ANY QUOTES USED MUST BE ATTRIBUTED TO SUNDAY WITH NIALL PATERSON, SKY NEWS

NIALL PATERSON: Former Labour Cabinet Minister Alan Milburn has quit the government’s Social Mobility Commission saying that Theresa May lacks the commitment to make Britain fairer. In his resignation letter he warned of increasing anger and resentment thanks to two decades of lost wage growth which is creating a breeding ground for populism. To discuss that and much more as well we are joined now by the Shadow Chancellor, John McDonnell, a very good morning to you. Shall we start with Alan Milburn and what appears to be the demise of the Social Mobility Commission. What is your view in all of this, do you recognise some truth in Mr Milburn’s words that Brexit is the priority and not improving the lot of society Theresa May promised on the doorstep of Number 10?

JOHN McDONNELL: Well it’s important that it’s not just Alan that’s resigned, it looks as though it’s the whole Commission and that’s a cross-party resignation then. I think he’s right, Brexit is dominating the government agenda but I just wonder whether the budget was the last straw as well because we were expecting quite a bit out of this budget in terms of tackling the education cuts we are experiencing at the moment – 5000 head teachers wrote to the Prime Minister and asked them to halt the cuts and that didn’t happen. It’s the same really with investment in skills and wage levels are so low now and are predicted to stagnate for the next number of years as well so I can understand the frustration Brexit has done to the agenda but nothing else has moved either, not just because of Brexit but just because even in the budget they couldn’t address the real issues.

NP: Let’s move on to your brief and of course you’ve been touring the City of late, speaking to bankers, speaking to fund managers, essentially going house to house saying Labour is your friend. Does that ever make you feel uncomfortable, who picks up the tab for lunch?

JOHN McDONNELL: No, I never take a free lunch, I never accept a lunch, it’s usually cups of tea and I pay for the tea! I’ve been doing this for two years now in this brief and I’ve been meeting lots of people, both in the City, hedge fund managers, asset managers but I’ve also been out on the shop floor as well, meeting workers themselves and management. I went to a tech fair the other week about robotics, issues like that and I’m trying to say, look, this is what we’re trying to do, this is what our plans are, being completely open with people and taking their ideas on board as well.

NP: But has the charm offensive been entirely successful? Morgan Stanley this week telling their investors that Jeremy Corbyn is a bigger threat to business than Brexit, provoking this response from Mr Corbyn.

JEREMY CORBYN: This is a growing movement with well over half a million members and a government in waiting that will work for the many, so when they say we’re a threat, they’re right. We’re a threat to a damaging and failed system that’s rigged for the few.

NP: How does that help your case?

JOHN McDONNELL: Let me just go back one, it’s not a charm offensive, it is us being absolutely straight with people, this is what our plans are, we want to listen to people to say what’s your view on that and we’ll take a lot of views on board as well and we’ll adjust our plans accordingly. Morgan Stanley, the reason Jeremy reacted that way, Morgan Stanley is an outlier and to come out with the criticisms that they did was a bit shocking because that’s not the response we are getting at the moment and remember as well, I have to make this point, Morgan Stanley have been contributing to the Conservative party for quite a while so they are supporters of our political opponents. I understand that but I am happy to sit down with Morgan Stanley and say what are your genuine criticisms because I don't think they realise what we’re about.

NP: Well I hope you’ve got your iPad somewhere about your person because I do want to get into the detail of your figures, examining the rationale of what is, one has to admit, a fairly striking economic policy portfolio. Can we start with Corporation Tax because there is a very clear difference between the government and the opposition: they say cut two points to 17%, you say raise by 7%. What’s the thinking there?

JOHN McDONNELL: Well we believe at this point in time, and I expected this to happen in this budget, you do not give tax giveaways to the corporations and the wealthy whilst public services are suffering so badly.

NP: So you could have said stay neutral at 19% but you …

JOHN McDONNELL: No, what we said is we’ll go back not even to the level of the last Labour government, we’ll go below that and that will still keep us competitive with the rest of the world, with America in particular but what we are saying is that we all have to pay our way in this situation and we cannot … I’ll just give this example, in this budget what the government has done is give another 4.7 billion in tax cuts by reducing the bank levy to the bankers. One week before the budget itself, charities and local government wrote to the Chancellor about the most vulnerable children at risk, we need two billion by 2020, now is not the time to be giving tax cuts to the wealthy, the banks and corporations.

NP: We’ll get on to some of those topics in a bit more detail but just focusing on Corporation Tax, I mean you say you would raise what, roughly about £20 billion and that does make sense, the Treasury says 1% would raise 2.3, 2.7 billion and if you multiply it and factor in inflation and you are roughly at 19.4 billion but isn’t that just a bit of a back of a fag packet calculation, it assumes there will be no change to behaviour. High rates at tax, return on investment is reduced meaning less investment, less growth, less take.

JOHN McDONNELL: Two issues there, one is if you look at the Grey Book, which I costed our manifesto, I published in the Grey Book alongside – the Conservatives didn’t by the way. We also said that we’d ensure that there was tax avoidance measures brought in to ensure that if there was any change in behaviour around tax avoidance and tackle it but I also put in, if you look at it, over four billion in terms of flexibility so that we had a bit of a buffer in case not everything came in.

NP: The economic consensus is yes, the Corporation Tax rise will raise money in the first year, after that it gets a little bit dubious because of the changes in behaviour and remember we are coming out of the European Union, raising Corporation Tax by 7%, in what way does that make us more attractive to …

JOHN McDONNELL: As competitive as were before in terms of the relationship with the rest of Europe and America, because we are going nowhere the rates elsewhere so we’ll still be competitive but you said there is a consensus about it, it is quite the reverse. We had large numbers, I think there were 130 economists who wrote in saying actually we support these plans and …

NP: Not the Institute of Business.

JOHN McDONNELL: Actually the IMF and others have actually said now is the time when you shouldn’t be cutting taxes in this way and you should be investing.

NP: Isn’t it a fundamental that whenever we see a rise in Corporation Tax it is people that not companies that ultimately bear the burden? So the company has less wealth which means that shareholders lose out, the company increases its prices, consumers lose our or wages are reduced, staff are laid off, the workforce suffer.

JOHN McDONNELL: It’s interesting, if you look at what’s happened, the government has cut Corporation Tax and now we have corporations sitting on earned income of around 590 billion not investing. So actually the promotion of tax cuts to encourage investment hasn’t worked and what we need to do now is ensure that we have a fair taxation system – we’re not asking for the earth, we’re asking for them to pay their way a bit more.

NP: Let’s stick with tax shall we and turn to income tax and your plans on that involve both cuts and rises.

JOHN McDONNELL: We said the top 5% will need to pay a bit more and again I think that’s been generally recommended by most of the economic institutions, the IMF, OECD and others, saying we need fair taxation systems now if we are going to afford our public services.

NP: But is there a point at which you say enough is enough? You are saying we’re just asking for a little bit extra, can you guarantee that you wouldn’t go beyond 50%?

JOHN McDONNELL: We’ve said that, we’ve said that because if you look at our manifesto we said only that 5% would be increased, we set out the levels, we were very clear on that and we said for the remainder there would be no increase in income tax or VAT or national insurance.

NP: Again the costing, 6.4 billion is what you say would be raised from income tax and that works out only if you just go to the spreadsheet and change the 45 to a 50, it assumes again no change in behaviour.

JOHN McDONNELL: That exactly what …

NP: And top rate earners are going to be reducing their taxable income as a result of it, the figures are just not accurate.

JOHN McDONNELL: They are accurate and they were tested and if you look at what’s been said in terms of the support we’ve had ….

NP: “The tax revenue that Labour’s proposal would raise is highly uncertain, if no one changed their behaviour and response it would raise around 7 billion a year, some of those affected would respond by reducing their taxable incomes.”

JOHN McDONNELL: Yes and that’s why we put in there measures to ensure that we dealt with tax avoidance and tax evasion and that we put a buffer in as well. May I suggest that on that one point, if you look at other economists they came out in our support.

NP: Okay, in terms of the tax take post-Labour rises, we are talking about roughly 48.6 billion again and again the IFS challenged that estimate, they in fact came up with a figure of 41 billion which in their view was a very generous estimate.

JOHN McDONNELL: That’s interesting though because we looked at the IFS figures, they said there was about nine billion difference. One of the things they said was …

NP: They said that their 41 billion was a very generous estimate so with a very generous estimate it was 9 billion less.

JOHN McDONNELL: With the greatest respect to the IFS, that was contested by large numbers of other institutions as well as economists but if you look at what they were saying, for example they were saying the property tax would not bring in a penny, that overseas companies own properties in this country. They operate in Singapore, they operate in Canada, they operate across the world and so we pointed to them and we said to them we want to have that dialogue with you. They also contested other matters but actually if you look at the buffer that I put in there, there is enough to tackle those issues.

NP: Okay, so you don’t recognise the IFS figures at least on that basis, on that specific point I’ll concede but your own figures have a habit of changing pretty rapidly. Back in March Rebecca Long-Bailey claimed that reversing Conservative changes to Corporation Tax, Capital Gains, Inheritance Tax and the Bank Levy would raise roughly £70 billion, that was in March. When you published your manifesto in May, those four measures plus scrapping the Married Persons Tax Allowance would raise £23.1 billion. Even when you are using your own figures they have a tendency to shift.

JOHN McDONNELL: No, no, that’s not true. The issue was there the projection over a number of years that Long-Bailey was using, when we went to the general election itself …Look at the Grey Book, look at the Grey Book, that’s what we published in the manifesto and that’s what we stand by and those projections, those projections were made on the basis of figures coming from the government itself, the OBR and the House of Commons Library.

NP: In two months you go from £70 billion to £23 billion …

JOHN McDONNELL: The 70 billion was a projection over a number of years. If you look at the Grey Book, that’s what we went to the people on, that’s what we stand by. Let me just say on the IFS, they may well have been differences, I’ll give you one example: their example is that when you invest in the economy they discount the multiplier effect, virtually every other economist doesn’t, they believe there will be a multiplier effect in the investment that we put in there and in that way you see there are differences between economists about how you calculate this. We took the view, expressed to us by a large number of the economists, that our figures not only were sound but were conservative estimates.

NP: Okay but on borrowing to invest, you are talking about a fiscal multiplier of one to one, you say it essentially pays for itself.

JOHN McDONNELL: It depends on the individual scheme of course.

NP: But in general you have argued that the scheme pays for itself, interest rates are low at the moment, you spend now and you reap the benefits. Now that makes sense according to generally received economic wisdom in circumstances where you are emerging from recession, where interest rates are anchored close to zero, I mean that’s where you see one to one or even two to one. Actually we are close to full employment, global monetary policy is tightening at the moment, financial sector is lending again, a large fiscal stimulus of the type you are talking about is far more likely to feed into higher inflation.

JOHN McDONNELL: No, let’s go to the Capital Investment Fund that we put forward. We suggested a programme of £250 billion investment by the state over a ten year programme, okay, nothing untoward, that’s been seen in the past. It depends on the individual schemes that you invest in from which you get … I’ll just give you an example of one scheme: Cross Rail for the north, ten billion, calculated not by us but independently, that would gain something like 90 billion investment in that region. That’s the sort of investment we’re going for, investments wisely chosen that get a return, pay for themselves in the long run but stimulate the economy and …

NP: You plan to get rid of the deficit on day to day by the end of the five years, and what’s the plan for debt?

JOHN McDONNELL: We are saying is that the debt to GDP ratio which is the important part, that tells you when you can pay for it, that will be down within the life of a parliament.

NP: If we take all of these thing …

JOHN McDONNELL: That was tested by the IFS. Just a minute, you quoted the IFS and that was tested by the IFS and the IFS found that sound.

NP: I just want to put something to you, on Corporation Tax, you can argue against it but the view of many people is it works in principle but unfortunately there will be behavioural changes.

JOHN McDONNELL: And that’s why we put the buffer in.

NP: Nationalisation for example …

JOHN McDONNELL: Let me just address that assertion you made, that’s why we’ve addressed behavioural changes within the programme that we’ve put forward both in terms of tax avoidance and evasion and also a buffer of a significant sum in that programme.

NP: Not to the scale that would be required to make the balance …

JOHN McDONNELL: Well with the greatest of respect, other economists believe it was, 130 of them including Josef Stieglitz, a Nobel Prize winner, what more do you want than that?

NP: Well I don’t have a Nobel Prize so I am not going to be challenging him directly but nationalisation, you have bristled when you have been asked this question in the past, why isn’t there a figure being put on it? We all understand that the figure will shift depending on the share price and other factors but why don’t you just tell us how much it would cost right now?

JOHN McDONNELL: Because the debate is about whether or not it is cost effective and you know as well as I do, as soon as any figure is bandied about you lose that debate.

NP: But we have talked about nothing else this morning than figures, your party eternally bangs on about the fact that your manifesto was the only fully costed one but there is a big hole in it when it comes to nationalisation.

JOHN McDONNELL: No, there isn’t a big hole in it. The debate about when you require an asset that is a valued asset, it pays for itself because it is an earning asset, that therefore covers the cost of nationalisation itself. So for example let’s take rail, we’re saying on rail that we will renationalise it on the basis of when the franchises end so it is cost effective. When East Coast Line was brought into the public sector and managed efficiently, it paid into the Treasury a billion. The government is now having to bail out the East Coast Line again at a cost most probably of two billion. What we are saying is bring it into public ownership, it will be managed more effectively, it will pay for itself and in fact it will …

NP: But wasn’t it British Rail that missed the boat on electrification and also …

JOHN McDONNELL: With the greatest respect, past research has demonstrated that the lack of investment in British Rail – and actually it was operating as effectively as it could with that level of investment so therefore …

NP: My point is that nationalisation does not mean that poor business decisions will not be taken.

JOHN McDONNELL: Well with the great respect, if you look at the East Coast Line …

NP: There is an awful lot of respect you have.

JOHN McDONNELL: Yes, there is and you need to respect my views as well which is 1) when you look at the examples in rail where it has been brought back into public operation, both the East Coast Line and Connex was the last one in the south-east, the most efficient services provided within our railway system and at the same time.

NP: All I am asking for is a figure, how much would it cost today to do what you are proposing?

JOHN McDONNELL: It will be cost free because it pays for itself.

NP: It’s still a commitment in terms of government spending isn’t it?

JOHN McDONNELL: If you are getting income from the operation of a service then …

NP: All I am asking you for a figure of how much it will cost.

JOHN McDONNELL: I am giving you the example of East Coast Line, it’s a concrete example, it’s been brought back into public ownership, it has operated effectively, paid money into the Treasury. Then it’s reprivatized and what happens? We are left with a possible £2 billion bill. So that demonstrates how effective it could be.

NP: In terms of public sector pay, again something that you have identified as something which resonates with the public and it does clearly, you maintain that the public sector pay cap needs lifting. How much is that going to cost?

JOHN McDONNELL: We have costed it within the thing, we looked at the cost against the OBR figure and we’ve said that it will rise with the level above inflation of those costings that the OBR have said and we put that in the Grey Book itself. Again, what we are also saying is that will be subject to negotiations, we are not going to interfere in those negotiations but the most important thing is to lift the pay cut.

NP: But in essence you are committed right now to a real terms pay increase across the public sector.

JOHN McDONNELL: We have costed in our Grey Book manifesto commitments, what we said was that we took the OBR figures and what would be the rate of increase within the economy and wages and we costed that and said if you lift the pay cap that would be the cost however that is subject to negotiation.

NP: On deficit reduction I must admit I’ve got a bit of confusion in terms of what the policy is. You said you would absolutely eliminate the day to day deficit spend by the end of five years but you will be inheriting a day to day deficit won’t you? On current figures we estimate that this is around £20-25 billion.

JOHN McDONNELL: Possibly more.

NP: Possibly more, now that’s on top of the 50 billion of additional tax rises that you are putting into place.

JOHN McDONNELL: Now just a minute, the 50 billion, the 48.6 pay for themselves, the tax rises come in they’ll pay for the public services so that’s cost neutral. When you come to the deficit itself, what we are saying is we will not borrow for day to day expenditure but what we will do is ensure that we have [inaudible] investment overall and that investment will cover its own costs because the rate of investment will give us a return on that investment so we believe over a five year rolling programme we will be able to bring that deficit down. How do you do it? You do what this government doesn’t do, you invest in the economy, you grow the economy and in that way the debt to GDP ratio comes down.

NP: If I can turn to the point I made a few minutes ago, I mean the idea that a massive fiscal stimulus at this point in our economic cycle is going to be paid for by itself just doesn’t stack up with the economists and situations in the past, one for one …

JOHN McDONNELL: I think you are confusing two things, one is on day to day expenditure, we will make sure we do not borrow, full stop. Any day to day expenditure will be covered by the tax increases we’ve brought about which is largely on corporations and the rich and the top 5%.

NP: But no one seems to think that they will raise the amount that you think they will.

JOHN McDONNELL: But you just said it again, no one says. One organisation queried one element of our overall items, 130 and others economists supported it. So what I’m saying to you is out there – and this isn’t just me, IMF and other organisations, the OECD, are now saying you have got to invest that. If we don’t invest we will have the same productivity crisis that we’re facing at the moment, that’s why this government has failed.

NP: Is capitalism inherently wrong or are you just the man to fix it?

JOHN McDONNELL: No, what we want to do is transform the economic model that we’ve got at the moment and the economic model at the moment is too short term, does not distribute the resources and the benefits fairly and at the same time is too based regionally in London and the south east. What we’re trying to say is you take a long term view and invest, you make sure that investment goes all over the country and no one is left behind, no area is left behind and then when we build a prosperous economically and environmentally sustainable economy, those rewards, that prosperity is shared by everybody.

NP: So you are the man to fix capitalism?

JOHN McDONNELL: We are the party that will go into government with the policies that will transform our economies so that everyone gains and as I say, we have an economically and environmentally sustainable economy, that prosperity has got to be shared by every person in every region rather than just by some of the wealthiest, which is the way it is at the moment.

NP: I don’t know why you didn’t take the opportunity to claim the Mr Fix It title, it certainly sounds a bit better than Spreadsheet Phil doesn’t it? But anyway.

JOHN McDONNELL: The title that I want is the person who actually brought common sense to the way we manage our economy, the way in which we look to the long term, the way we share all the resources around people fairly so we all gain from the prosperity and the investment we put in and that we tackle, I have to say also, that we tackle some of the appalling, the appalling treatment of some of our fellow citizens in terms of homelessness, housing, education cuts and the NHS crisis that we’ve got.

NP: Well you may very well have that opportunity before too long. Mr McDonnell, many thanks indeed.

JOHN McDONNELL: Thank you.