‘Turning Out the Lights’

On the morning of the 1992 General Election the Sun newspaper front page famously warned its readers that “If Kinnock wins today will the last person to leave Britain, please turn out the lights.”

2024 was always going to be a year where investors needed to pay attention to political developments.

But in comparison to concerns that the popularity of “far right” political parties in Europe might undermine the Euro, now galvanised by President Macron’s gamble to call early parliamentary elections, or even the likelihood of political fireworks if the official result of the US Presidential election on November 5th is again disputed, investors have to date been relatively sanguine about the prospect of the first Labour government in the UK since 2010.

It’s time they started paying attention.

Perhaps wisely, the Labour Party has been playing its cards close to its chest on its economic plans. Although there is considerable conjecture that the new government intends to unveil a programme of tax increases on various sources of wealth, investors would do well to consider the economic agenda it has so far been willing to set out.

“100% renewable grid” by 2030?

The most eye-catching manifesto pledge is for Britain to achieve 100% renewable electricity generation by 2030, through the building of new nuclear reactors and the quadrupling of the UK’s offshore wind generating capacity to 60 GW.

Although politicians of all creeds have generally demonstrated little understanding of how a power grid works, leading to breathtaking ignorance about the cost and feasibility of the “energy transition”, Shadow Energy Minister Ed Miliband, combines an unusual degree of economic illiteracy with the zeal of a man who has just found his calling through membership of an apocalyptic cult.

Should Labour be serious about its policy pledge (in an ironic twist to historic precedent, the trade unions may yet prove a restraining influence over “Net Zero”) the risks to the British economy are far worse than in 1992 had Kinnock been elected.

Wind power is neither cheap nor useful

My research¹ has demonstrated that on windy days, Britain already has a glut of electricity, which cannot be consumed, stored (since large scale batteries or the latest fad of green hydrogen remain cripplingly uneconomic) or exported (since Europe experiences simultaneous windy day gluts).

The constraining factor to a renewable grid is capricious weather, leading to intermittent power generation.

Since when the wind is blowing in the North Sea it is usually blowing in the Irish Sea, this fundamental problem cannot be overcome by installing more wind turbines.

Irrespective of the cost, there is already no economic benefit from building more wind power.

The companies building these monstrous offshore wind farms, nowadays often the size of Greater London, don’t care that their product is largely useless, since the government has guaranteed them a price for their output, funded by higher electricity bills for UK consumers.

No company would today build a new offshore wind project if it was forced to operate in the free market without subsidies, a guaranteed price or above market price contract or pay for itself the costs of intermittency. This exposes the oft repeated lie that wind power is “cheap”.

I say it is also useless.

The power grid is like a factory which always needs to be manned. In this analogy, nuclear power is an expensive worker who never clocks off; gas power is the flexible worker who can be relied upon to turn up when needed; whilst wind is the unreliable worker who calls in sick more often than they turn up.

Labour’s proposed energy policy involves sacking all the flexible workers (gas), replacing them with either more expensive inflexible workers (nuclear) or those (wind) who guarantee to only turn up when they are not needed.

Without the reliable flexible worker (gas), the factory owner is unable to respond to either volatility of demand or supply (of unreliable workers).

It ends up needing either to over-invest in the expensive inflexible workers (nuclear) or in general employ far more workers overall than needed, with no guarantee of being consistently adequately resourced.

The cost of this duplication of resource in building a “renewable grid” is passed on to British consumers through higher electricity bills.

To mitigate the loss of flexible gas, we will likely see government continuing to pretend that burning wood (biomass) instead, despite its higher CO2 content, and deforestation consequences, qualifies as “renewable”.

It is also unrealistic to expect large scale deployment of nuclear by 2029, even new generation small modular reactors.

At higher market shares of wind power, with more electricity needing to be stored for longer on nosebleed expensive industrial scale batteries, unable to store power for longer than a few hours, it is easy to see how building an electricity grid powered solely by renewables would end up costing the UK more than 100% of GDP, rendering it insolvent.

A renewable grid will produce abundant electricity for a few days annually and prohibitively expensive, unreliable power the rest of the time, requiring a blank cheque of consumer subsidy, resulting in demand destruction, supply rationing and deindustrialisation.

Reeves to “manage” the economy

To her credit, Shadow Chancellor, Rachel Reeves, at least has some real-world business experience, having spent six years on the Bank of England graduate programme, followed by two years at Halifax Bank of Scotland, before it was rescued from insolvency in 2008 by Lloyds.²

Alarm bells rung, however, earlier this year when she claimed that this combined eight years of experience as a twenty-something before entering politics means she “know[s] what it takes to run a successful economy”.³

A less charitable observer might think this is like a surviving junior officer aboard “The Titanic” subsequently claiming that they now “knew” how to “run” the global shipping industry, being able to foresee World War Two, the invention of container shipping and the oil tanker, as well as competition from transcontinental air travel.

Britain achieved its historic economic success by the wisdom of Adam Smith’s “invisible hand” not through the micromanagement of some omniscient and omnipotent Chancellor of the Exchequer.

Labour to hijack pensions

With the UK government considerably more indebted than when Tony Blair came to power in 1997, its cost of borrowing elevated and the Bank of England shrinking its balance sheet, Labour has displayed a degree of cunning over how it in intends to fund its munificence, deciding that it will exclude strategic “investments” from “day-to-day” fiscal deficits and government debt calculations, presumably so that reckless spending can appear “prudent” and debt can be hidden off balance sheet.⁴

Labour also proposes the compulsory consolidation of defined contribution pension funds (expected to grow to over £1trillion (equivalent to over 40% of GDP) by the end of the decade) so that they are more “active” investing in and influencing management of British public and private companies.⁵

There is a strong suspicion that these pension fund assets would be coerced into supporting Labour’s “industrial policy”, accountable to government ministers rather than their underlying investors, who might find they are disappointed with their investment returns.

Snouts in the trough

Whilst the record of governments in picking winners is patchy, the record of dodgy companies, requiring endless taxpayer subsidy, in picking government is exemplary.

It has been reported that three-thousand-pound tickets for the Labour Party conference “business day” later this year sold out in a “Glastonbury-style rush”.⁶

A cynic might suggest that this owed much to the prospect of pigs getting their snouts in a taxpayer trough, and little to any enthusiasm from business delegates at the prospect of linking arms and keeping the red flag flying.

Stagnant standards of living

Although the Labour Party has said it is committed to economic growth (even wealth creation) it would seem to have already made an erroneous diagnosis that contrary to all the empirical evidence in the history of mankind – which suggests that “equality” of outcome and “wealth creation” are incompatible - Britain’s economic problems stem primarily from “inequality”.

Left-wing think tank, The Resolution Foundation, foreshadowed much of the Labour Party manifesto with their “Ending Stagnation” publication, which repeats the word “inequality” 186 times over its 291-pages.⁷

It correctly identifies stagnant standards of living since the Financial Crisis in 2008 as the manifestation of Britain’s economic woes.

It then goes wrong by suggesting that rising living standards can only be achieved through higher levels of government investment and by the UK becoming more like France and Germany, despite their GDP per capita growth since 2008 being no better than the UK.

Source: World Bank, Argonaut ⁸

The American exception

It is hard to believe that back in 2008 US and UK standards of living were broadly similar. Since then, however, US GDP per capita has risen 60% to $76k (£59k), compared to just $46k (£36k) in the UK.⁹

Instead of understanding what the U.S. has been doing so well that Britain might copy, the American free-enterprise model is summarily dismissed on the somewhat superficial basis that:

“Despite being far richer, the past decade in the US has shown the dangers to democracy from being the most unequal advanced economy in the world.”¹⁰

I am reminded of Margaret Thatcher’s parting parliamentary rejoinder in response to criticism of “inequality” under her Prime Ministership (during which UK GDP per capita more than doubled):

“He would rather that the poor were poorer, provided the rich were less rich.”¹¹

Too much government, not too little

Despite government spending rising to over £1.1trillion (over 50% of GDP) during COVID, where it has subsequently remained, never once is it considered that too much government - rather than too little - has been responsible for Britain’s economic woes.

Source: ONS, Argonaut ¹²

To put this into perspective, government spending has already gone from just one third of the economy in the late 1980’s and 1990’s to now almost one half. This means that the private sector has gone from being twice the size of the public sector to almost the same size.

Source: ONS, Argonaut ¹³

Since the public sector has no profit incentive to improve productivity, sustainable economic growth must be led by the private sector. As taxes on the private sector must pay for the public sector, if fiscal spending is not restrained, the private sector will eventually collapse under the burden of funding government.

I would therefore suggest that any sustainable revival in the UK economy is dependent on the private sector expanding faster than the public sector.

But rather than making Britain an easier place to do business, Labour instead proposes increasing employee rights to make workers more “secure” and “empower” them to take more “risks”, without any explanation of what this means, or how this can have a positive economic impact, since this must necessarily transfer “risk” to entrepreneurs and business owners, without any consideration that this might impact their propensity to invest capital.

Imminent rate cuts

Reeves’ first boss at the Bank of England is now its Governor, Andrew Bailey, who has so far been reluctant to ease base rates, even though UK inflation has already fallen back to the official 2% target.

Although the BOE currently describes the case for rate cuts as “finely balanced”, two quarter point reductions are now priced this year, starting in August.

Post-election, it would not surprise if the case for rate cuts was accepted with even greater alacrity from Bailey causing glee in Downing Street.

The UK could soon have base rates of 3% rather than 5%.

This makes Sunak’s decision not to hang on another 6 months and to instead call an early election even more baffling.

With rate cuts imminent, Labour could yet get lucky and find that its inheritance – whilst clearly inferior to that bequeathed to Tony Blair in 1997 – turns out to be less bad than commonly thought. Despite its anti-business agenda, Labour will credit its own policies for any short-term cyclical upswing.

Investors would be well-advised to be sceptical of the duration of any such honeymoon period, since under a Labour government the UK stock market will likely become even more reliant on overseas earnings.

Turning out the lights

Labour’s economic plans threaten to both bankrupt Britain, smothering economic activity under a gigantic windy white elephant, undoing the Industrial Revolution and reducing us to medieval standards of living, with the consolation that we will at least all be equally miserable.

Unlike in 1992, by the time we get to the next election in 2029, we may not need to worry about turning out the lights.

Barry Norris
Argonaut Capital
June 2024