The most important news this week had nothing to do with Boris Johnson. It was the rise in typical two-year mortgage rates to more than 6 per cent. Those households remortgaging next year will pay an average of £2,900 more. The Conservative destruction of the British economy is an astonishing thing.
But there is a deep, if unjustified, association between the Conservatives and fiscal prudence, and Labour and fiscal recklessness. Labour is ahead of the Tories on several economic measures but by a far smaller margin than recent events would suggest.
This is one reason it was wise for Rachel Reeves, the shadow chancellor, to curtail Labour’s investment commitments. Fiscal rules are central to addressing voter scepticism about the party’s economic credibility. Increasing green investment to £28bn by the middle of the next parliament will boost growth and help to ensure debt is falling as a share of GDP by the end of the parliament.
Yet hard questions remain. Depending on the speed with which it moves, Labour could spend £28bn to £84bn in the next parliament investing in future industries. As the party has ruled out significant tax rises, this money would be borrowed. Not so long ago this would have been an easy choice – and given the long-term returns on capital investment it probably still is – but the picture now looks very different.
Can Labour win an election in which its most significant economic policy is funded by borrowing, even if it meets the party’s fiscal rules? We may be about to find out.
Labour’s Green Prosperity Plan is often compared to Joe Biden’s Inflation Reduction Act, part of the most significant and pro-worker industrial strategy from any liberal democracy in recent memory. There are three vital differences.
First, it is called the inflation reduction act, not the green superpower act, because the White House took great care to frame the act as addressing immense pressures on US households. It was about reducing bills – even gas prices – and creating jobs.
Second, the the American act was paid for in part by tax rises. Biden pledged that taxes would not rise on households earning less than $400,000. The act included tax rises on the top 1 and 0.1 per cent of earners, a 15 per cent minimum corporate tax rate and a 1 per cent excise tax on stock buybacks. Those tax rises did not pay for all, or even most, of the act’s investment and subsidies but they did, importantly, signal that Biden understood there were trade-offs and that someone had to pay.
Third, the Inflation Reduction Act was about private as well as public investment. The act establishes vehicles for public investment to create new markets and shape existing ones, but it also makes extensive use of subsidies and tax incentives to encourage private investment in future industries, especially in counties and states that Biden needs to win at the 2024 presidential election. That is no accident.
The lessons for Labour from Bidenomics are as much about politics as economics.
While security, bills and jobs have always been part of Labour’s argument for its Green Prosperity Plan, more could be done to emphasise this. The whole plan needs to be about workers and industries, what towns and cities across the UK can produce and do in concrete terms. If we need heat pumps, we need plumbers and electricians. If we need wind and solar farms, we need engineers and steel workers. We need nuclear power because we must protect British households from vulnerability to despotic petrostates. Standing tall in this uncertain world means producing more at home: zero-carbon energy, yes, but why not infrastructure and housing too?
Labour can never do enough to emphasise it can be trusted to steward the nation’s finances. Keir Starmer and Rachel Reeves represent the most credible Labour team in decades. It is imperative they enter the general election campaign with unambiguous confidence in their economic platform.
There is more than one way to achieve economic credibility. The truth is no one quite knows how to achieve it across economic contexts. This moment is different to 1992, 1997 and 2015. Might voters trust Labour more if the Green Prosperity Plan – or Economic Security Act? – is accompanied by a commitment not to raise taxes on individuals earning less than £100,000? Because someone must pay, even if it’s the top 1 per cent. Or might voters reward Labour for emphasising that investing £28bn a year is a goal not a commitment? The party’s fiscal rules mean that whether this goal is achieved depends on economic circumstances.
These options point in opposite directions. One tacks to the left, one to the right. What both share is an unambiguous message: we know that our money is your money, and because it’s your money, we will treat it with the utmost respect and caution.
And lastly, why not make more of the need for private investment to work alongside public investment? Public investment should lead where markets must be created or incentives are misaligned. Private investment should be supported and encouraged where there are established markets that must be expanded or accelerated. We are still one of the world’s financial hubs, but we must make Britain a more attractive place to invest in domestic infrastructure, technology and industry.
Thirteen years of Conservative government have left Britain uniquely vulnerable to global shocks. Labour has a credible plan to change that. Now is the time to ensure that plan can withstand the heat of a general election campaign.