Until last week’s U-turn on its pledge to spend £28bn on greening the economy, Labour had a coherent story to tell on the economy. It was not an especially exciting story but it made sense.
The narrative went like this. Since coming to power in 2010, the Tories have made a right mess of things. Misguided austerity has resulted in weak growth and flatlining living standards. Public services have been starved of money and too little has been done to safeguard the future of the planet. Failure on such a comprehensive scale requires a different approach.
After last week’s emasculation of its green prosperity plan, the storyline has changed. It now reads: the Tories have left Britain in a parlous state but if you vote for us little will change. We are continuity Conservatism.
Previously, Labour was going into the election offering a mild form of green Keynesianism as the alternative to stagnation. It will now be appealing to voters on the basis that it can run the status quo more competently than the current lot.
To be fair, that wouldn’t be all that difficult. After the psychodramas of a parliament that has given us three prime ministers in Downing Street and five chancellors at the Treasury, some stability would not go amiss. What’s more, Labour always needs to persuade a sceptical electorate that it can run the economy competently. Sir Keir Starmer and Rachel Reeves are understandably reluctant to have the next election campaign dominated not by the government’s dismal economic record but by Labour’s £28b “tax bombshell”, which is what Rishi Sunak and Jeremy Hunt would prefer. The scars of the 1992 defeat are still livid.
All that said, the ditching of the £28bn pledge reveals an ideological vacuum at the heart of Labour’s economic policy and an acute lack of self-confidence. It is also storing up big problems for Starmer and Reeves once the election is won.
The case for green Keynesianism was made just last month by a group of economists from the London School of Economics and Cambridge University, including Lord Stern, the author of the 2006 report on the economics of climate change.
Last month’s report made the following points: the planned cuts in public investment over the next few years will lead to a continuation of stagnant productivity and weak growth; the UK requires an increase in public investment of 1% of national output (£26bn) to make up for decades of under-investment in the capital needed to tackle climate change and make the economy more efficient and productive; more public investment would crowd in private investment; and the investment by the state would pay for itself.
On the last point, the authors of the report could not be clearer: “There will be upfront investment costs to delivering the transition to sustainable, inclusive and resilient growth, but targeted and temporary borrowing for good public net investment reduces the debt-to-GDP ratio over time and is fiscally responsible.
“Once the UK’s sustainable innovation system is up and running, government support can be phased down, as new, more efficient and productive industries increasingly outcompete the old and generate their own global revenues and inward investment. By contrast, inaction would probably prove costly to economic competitiveness and financial resilience and require costly remedial support later on.”
The Starmer-Reeves case for watering down the green prosperity plan is that economic and financial conditions have changed since it was originally announced at the 2021 party conference. This argument doesn’t really stand up to much scrutiny. Growth is actually much weaker than it was in 2021, when activity was recovering from the disruption caused by Covid lockdowns. Inflation certainly surged in 2022 as a result of supply-chain bottlenecks and the Russian invasion of Ukraine but is now on a declining trend. There may well be a small rise in the annual inflation rate announced this week, but it will be below 2% by the spring. Likewise, interest rates are heading downwards. The financial markets expect them to fall from 5.25% to just over 3% by 2026.
The other reason for not diluting the green prosperity plan is that the news on the climate crisis has been getting worse, with 2023 the hottest year on record. The case for increasing public investment to green the economy is as compelling as in 2021, if not more so.
In the meantime, Liz Truss managed to wreck the Conservative party’s reputation for economic competence in the way that Black Wednesday did 30 years earlier. That made a Labour victory much more likely but has also made the party even more determined to articulate a strategy that doesn’t risk spooking the markets.
The paper by Stern and his colleagues demonstrates why borrowing to invest is consistent with financial prudence, but even were that not the case Labour could still fund its full green prosperity plan by raising tax.
As the tax expert Richard Murphy pointed out last week, two simple changes aimed at the better off would raise almost £28bn: charging the same rate on capital gains as is paid on income tax would net £12bn while restricting tax relief on pension contributions so everyone gets relief at the same tax rate, whatever their income, would raise a further £14.5bn, and make the system fairer to boot.
Labour has decided against borrowing £28bn and it has also decided that it won’t tax the wealthy to raise the £28bn either. Instead, the belief is that stability will produce higher levels of growth and free up resources to meet the public’s demands for better public services. What’s the difference between that and what Sunak and Hunt are saying? Not a lot as far as I can see.