Labour’s green prosperity plan will prove to be either the party’s Achilles heel or the centrepiece of a “Green New Deal” for Britain — or possibly both.
The pledge to invest £28bn a year in low-carbon infrastructure, announced by shadow chancellor Rachel Reeves in 2021, is coming into sharp focus as this year’s general election draws closer.
City investors have expressed scepticism over Labour’s plan to borrow heavily to finance the scheme, and believe the party’s room for manoeuvre could be further constrained if the government announces tax cuts in the March budget.
Meanwhile, the Conservatives are set to boost their attacks on the policy, which they argue will increase the UK’s debt. In response, Labour leader Sir Keir Starmer has scaled back the scheme and is under pressure to reduce it further.
What is Labour’s pledge?
Vowing to be Britain’s first “green chancellor” if Labour wins the election, Reeves announced the plan to invest £28bn a year in low-carbon infrastructure at the party’s 2021 annual conference.
The fact that the policy would be funded by borrowing was largely uncontroversial as interest rates were 0.1 per cent at the time. Labour subsequently claimed it would be a British version of US “Inflation Reduction Act”, President Joe Biden’s widely praised green fiscal stimulus programme.
But the Conservative party has since latched on to Labour’s GPP, seeking to weaponise it as a symbol of Starmer’s fiscal indiscipline, despite Labour arguing that borrowing for capital investment will produce new material state assets.
Starmer has scaled back the initial scheme, delaying the target by up to five years and saying the pledge could be jettisoned altogether if it breaches the party’s fiscal rule to get debt falling.
What do bond investors think?
Some City investors are sceptical that Labour will be able to allocate anything close to the original £28bn pledge, given the constrained position of the UK’s public finances and expectations of Tory tax cuts ahead of the election.
Mark Dowding, chief investment officer at RBC BlueBay Asset Management, said he would be surprised if the GPP ended at “much more than a tenth or at most a quarter”. He added he thought other priorities may be seen as more urgent such as the NHS.
UK politicians were dealt a warning shot in 2022 when former chancellor Kwasi Kwarteng announced £45bn of unfunded tax cuts, triggering turmoil in bond markets and leading to intervention by the Bank of England.
Mike Riddell, a bond fund manager at Allianz Global Investors, said the recent underperformance of long-dated gilts relative to other markets since chancellor Jeremy Hunt’s Autumn Statement last year signalled that UK government bond investors “are definitely still concerned by the prospect of any additional borrowing, regardless of where it comes from”.
What would the money be spent on?
Only a fraction of the £28bn has been allocated, with the full details expected to be fleshed out closer to the election. But Starmer is under pressure to do so soon to win over supporters.
“We are in a curious situation where we have emphasised up to £28bn of extra annual debt but haven’t spelt out the full benefits of where we could spend the £28bn,” said one Labour aide.
The GPP will provide £6bn a year for a home insulation programme and a one-off £8bn investment to set up a “sovereign wealth fund” for green industrial infrastructure.
That sovereign wealth fund would spend £2bn on eight gigafactories, £3bn for six clean steel plants and £1bn to set up net zero industrial clusters. Money would also go into the creation of a state-owned company called GB Energy to co-invest in low-carbon energy projects.
GB Energy would play a major role in helping a Labour government hit its separate target of achieving a zero-carbon electricity grid by 2030.
Why are the Tories targeting it?
Conservative attempts to portray Labour as the party of higher taxes have been a feature of every recent general election campaign. As a result, Reeves has painstakingly sought to redefine Labour as a party of financial rectitude.
Labour has outlined only a handful of targeted tax rises on private schools, private equity chiefs and those with “non-domiciled” status, who are exempt from paying UK tax on foreign income.
Tory strategists have argued that the green plan’s extra borrowing will mean higher state debts, higher interest costs and ultimately higher taxes. Labour has countered that spending will produce income for the exchequer and lead to economic growth.
Prime Minister Rishi Sunak joked at the Christmas party for lobby journalists: “When I ask Sir Keir where the money is coming from to fund his £28bn spending spree, he turns into the Silent Knight.”
Bim Afolami, a Treasury minister, recently claimed that for every extra 1 per cent of gross domestic product borrowed by the government — about £25bn — it could “potentially” push up interest rates by “as much as half a per cent”.
How has Labour scaled it back?
Last week Starmer struck an ambiguous note as he described the £28bn investment figure as an “ambition” rather than a concrete pledge. Indeed, the Labour leadership has already reduced the scope and scale of the plan on four separate occasions during 2023.
In May, last year Reeves, on a trip to Washington, announced the scheme would have to fit within her fiscal rules, under which debt must be falling as a proportion of GDP within five years.
In June, Reeves confirmed a Financial Times story that the £28bn target might not be met until the second half of the first Labour parliament.
She also quietly removed the phrase “additional” from the previous promise of “an additional £28bn of capital investment”. Henceforth any green spending by the Tory government — currently about £8bn a year — would be netted off the figure.
In October senior Labour figures said the commitment might not be met until the end of the next five-year parliament. A few weeks later Reeves announced a new rule under which every £1 spent by the GPP would have to shoehorn in £3 of private investment.
What is the future of the green plan?
Having made this the centrepiece of Starmer’s vision of economic change, the Labour leader would struggle to ditch the entire scheme.
On Sunday, Starmer leaned into the plan, insisting: “It’s absolutely clear to me that the Tories are trying to sort of weaponise this issue. This is a fight I want to have.” Another party figure said: “Messaging and details can always be tweaked, but this is our big growth plan.”
But intense discussions are still taking place on how to refine the policy further in the face of intensifying Tory political attacks.
For now, Starmer has tried to frame the debate in different language, preferring to emphasise the 2030 decarbonisation target over the broader green prosperity plan.
In his October conference speech, he mentioned neither the green plan nor the £28bn. Starmer is likely to continue trying to redirect the conversation towards the 2030 target and emphasise the primacy of the fiscal rule. The March Budget, when the Office for Budget Responsibility will set out fresh fiscal forecasts, could be the moment for another partial retreat.
