UK Labour's 'Corbynomics' targets Osborne's investment weak spot

By David Milliken

LONDON, Sept 18 (Reuters) - New Labour Party leader Jeremy Corbyn has been labelled a threat to Britain's economic security by the Conservative government but he may have more impact on its economic policy than the average fan of Karl Marx.

With ideas ranging from nationalising railways to having the Bank of England undertake 'People's Quantitative Easing', Corbyn was elected on Labour's most radically left-wing platform in a generation.

But on one of his central arguments -- that Britain suffers from a lack of infrastructure and housing investment -- parliament's new official opposition leader finds support from many City of London (LSE: CIN.L - news) economists and industry groups.

Finance minister George Osborne plans to cut public investment to a 14-year low as a share of the economy, even as the cost of borrowing remains near its cheapest on record.

"The pressure could be increased over the coming months and years on the government to increase investment spending," Paul Hollingsworth from consultancy Capital Economics said.

Osborne, a keen political tactician, has borrowed left-wing policy ideas in the past to neutralise Labour's appeal. In July, he announced a big rise in the minimum wage to help plug the gap caused by cuts to welfare benefits for the working poor.

If Corbyn bucks expectations that his leadership will alienate centre-ground voters before the 2020 elections, possibly by capitalising on a future economic slowdown, Osborne might be tempted to give ground on investment spending.

The International Monetary Fund has encouraged Britain to spend more on infrastructure, and the Organisation for Economic Co-operation and Development says British government capital spending ranked 18th out of 24 developed countries in 2013.

But Osborne cannot easily invest more after he toughened his commitment to fiscal austerity last year. He wants the government would run a budget surplus in normal economic times, and says he would not borrow even for investment spending.

His priority is to reduce Britain's 1.5 trillion pounds ($2.3 trillion) of government debt, which doubled as a share of the economy during the financial crisis and which he believes limits Britain's ability to tackle future crises.

Many economists say this makes little sense when Britain can borrow money for 30 years at less than 3 percent interest, below the potential rate of return for many government projects.

PEOPLE'S QE?

Corbyn, by contrast, wants to borrow more now to spend on housing, transport and high-speed internet. Part of this could be funded by requiring the BoE to create money and fund a new National Investment Bank at times of economic stagnation.

By making the BoE central to funding investment, which raises concerns about the Bank's credibility and higher inflation, Corbyn may have complicated his message, according to Martin Beck, an economist with consultancy Oxford Economics.

"It (Other OTC: ITGL - news) is very easy for the Conservatives to now say the only way you can get more investment is to go down this crazy route of crazy money," Beck said. "Connecting those two may have undermined the case for more investment."

BoE Governor Mark Carney has warned of the risk of excess inflation if the BoE invested in assets other than government bonds.

But for Richard Murphy, who advised Corbyn on his economic plans, the BoE's independence is a "charade" and a looming global economic slowdown will force whoever is in power to direct the Bank to take radical policies to spur investment.

"When we have a major economic downturn ... (voters) are going to slaughter the politician who doesn't make this decision. If George Osborne doesn't copy this plan, he is going to be deep in it," he said. ($1 = 0.6399 pounds) (Editing by William Schomberg/Ruth Pitchford)