivity Investment Fund to support housing, research and development, economic infrastructure and skills, to include £2 billion for digital investment and the railways. The living wage survives Brexit under the Conservatives, but it continues to be much less generous than that envisaged by the organisation that put the “living wage” on the contemporary political map.
Such policies look radical, especially when coupled with promises to protect gig economy workers and make corporate pay subject to more stringent shareholder approval. But they also amount to a broad continuation of the existing model. Britain will compete on the basis of cost, with a recognition that government will have to play a more active role in assisting businesses – in order to make up for lost investment from the EU, and in part to compensate for the potential higher costs created by Brexit.
Labour’s manifesto is more radical. It promises a higher corporation tax of 24%, an increased minimum wage to the “real” living wage level, stronger trade union rights, more holidays and an end to zero-hour contracts. These are all measures which, at face value, do little to appeal to major corporations.
But that conclusion relies on a crude neoliberal logic to capitalism. Many Northern European economies not only retain high levels of investment, but they also outperform the UK in terms of their competitiveness. Labour’s strategy requires a different model of capitalism, and Labour is promising to use public investment to achieve it.
Not only is it promising to set specific limits on executive pay for private companies that contract with the state, it is promising an additional £250 billion to support a National Transformation Fund – a sizeable investment, but over a ten year period – plus £250 billion to set up a new National Investment Bank to support small businesses in particular. Together, this would easily exceed the value of direct grants and subsidies delivered through the EU.
Labour’s strategy takes the UK ideologically closer to Northern European social democracy just as it detaches itself politically and economically. The Conservative party’s policy continues to push liberal capitalism of the type pursued by the US, Canada and Australia.
Tipping the balance
The risk for the Conservatives is that too much is given away to businesses and that they drive the welfare state and the social contract still further into the ground. If they hold their nerve and stand up to big business, there is a chance that they might keep jobs in the UK. Nevertheless, they will probably have to look at more compensation, especially for the transnationals, and that is likely to mean further cuts to corporation tax – perhaps below the 15% promised by former chancellor George Osborne.
The risk in Labour’s strategy is that the increases in tax tip the balance towards exit. This is made less likely by the fact that UK’s main business taxes are much lower than its competitors. But it will add to costs already imposed by Brexit. To work, Labour may have to give back even more to businesses than it is planning. It will have to compete in a social democratic way, improving the relationship between employers and employees. It will also have to target long-term public investment towards businesses that require better skills and infrastructure more than they require cuts to labour costs and taxation.
Of course, the biggest risk that both parties face is that both strategies will fail. EU rules requiring financial firms to relocate investment in order to access EU markets will mean those businesses simply have to move. The costs and uncertainty faced by companies in the UK, coupled with the range of investment sweeteners being provided by other governments, may make the decision for them.
And businesses sense blood – they know that they exist in a new and advantageous buyers’ market where other EU states, including France, Germany and Ireland, are competing aggressively for UK businesses. Faced with such pressure, both parties would likely end up providing much more to businesses even than they envisage at present.