John McDonnell, the shadow chancellor of the exchequer and member of the UK’s main opposition Labour Party, talks to Nick Kochan about his plans for the country’s banking sector, alongside tax and wage reforms. 

John McDonnell

John McDonnell

John McDonnell, the UK's shadow chancellor, has been a frequent visitor to the City of London over the past two years. As part of his “tea offensive”, he talks to banks and asset managers about his plans to change the structure of the economy should his party win the next general election. He is seeking to persuade them that his changes are less extreme than they may have feared.

Mr McDonnell says his plans are intended to bring stability, to promote and direct long-term investment, and to reflect fairness and stimulate worker loyalty. That stability will be welcomed in the City after the chaos of Brexit has subsided, he claims.

Banking reforms

While ruling out removing the independence of the Bank of England, Mr McDonnell raises the possibility of reviewing its mandate to include productivity by amending its macro-prudential powers. He meets regularly with Mark Carney, and says he has a “productive” relationship with the governor of the Bank of England (BoE).

According to Mr McDonnell, a Labour administration would call a halt to any plans to sell off further stakes in the state-controlled Royal Bank of Scotland (RBS). ‘We want to keep as much of [RBS] as we can in the public sector and keep it as a tool for investment in the long term,’ he says.

He proposes a “strategic investment board” to run RBS, which will have long-termism as part of its mandate. Representatives of the BoE, Treasury and the City would sit on its board.

Tackling tax

The fiscal policies of an incoming Labour government would include an overseas property-owning levy, an increase in income tax on those earning more than £80,000 ($102,600) and a reversal of “some but not all” of the recent corporation tax reductions. A financial transactions tax is another measure at the core of Labour’s proposed tax programme.

A tax transparency and enforcement programme is planned, one goal of which is to “close down some of the loopholes that currently exist on tax duty”, according to Mr McDonnell. Labour estimates the amount of unpaid tax to be £70bn, which is midway between the government figure of £34bn and the £120bn claimed by tax campaigners.

Companies deemed to be failing to pay “fair taxes” run the risk of “direct intervention” from a Labour government. “We will sit down with individual companies and say: ‘This is where we think you are failing, this is the advice you need to take and this is how you can achieve a fair tax mark’,” says Mr McDonnell. A “fair tax mark” will be awarded to tax-compliant companies, he adds. Those failing to take the advice could face unwelcome reputational damage.

Remuneration and rights

Mr McDonnell is advocating a 20-to-one ratio for the pay differential between the highest and lowest paid employee in a company. He also proposes plans to restrict firms’ scope to award bonuses. He believes this policy is in step with a changing City culture on bonuses. “Opening a debate about remuneration is healthy and will result in consensus and reform,” he says.

His proposal for a mandatory “inclusive ownership scheme”, which requires a company to allocate 1% of its equity each year over a 10-year period to a pot collectively owned by the employees, however, has already received a negative response from many employers.

The dividends accrued inside the fund will be allocated to employees and Mr McDonnell says that this gives the employees an incentive to be both loyal and productive. He says the shares stay in the pot, which will be a legal entity like a trust; an employee would not be able to take the shares with them when leaving the company.

Moreover, employee representatives will be allocated one-third of board seats (in companies with more than 250 employees), in what Mr McDonnell calls a dramatic reform of corporate governance. He points to similar models in France, Germany and Spain.

Mr McDonnell is attempting to neutralise the shock that his programme might give to the City following a successful Labour Party campaign. He believes that the more the City knows about his plans, the less reason companies within the Square Mile should have to shift their capital out of London.

He takes comfort from the fact that banks, asset managers and pension funds are “beating a path” to come and have a conversation with Labour. “Once they have heard the initial policies, they want to be involved in developing them. That is fine. There has always been an open door here,” he says.

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