David Gauke is a former Justice Secretary, and was an independent candidate in South-West Hertfordshire at the 2019 general election.
How does an Opposition both reassure the public that it will not take risks with the public finances but also pursue policies that will be sufficiently radical to make a difference to people’s lives?
This is always a challenge for any Opposition and Labour is currently no exception. After putting forward Jeremy Corbyn as candidate for Prime Minister in 2019 – with no shortage of radical policies – and with the nation having had a more recent experience of what happens when fiscal policy goes awry (admittedly by a Conservative government), Labour will have to convince the public that it can make the sums add up.
At the same time, we are going through a cost of living crisis and the public want to hear a convincing case that a change of government will make a positive difference.
Too bold a policy on spending, and Labour is open to the accusation that it will tax and borrow more, which has generally been a losing position. Too cautious, and at least some will argue that it does not have a credible plan for growth.
This dilemma is the reason why, in the last week or so, there has been lots of talk about £28 billion. This is the annual cost of the Green Prosperity Plan, announced by Rachel Reeves in her 2021 party conference speech, to be invested in the green economy.
Patrick Maguire noted in The Times that, in a recent speech, Rachel Reeves referred to the Green Prosperity Plan – but not the £28 billion. Maguire also reported that there are rumours that the £28 billion pledge might be dropped.
Over the weekend, John Glen wrote to Reeves asking for greater clarity as to Labour’s policy. Reeves’ “securonomics” speech, delivered to the Peterson Institute in Washington DC was interesting in its own right to the extent that it linked Labour’s economic policy to that pursued by the Biden administration. Reeves essentially endorsed the arguments of the US Treasury Secretary, Janet Yellen, and the National Security Adviser, Jake Sullivan, that the state needs to take a bigger role in the economy.
Sullivan’s speech at the end of April to the Brookings Institution has apparently caused much interest in Labour ranks and has clearly influenced Reeves’ thinking. Sullivan argues that the Biden administration faced four problems – the hollowing out of the US’s industrial base; security risks from China and Russia; climate change; and rising economic inequality leading to the rise of populism – and that the response should be to reject the previous Washington consensus on free markets and free trade which, in their view, has done little to help the fortunes of the American middle and working classes.
Greater importance should be placed on resilience, secure and trusted supply chains, using the power of government to create jobs and using taxpayers’ money to support the green economy. The thinking of US Democrats and the British Labour Party looks very closely aligned.
The Biden Administration has been willing to spend freely, most noticeably through the Inflation Reduction Act, as well as the Bipartisan Infrastructure Act. US Government debt is increasing rapidly – hence the need to suspend the debt ceiling – which is less risky for a nation with a reserve currency than for the UK.
Even so, as Larry Summers, a former Democrat Treasury Secretary, has argued, the US public finances do not look sustainable, and there are inflationary pressures which may only be able to be brought under control by a tighter monetary policy. Summers predicts a hard landing, which may happen this side of a US (and UK election). While aligning with US policy has its appeal now, it is perfectly possible that by the time of the next UK general election, this may leave Labour vulnerable to criticism.
Glen has already highlighted the risks if the Green Prosperity Plan is unfunded. He quotes Paul Johnson of the Institute for Fiscal Studies, who has commented that “additional borrowing both pumps more money into the economy potentially increasing inflation and also drives up interest rates”. This is an argument of which we will hear plenty.
Labour will also be questioned as to their approach to meeting the Government’s fiscal rules. In recent years, we have had a fiscal rule requiring current spending to be funded by taxation in the third year of the fiscal forecast. We have also had a rule that debt should be falling as a percentage of GDP in the same year.
The first element of these tests does not cause a problem for the £28 billion (it is capital spending). The second element might be a constraint, but Labour will change the definition of “debt” so that it counts what it owns as well as what it owes (a “net worth” fiscal rule). It requires a bit of explaining but it is a respectable argument.
Last autumn, however, Jeremy Hunt changed the first element of its fiscal rules so that overall borrowing should be below three per cent of GDP by the fifth year of the forecast. The distinction between capital and current spending is gone. Add £28 billion to borrowing and the fiscal rule is broken.
Again, one can make a perfectly respectable argument that a fiscal rule based on current spending is a better test than overall borrowing but Labour – if it sticks with the £28 billion – will have to explain why they do not intend to meet the Government’s existing fiscal rule. The fear for Labour is that it is often the case that when you are explaining you are losing.
A final set of questions relates to whether, if we are going to spend £28 billion to improve economic growth, spending it on the green economy is the best way of doing so. It might be exactly the right thing to do to address climate change or to bring jobs to deprived parts of the country, but those are different questions.
How will these different objectives be prioritised? If it ends up simply in a bidding war on green subsidies with the US and EU, it might not even be that effective in achieving those objectives.
Labour, therefore, faces a choice. It can close down the argument and abandon the £28 billion, but that would leave it little to say on how it would improve economic growth. The Green Prosperity Plan was already doing a lot of heavy lifting in terms of meeting its mission to turn the UK into the fastest growing economy in the G7 (what about the vast majority of the economy which is not “green”?), but without the £28 billion the growth plan sounds very thin. All that would be left is planning reform and removing some relatively minor barriers to trade with the EU (Labour could, of course, be more ambitious on the latter issue).
The alternative is to lean into the argument and make the case for Labour’s own fiscal rules and a willingness to “borrow to invest”. Recent polling suggests that the public is much more sympathetic to these arguments than in the past, but if the Conservatives can link higher borrowing with higher inflation, that support could yet be tested.
The Green Prosperity Plan is one of Labour’s highest profile policies but it is also a political vulnerability. Glen’s intervention is an early skirmish designed to test Labour’s commitment to it. If the £28 billion pledge stays, it will be one of the defining issues of the general election campaign. If it goes, Labour will be missing a big idea.