Joe Biden’s Inflation Reduction Act is reshaping the way governments behave. Since the 1980s the idea that the state should do and tax less has been dominant across Western economies, the market the arbiter of economic choices. The act challenges that orthodoxy. President Biden is intervening in the US economy in a way not seen since Roosevelt, spending more and taking a proactive role in shaping what the country makes, sells and does.
Much UK commentary around the act has focused on our inability to compete – ranging from the obvious (we can’t outspend the US) to the ridiculous (we don’t need to respond). Clearly we cannot match $397bn of public spending, but this misses the point entirely. The UK’s challenge is how it responds to the new relationship between policymaking, the market and the state that America is creating.
Labour has been talking about industrial strategy for some time, with Rachel Reeves, the shadow chancellor, taking a keen interest in Biden’s “modern supply side economics”, or “securonomics“, as she calls it. The ideas in her New Business Model for Britain provide an optimistic vision of how an active state can work with the private sector to mobilise investment for the net-zero transition. But with Labour eager to highlight its ironclad “fiscal rules” and watering down its Green Prosperity Plan, it seems just as much at risk of missing the point of the Inflation Reduction Act as those playing down the need for a UK response.
Today, any government press release is likely to feature the phrase “world-leading”. For industrial policy, the reality is that recent UK efforts amount to very little. Our industrial base is in decline, business investment the lowest in the G7, productivity historically low, and companies are questioning whether the UK is an attractive investment proposition.
This should be a warning for Labour. When it talks of economic transformation, it needs to match bold language with bold ideas. People are not seeing tangible benefits from levelling up or “world-leading industries”. Calls for an industrial strategy that lead to reviews and stakeholder forums don’t transform the economy. Instead, the focus must be on making significant changes quickly. Billions of pounds in private investment are needed if we are to claim the prizes net-zero transition offers. Incentivising that investment isn’t just about political stability, or removing the policy barriers preventing investment. The disastrous results of the latest renewables auction, in which there were no bids from offshore wind, and a plunging carbon price demonstrate the scale of the challenge facing investor confidence, strengthening the case for a confident industrial and fiscal policy.
For too long the government has been unwilling to undertake decisive intervention, driven by a fear that spending equals recklessness, not investment in the future. This is despite the evidence that green investment has an economic multiplier effect, not to mention its success in crowding in private finance. Tata’s commitment to a £4bn battery gigafactory cannot be seen in isolation from government’s £500m offer to electrify its Port Talbot steelworks, for example.
This is where Labour must learn from the Inflation Reduction Act. It is full-fat industrial policy, brutal in its directness. There is no tendering, no call for proposals, no bureaucracy, just subsidy – and lots of it. Companies are paid quickly for doing things the government wants them to. Will it waste public money? Of course it will. Is it working? In a year, the White House says it has attracted $270bn in private investment, creating 170,000 jobs in 44 US states.
Competing with act was never in question. Learning from it is imperative. Businesses are relocating to the US in their droves; the UK needs a similar approach if it wants to retain industries tempted by Biden’s offer. The mantra is “back your winners”: greater reliance on fiscal policy necessitates a macroeconomic policy that is more political – governments must choose what to tax and where to spend.
The net-zero transition won’t be easy. Any government is right to be honest with the electorate about that. Rising borrowing costs mean that using bond markets to finance spending won’t be easy, while borrowing in the financial markets for day-to-day spending is difficult with increased debt and higher interest rates. The Inflation Reduction Act’s use of subsidy is foregone revenue: by spending to attract investment now, the government can raise revenue from industries that grow as a result of its intervention.
Labour needs to strike a balance between being honest about today’s challenges and offering hope that it can transform peoples’ lives. The approach of the Inflation Reduction Act, in all its ugliness, does just that. People don’t want aphorism about missions: it’s delivery that counts. Labour can’t take for granted that a change of government will be enough. The Inflation Reduction Act shows what can be done when government is willing to break the mould. Labour in power will need to respond with a boldness of its own if the UK is to keep pace.
[See also: The Inflation Reduction Act, one year on]