Inclusive Ownership Funds – is the FT’s analysis correct?

On Monday, as we moved one step closer to a General Election, the FT launched a brutal attack on a flagship Labour policy.  Labour, in one of “the biggest state raids on the private sector to take place in a Western democracy”, will “confiscate” shares. Turning the rhetorical dial up to 11 it said “Labour would expropriate £300bn.”

Labour’s Inclusive Ownership Funds (IOF) policy requires a large company – defined as one with 250 employees or more – to transfer 1% of its shares each year into a fund on trust for its workforce, up to a maximum of 10%. The transfers will be effected either by a gradual dilution of the original shareholders – via annual scrip dividends – or by purchasing shares on the open market for the benefit of the IOF.

The case for IOFs is a holistic one. In a closely held briefing document – even a promise to write a supportive piece did not precipitate the delivery of a copy from the Shadow Treasury Team but I have my sources – Labour points to the declining labour share of national income, the concentration in ever fewer hands of financial assets, and the scope for decision making with a longer timescale that can follow from enhanced employee share ownership.

But what about the money? The aggregate value that would come to be held in IOFs might not much matter. It’s a figure that follows from the scope of the policy – something Labour’s rather hazy on. This might not surprise you because questions about geographical reach get very tricky very quickly but on any view it’s very significant.

A better way of looking at the policy might be to analyse its consequences for affected investors. The effect of diluting shareholders via scrip dividends would be a gradual reduction in their dividends of 10% over the course of a decade. Not ideal, perhaps, but not catastrophic either. And this diminution might be more than compensated – Labour gives some evidence for this effect – by the productivity gains resulting from a share-owning workforce.

A sharper criticism of the proposals – the foundation for the vigorous language of “expropriation” and “confiscation” – is the share of profits going to the Government. Under Labour’s plans each worker would receive an annual payment from her IOF capped at £500 with dividends over that cap going to the Government.  Clifford Chance, authors of the report on which the FT story is based, say this means £9.4bn – or 88% of total projected annual dividends paid to IOFs – would find their way to the State. Labour, on the other hand, gives an equivalent figure of £1.1bn.

The resolution of this divergence depends, again, on geographical scope. Clifford Chance says that global firms will pay dividends on global profits with the small number of UK employees quickly capping out at £500 and vast surpluses to the Government. There are some signs Labour might confine the policy to UK profits but this is still a forceful criticism.

Policy making in the tax sphere is notoriously difficult for any Opposition; it requires complex modelling of data and access to closely held and expensive tax expertise. And the problem is especially stark for the present Labour Party which has not sought or maintained good relations with the tax drones inclined to help on this stuff. What Labour has done is recognise its difficulty with a promise to consult to ensure that the implementing legislation is “robust and widely supported”.

What we’re left with is a policy of uncertain application, which will be hugely difficult to implement, and will have a number of distortive effects (go long outsourcers who will help keep your headcount below the magic number). But it will also deliver an important advance in how our economy is structured, a form of widely held employee share ownership.

Ultimately the question we, as voters face in a General Election might just be whether we’re ready to commit to an inclusive capitalism – or are just embarked on what Larry Summers described as a “rhetorical embrace”.

Note: I was an adviser on tax policy to Labour under Ed Miliband – and have (although not recently or in connection with this policy) advised the present Shadow Treasury Team.

One thought on “Inclusive Ownership Funds – is the FT’s analysis correct?

  1. Correction, a policy for the few and not the many who work in the private sector.

    Where Thatcher spoke of a shareholding democracy for all, regardless of employment status, McDonnell speaks of inclusive capitalism, whatever that means, for those employed by a minority of large businesses in the private sector, defined by the number of people they employ.

    That minority of beneficiaries drawn from the private sector would obviously dwindle further as a result of Labour nationalising their employers …

    Thatcher’s shareholding democracy was one into which one opted. And in the case of most of the Sids, one out of which one opted before one had even received one’s share certificates. The Sids preferred to take the money rather than dabble on the Stock Market.

    McDonnell’s inclusive capitalism is one out of which one may not opt and would deny its beneficiaries access to the shares allocated to them. Thus meaning they would be unable to cash in their shares like other shareholders in their company. They would have no right to sell or presumably even bequeath their shares?

    I gather the trades unions, most of whose members are to be found working in the public sector, expect to have a key role in managing these Inclusive Ownership Funds?

    This risible scheme is clearly based on the assumption that bonus schemes improve productivity and do not result in say the mis-selling of PPI.

    At least with the schemes that resulted in PPI mis-selling the workers knew what they had to do to earn a bonus.

    In the case of Labour’s scheme they would have no idea of what they would need to do to generate an increased dividend for their company. A dividend in which they would not always fully share.

    Labour does not need to consult experts in taxation about a scheme designed for the labour market of yesteryear, but experts in the field of management working in the context of the UK labour market of 2019.

    An inclusive management approach is one that devolves power and responsibility down to the lowest levels within an organisation, maximising the autonomy which an individual worker exercises over how they carry out their daily work.

    The possibility of at most an extra £500 pa (not subject to tax in any form?) is a bonus scheme by another name and an approach, by definition, limited to (a minority of) profit making companies in the private sector.

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