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Imagine for a moment that you settle down to election TV tonight, and at 10pm, the exit poll headline is: “Breaking — Exit poll shock: Labour set for majority.” You may be elated or morose,

or just call it a day and go to bed. Over in Australia and Asia, though, the foreign exchange markets will be stirring and if the exit poll is corroborated, sterling will be firmly in the

cross-hairs. By the time the UK wakes up and goes to work, sterling will probably have been marked down a lot, and stock index futures will be pointing to a “red” day on the equity markets.

To most people, these developments will be of little immediate consequence, representing a knee-jerk reaction. Yet, they could be a taste of the financial turbulence to come. The UK may have

recourse to capital controls for the first time since they were abolished in 1979. Everything depends on how a Labour government with a working majority, and flushed with political triumph,

sets about the radical and transformative agenda to which it is committed. It could be more cautious and pragmatic than it has sounded in campaigning mode. Yet, it would be foolish to

imagine that this agenda, as it has been pitched, can be implemented without breaking a lot of eggs. Shadow Chancellor, John McDonnell told a City audience in January, “I want to make it

absolutely explicit that capital controls would not happen under a Labour government. We don’t see any necessity for them.” He may genuinely believe this, in contrast to some party

protagonists who think Labour’s economic programme requires controls. In any event, if push comes to shove, it’s not McDonnell’s call. He may be obliged to introduce them, regardless. To

understand why, consider that the UK runs a balance of payments deficit, which in 2018 amounted to £92 billion, or 4.3 per cent of GDP — the largest among major industrial nations. This

comprises trade in goods and services and net flows of income, profits and dividends in and out of the country. To finance this deficit, we have to import capital to “balance” the deficit,

and this comprises mainly the net flows of direct investment by companies, loans and deposits in banks, and portfolio investments in financial instruments. All of this happens all the time,

without incident. If for some reason, though, the system is shocked, and confidence evaporates resulting in capital flight from the UK and or a reluctance by foreigners to commit capital to

the UK, sterling would plunge, financial turbulence at home would ensue, and the prices of equities, gilts and real estate would fall. If the Bank of England couldn’t or wouldn’t raise

interest rates to quieten things down, the government might have no alternative but to impose controls on the movement of capital out of the country. A transformation would have been

accomplished — to a siege economy. Capital controls are not uncommon. China has extensive controls, because it doesn’t trust its own citizens and firms to keep capital at home. In the euro

crisis, Greece, Cyprus and Ireland introduced them temporarily. More recently, we have seen them imposed in Venezuela, Ukraine and Argentina. They take different forms, which are at the

discretion of the government. Anyone born before about 1960 in the UK will remember there was a £50 limit on how much foreign currency you could take on holiday. That’s about £228 in today’s

money. This is certainly one type of restraint that might happen, but more generally, and given that financial transactions are now done largely on-line and with immediate effect, controls

would be designed to ban the conversion of sterling into foreign exchange to make payments, or impose quantitative limits and restrictions. Banks, companies, and individuals might be

required to surrender payments related to foreign currency transactions, and to get pre-authorisation for certain types of payments. Pension and other payments to UK citizens living abroad

might be restricted. There might be new taxes on capital movements. Using a cash machine abroad might be subject to new, low maximum withdrawals. Many of these measures, it should be noted,

would not be compatible with the UK’s EU membership obligations. Consequently, if we were still in the EU, we would have to flout any relevant agreements and Treaty obligations, if the

government were determined or desperate not to be knocked off its chosen course. Alternatively, we might be on our way out of the EU, which would be a relief to those who would like to erect

a wall of capital restrictions behind which to re-cast the UK economy. And that is the nub of the problem. The Labour economic programme taken in chunks and implemented with care and after

consultation over, say, two terms, would be a quite different proposition from the one being proposed. This comprises a large increase in public expenditure taking its GDP share from 40 to

46 per cent funded only by firms, a few rich people, and higher taxation of capital and dividends. There is also a pot pourri of new investment banks, various nationalisations, the forced

transfer of shares from shareholders to workers or government accounts; and a commitment to expensive universal programmes such as the abolition of tuition fees and the pension promises to

Waspi women, from which the middle class and better-off will benefit disproportionately. There are inevitably political issues about the measures themselves and the possibilities of using

alternative fiscal, regulatory and competition policies to realise stated goals. But, as things stand, the outcome is likely to feature much larger budget deficits and borrowing for much

longer than envisaged. And these might have the perverse effect of widening the balance of payments deficit still further, necessitating even greater net capital inflows in impossible

circumstances. The trick in the end is how to revive financial, business and private sector confidence in those abroad who would finance our balance of payments. Either the government would

have to embark on a course-correction, or we would have to become acclimatised to a siege economy to keep capital at home. Now imagine this all happening outside the EU. Have a great day.