After months of speculation and internal squabbling, the U.K. Labor Party has officially abandoned its pledge to borrow £28 billion ($35 billion) annually to invest in green energy initiatives if it wins the next general election.
While the British media quickly dubbed it the “mother of all U-turns,” the Labor Party’s announcement came as no surprise. Since June 2023, the party has been gradually scaling back its Green Prosperity Plan, first unveiled by shadow chancellor Rachel Reeves in September 2021.
Instead of spending an extra £28bn each year on green investments over five years, as was the initial proposal, the party now plans to spend just £23.7bn – less than £5bn a year. Likewise, while the original plan relied exclusively on government borrowing, the updated version aims to raise £10.8 billion through extraordinary taxes on major oil and gas companies.
The Green Prosperity Plan, which was initially promoted as Labour's flagship economic policy, aimed to encourage public-private investment in low-carbon energy sources, through the creation of a new state energy company. and a national wealth fund. But the annual financing designed in the revised plan represents just 0.2% of 2022 GDP and about 0.4% of annual government spending. Italy, by contrast, with a debt-to-GDP ratio of 144%, compared to Britain's 100%, allocates €11.8 billion ($12.7 billion) annually to green projects. These investments, equivalent to 0.6% of Italy's 2022 GDP, are financed through the European Union Recovery and Resilience Facility.
In retrospect, Labour's plan was already doomed to fail after former Prime Minister Liz Truss announced her disastrous mini-budget and virtually brought down the entire British economy in 2022, costing the country an estimated £30 billion. . In a November 2023 commentary in The Economist, Reeves emphasized the party's respect for its “fiscal rules.” Echoing former Prime Minister Gordon Brown, he promised: “We will not go into debt to finance everyday spending and we will reduce the national debt as a percentage of GDP.”
The Tories' counterargument was obvious: how could Labor reduce the debt-to-GDP ratio and at the same time plan to take on another £140bn of debt?
However, contrary to Conservative arguments, Labour's original promise was actually economically sound. It is testament to the superficiality of the British media that, while commentators obsessively covered Labour's U-turn, few actually attempted to assess the economic validity of its proposals. On the contrary, they simply repeated the conservative refrain that the numbers “don't make sense.”
The IPPR report estimated that meeting the government's climate targets would require annual public investment of £30bn “until at least 2030”. Increased investment in green energy, although financed through debt, was projected to catalyze additional private sector investment, reduce environmental costs, increase tax revenues, and reduce public spending related to social assistance.
To be sure, Labour's plan was not aligned with the party's promise to reduce the debt-to-GDP ratio. Still, the party should have relaxed its tax rules for two main reasons. First, it is absurd to apply accounting conventions to the existential threat of climate change. Second, more government spending could stimulate Britain's anemic economy, while investing in low-carbon technologies would yield significantly better results than investing in high-carbon industries.
Taken together, both arguments could have constituted a more than compelling reason for the Labor Party not to deviate from its original plan. But party leaders struggled to articulate a coherent response to Conservative criticism, due to their anxiety about appearing fiscally responsible.
At first glance, with unemployment at 3.9% and annual inflation at 4%, the British economy may seem robust enough to assume that additional government spending is unnecessary. But this does not take into account the fact that the UK has teetered on the brink of recession over the past two years. Separately, the percentage of working-age British citizens not actively seeking employment rose to 21.9% by the end of 2023, underscoring the country's economic fragility.
At its best, investing in green infrastructure has the potential to create new jobs that are more valuable and productive than many of the frustrating “useless jobs” prevalent in the British economy, which often lead workers to choose an early withdrawal. Likewise, since the primary goal of clean energy investments is to increase supply by boosting electricity generation, they are less likely to drive up inflation.
But Labor leaders failed to articulate the Keynesian reasoning behind their green investment plan. This can be attributed, in part, to the enduring dominance of neoclassical economics and its assumption of full employment. According to the prevailing discourse, boosting public investment is an inefficient way to increase supply. Consequently, Labour's proposed green spending would have had to be financed by tax rises.
There is another, deeper reason why Labor politicians are so reluctant to embrace Keynesianism. Since Brown set the party's fiscal rules in 1997, his leaders have sought to counter the widespread perception that Labor is hostile to private enterprise by adopting a façade of fiscal conservatism.
Consequently, Labor leaders today find themselves in the unenviable position of being punished by markets and the media for revolutionary goals they never embraced, while failing to implement the progressive policies their voters want. The only way out of this dilemma is for the party to present a persuasive Keynesian argument for investing in green growth.
Robert Skidelsky, member of the British House of Lords, is Emeritus Professor of Political Economy at Warwick University. He is the author of an award-winning biography of John Maynard Keynes and The Machine Age: An Idea, a History, a Warning (Allen Lane, 2023).
Copyright: Project Syndicate, 2024.
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