So let us turn instead to the ongoing discussion of Labour’s £28bn green investment pledge. Proponents of the policy argue that an opposition must differentiate itself from an unpopular government on some issues and that Keir Starmer’s reputation as a flip-flopper is doing him electoral harm. Retreat on this and it will only confirm some voters in their belief that the Labour leader does not really stand for anything, they argue.
The contrary view is that the pledge gives the Conservatives the opportunity to argue that Labour is the party of higher spending and higher borrowing which ends up with higher taxes. It is a well-worn argument for the very good reason that it usually works. Certainly, within Downing Street there is a belief that the £28bn pledge exposes a rare Labour vulnerability.
There is something to be said for both arguments, although – on the basis that, if in doubt, do the thing your opponents least want you to do – dropping the £28bn policy seems the wiser course to me.
This should not, however, be viewed as simply a matter of political tactics in advance of a general election. There are two arguments to be made for sticking with the £28bn pledge on the grounds of policy substance. The first is that the plan is essential to delivering higher economic growth. The second is that it is essential to tackle climate change. The suggestion of dropping the policy provoked dismay from some quarters. “No one seems to particularly care about our children’s future,” tweeted Gary Lineker. John McTernan, Tony Blair’s former political secretary, complained that “there are days when you have to wonder, what is the point”.
A little perspective is needed. Just as spending an extra £20bn on green infrastructure (in addition to the government’s £8bn) is not quite as profligate as the Tories make out in the context of public spending of over £1.1trn, it will not be as economically transformative as some might pretend in the context of a £3trn economy. Nor is it going to transform the prospects of solving climate change.
Nonetheless, there is frustration bordering on fury at the sense that Labour is going to be constrained by fiscal rules and worries about bond market credibility. A lot of good and worthy things that Labour governments are supposed to do might not happen. Some are getting their sense of betrayal in early.
This quickly becomes a debate about fiscal rules and whether and in what form they should exist. Surely, they should not stand in the way of investing for the future, especially as we must decarbonise the economy anyway, goes the argument. Our fiscal rules are too blunt an instrument, constraining governments from doing good.
There is something in that. There is a case for exploring partial carve-outs from the fiscal rules that would enable higher levels of expenditure in ways that bring long-term benefits. (I have put forward the idea of an Office for Spending Evaluation that would categorise expenditure depending upon its value in either reducing future demand for public spending or improving productivity. Potentially, this could be used in conjunction with revised fiscal rules.)
None of this, however, negates the problem with our public finances. The national debt, measured as a proportion of our overall economy, is high. At best, our debt is going to flatline in the next few years (our current fiscal rules are relatively lax) and, if we have a shock to the economy (and we have had two in the last 16 years), it could rise substantially again. Debt interest is already one of the government’s biggest items of expenditures. As the economist Ian Mulheirn (not unsympathetic to Labour) recently pointed out, we cannot simply wish the debt issue away.
Mulheirn made three arguments as to why public investment should not get a free pass. It is not always well-targeted; it probably will not – based on analysis by the Office for Budget Responsibility – pay for itself in terms of the public finances; and creditors do care about absolute debt stocks because the assets created by public investment, such as hospitals, are not very liquid.
A Labour government will face many demands for higher spending, including improving public services, strengthening our defence, decarbonising the economy and pursuing an industrial strategy. But extra borrowing to pay for them in the current circumstances carries risks. Worrying about debt is not just an eccentric preoccupation of Conservative Treasury ministers (or even former Conservative Treasury ministers).
Whichever way the current confusion over £28bn is resolved, it is unlikely to be crucial in determining the result of the next election. It does, however, expose a tension that may become a bigger issue for Labour in power. Many of its supporters want radicalism and boldness and to use the government’s capacity to borrow to solve the nation’s problems. Rachel Reeves’s Treasury will argue that there really is little capacity to borrow much more. The latter argument will almost certainly prevail, but the current row gives us a foretaste of the political difficulties to come.
[See also: Labour’s £28bn U-turn comes with serious risks]