Friday morning. A humbled looking Theresa May is muttering about how 'defeat means defeat', while Boris Johnson readies his leadership bid. Nicola Sturgeon is flying down to London with a list of demands for supporting a Labour-led coalition. And Jeremy Corbyn is finishing off some work on his allotment before hopping on a bus to the Palace. It might sound far-fetched. But the polls are so all over the place, it is no longer impossible that the Tories will lose their majority.
If it happens, one point has been overlooked. Over in the City, stocks will be getting trashed, and the pound will be in free-fall. The markets have only just begun to contemplate what a Corbyn-led Labour Government would be like, but have hardly paused to give it any serious consideration. In the run up to the EU referendum, the pound was already wobbling, but so far it has hardly reacted to the narrowing of the polls – in fact, it is slightly up against the dollar since the campaign opened, while the FTSE has risen by more than 300 points. If Labour wins the most seats, it will come as a major shock – and not in a good way.
Once global investors look at the implications of that, they won’t like it at all. Labour’s ‘Robin Hood’ tax will devastate financial services, one of our largest exporters and employers. It will do far more damage than leaving the EU. After all, why pay a tax on trading shares in London when you can simply side-step it by trading them elsewhere? Higher corporation taxes, and controls on executive pay, will drive companies out of the country, and probably to a far greater extent than leaving the Single Market. It may not be to everyone’s taste, but for forty years the UK’s key competitive advantage has been that it is a relatively low tax, lightly regulated place to base a company. If that is reversed, businesses won’t stick around. Finally, a massive splurge in public spending will end up being paid for with printed money, largely because all those ‘fully-costed’ tax rises won’t actually turn out to bring in much cash. And that will hit sterling, and share prices.
The historical record suggests far-left governments are terrible for the markets. The minority Labour government led by Harold Wilson from February and October 1974 – the one where Denis Healey famously promised to 'squeeze the rich until the pips squeak' - saw a 50 per cent fall in the London market (although, in fairness, all kinds of terrible stuff was happening to the global economy that year). Clement Attlee's government of 1945 to 1951 might be lionised on the left for its creation of the welfare state, but there was not a lot of wealth creation going on to pay for it all. It presided over a 7.5 per cent fall in share prices, while the Dow Jones index in the US almost doubled in the same period.
Under Jeremy Corbyn and John McDonnell, what should we expect? In reality, there will be a sudden sharp correction, simply on the shock of the result, followed by a long, painful decline as the competitiveness is drained out of the economy. Over three or four years, expect to see at least 30 per cent off the FTSE-100 – and to see sterling down to parity with the euro, and perhaps even with the dollar. That may not bother them very much. But it will certainly be a problem for anyone with money in the markets.