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The Labour Party recently scaled back its ‘green prosperity plan’ – a pledge to spend £28 billion per year on clean energy to mobilise a transition away from fossil fuels. Citing fiscal constraints such as high borrowing costs and supply chain restrictions, Shadow Chancellor Rachel Reeves told BBC Radio 4’s Today Programme that “economic stability, financial stability, always has to come first”.
Reeves stated that “the Tories have crashed our economy, and as a result interest rates have gone up 12 times, inflation is now at 8.7% and I’ve always said our fiscal rules are non-negotiable,” adding: “that’s why it’s important to ramp up and phase up our plans to get to the investment we need to secure these jobs so that it is also consistent with those fiscal rules to get debt down as a share of GDP and to balance day-to-day spending”.
Reeves’ comments were met with an unsympathetic response from the Conservatives, who alluded to Keir Starmer’s ‘flip flops’. Chancellor Jeremy Hunt disputed Reeves’ claims of fiscal responsibility, arguing that “this superficial change from Rachel Reeves still adds around £100 billion to our national debt – meaning higher mortgages for families and higher debt interest bills for taxpayers”.
While Reeves claimed in an article for The Times that “Labour’s mission is to secure the highest sustained growth in the G7, with good jobs and productivity growth in all parts of the country – all built on the rock of economic stability,” Britain has in fact suffered decades of declining public and private investment, which according to a leading think tank has plunged the country into a “doom loop”.
The Institute for Public Policy Research (IPPR) has found that sluggish investment is “harming economic growth, driving inequality, and slowing the pathway to net zero and energy security”. As a consequence, business investment is lower in Britain than in any other G7 country.
Britain ranked 27th out of 30 surveyed OECD countries for business investment in 2021, above only Poland, Luxembourg and Greece, and has not been ranked as the median country for private sector investment since 2005. If Britain had ranked as the average country in the G7 for public and private investment combined, governments would have invested £562.7 billion over 16 years in real terms, enough to build 30 Elizabeth lines.
IPPR argued that despite the criticisms that calls for large scale investment to facilitate a green transition had faced, a £30 billion plan for public investment would only account for 1.2% of GDP, lower than the 4.5% recommended by analysts at the Resolution Foundation. Meanwhile, other countries have engaged in far more substantial climate change spending plans; Biden’s Inflation Reduction Act, which aims to cut carbon emissions by 40% by 2030, has mobilised $369 billion worth of climate change investments, while back in February the EU announced its own Net Zero Industry Act to drive 250 million Euros into clean power generation by 2030.
Concerns have risen among associations representing British industry that the Inflation Reduction Act, by accruing vast subsidies for the development of renewable technologies, will leave British manufacturers behind. Make UK, which represents around 20,000 British manufacturers, has excoriated the lack of a long – term industrial strategy to develop electric vehicles, and the sluggish approach to investment taken by the British government. Its representatives told The Guardian that the Inflation Reduction Act comprised 1.5% of US GDP, which if spent by the British government would total £33 billion, £5 billion more than was originally proposed by Labour’s Green Prosperity Plan.
Disputing that public investment would exacerbate inflation, the IPPR stated that “pairing investment with progressive tax rises – such as equalising taxes on income from wealth and income from work, or on share buybacks and dividends – could further ease inflationary pressures and create fiscal headroom in the medium term”. Indeed, the research emphasised that contrary to perceived constraints, increased levels of public investment could improve productive capacity and raise GDP above debt. Research from Cambridge Econometrics, carried out for government advisory body the Climate Change Committee (CCC), has found that net zero measures could in fact raise GDP by 2% by 2030, and by 3% by 2050.
Responding to arguments that sustained public investment could “crowd out” the private sector, IPPR argued that, by fostering expectations of future growth and profit, public investment could “crowd in” private sector investment, reducing risks and stimulating demand. The report argued that “for this reason, public investment should be well directed towards strategic industries (i.e. green sectors) to positively influence firms investment decisions”.
The Costs of Inaction
Rachel Reeves claimed that supply chain constraints were a key factor in Labour’s decision to abandon the green prosperity plan, arguing that the plan would leave Britain dependent on imports for the materials necessary to establish solar and wind infrastructure. Indeed Britain’s chronic import-dependency, which saw the country run a trade deficit of £92 billion by 2018 and has been decades in the making, has arguably stymied the domestic, productive investment necessary for a transition to clean energy.
Yet failing to ensure high levels of public and private investment in productive capacity and clean energy infrastructure will have stark economic implications. According to OBR forecasts, public debt will grow to 289% of GDP by 2050 without any further emissions reductions.
Britain has also turned to foreign petrostates with dubious human rights records to supply its energy as a consequence of flatlining investment; in the year following Russia’s invasion of Ukraine, Britain imported £19.3 billion from regimes including the UAE (which contributed £2.5 billion), Saudi Arabia (which contributed £3.4 billion) and Qatar (which contributed £6.9 billion). According to the Energy and Climate Intelligence Unit (ECIU), the average British home will spend nearly £6,000 on foreign gas over the next 12 years, including £140 per year on Qatari gas.
A sustained lack of investment in renewable energy and insulation has incurred significant costs; the continued ban on the development of new onshore wind farms cost the British taxpayer £5.1 billion last year, and the coalition government’s decision to ‘cut the green crap’ back in 2013 has added an estimated £2.5 billion to the country’s energy bills. Policies such as reducing energy efficiency subsidies and scrapping the zero carbon homes plan have added £40 to average annual household bills over the past decade, with Carbon Brief attributing 90% of the increase in bills to rising gas prices.
Labour’s abandonment of its green prosperity plan is arguably emblematic of an excessively cautious approach to large-scale investment plans, which has characterised successive British governments. Hamstrung by Treasury restrictions and debt-to -GDP rules, the country has, as the IPPR has found, slumped to the bottom of the G7 in mobilising productive public and private investment.
Yet the IPPR’s research has also demonstrated that, although borrowing costs are high, a combination of sustained, targeted public investment and progressive taxation can provide expectations of future growth and profit in renewable sectors, raising GDP and encouraging the private sector to subsidise clean energy initiatives. As the US progresses with the Inflation Reduction Act, and other parts of the world mount their own decarbonisation plans, Britain’s aversion to investment shows that it risks being left behind in a global competition to reach net zero.