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.