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Could a public accounting tweak unlock green investment?

A little-noticed aspect of Rachel Reeves' Mais lecture could give Labour the fiscal headroom they need.

By Steve Coulter

Rachel Reeves used her prestigious Mais Lecture last month to call for “a new model of economic management”. But if that sounds radical, the shadow chancellor of the exchequer is keen to manage your expectations – a new Labour government can only do so much, she suggests, thanks to the poor state of the economy and public finances they will inherit. So, will the chess-playing candidate for chancellor play an aggressive or defensive game if put in charge of the UK’s economic and fiscal policy? 

There’s a lot to play for, as Reeves acknowledged. The UK’s investment gap – the difference between what we would have needed to spend between 2006 and 2021 to hit the OECD average and what we actually spent – has been estimated at more than half a trillion pounds.  

She claimed in her lecture that in 2010 “historically low interest rates and slack in the economy” offered a “unique opportunity” to invest in the productive capacity of the economy. Instead, we had austerity. But Reeves could get just as unique an opportunity to change the direction of the economy as when real interest rates were in negative territory. The Treasury’s Net Zero Review concluded that “a successful and orderly” green transition would result in “more benefits – improved resource efficiency for businesses, lower household costs, and wider health co-benefits – than an economy [that remains] based on fossil fuel consumption.” The UK’s trade body for energy, Energy UK, estimates that the most rapid transition could result in 6.4 per cent growth in UK GDP by 2050, equivalent to £240bn. 

And yet Labour has committed to the government’s spending plans after the election and has adopted similarly rigid fiscal rules. These would allow more borrowing – provided it is for investment, not day-to-day spending. But by retaining the government’s so-called sustainable debt rule (requiring debt to be falling as a share of GDP over the forecast period), the party accepts a firm limit on how much extra investment it can actually do.  

The economy may be the defining issue in this year’s election, and Labour is eager not to expose itself to Conservative attacks over public spending. But the Mais lecture gave no evidence that these rigid fiscal rules could be modified, even after the election. Indeed, Reeves placed extra political obstacles in the way, saying the rules can only be changed if an economic emergency is declared – a last resort for any government.  

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Yet a close reading of Reeves’ speech reveals an interesting move. In September 2022, Liz Truss’s government put forward a set of unfunded tax cuts in its mini-budget without consulting the Office for Budget Responsibility (OBR). Reeves called this a “concerted attempt to undermine our independent economic institutions”.  By contrast, she will “ask the OBR to report on the long-term impact of capital spending decisions”.  

This means the more capital expenditure a Labour government does, the more likely the OBR’s assessment of gross domestic product will be positive. As a result, debt we accumulate in boosting the productive capacity of the economy will look better against the increased weight given to evidence of more investment-driven GDP growth. In other words, Reeves could get away with more spending without breaking her fiscal rules.

This would be a substantial shift in how our institutions view government spending. “As chancellor,” she said, “I will report on wider measures of public sector assets and liabilities at fiscal events, showing how the health of the public balance sheet is bolstered by good investment decisions.” The current focus on public sector liabilities – that is, borrowing and debt – mean that chancellors spend their time and energy managing these, at the cost of allowing national assets to wither. Instead, Reeves would be incentivised to grow the country’s assets because she’d have to tell the country how they’re growing every Budget day. 

Fresh from stripping back the green prosperity plan, the shadow chancellor believes she’s struck the necessary balance between “the imperatives of the energy transition and the real economic constraints we face”. Labour seems to have calculated that climate-conscious voters won’t leave the party, and businesses won’t get impatient with a go-slow approach to the green transition.  

This is a gamble: half of Labour voters think that climate change is the most important challenge facing the world, just ahead of the general public. Another recent poll of business leaders found 63 per cent think the government needs to take action if it wants to keep up in a “global net zero race”. 

Meanwhile, the woman who would be our next chancellor has made another bold move – to quietly redefine the goals of fiscal policymaking, while keeping the existing rules intact. Will it pay off – and is it enough? 

This article was originally published as an edition of the Green Transition, New Statesman Spotlight’s weekly newsletter on the economics of net zero. To see more editions and subscribe, click here.

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