Labour’s backsliding on its green agenda must be halted

The announcement that Labour will be looking to scale back its £28bn a year ‘green prosperity plan’ is a political and economic error. Barely a fortnight after her visit to Washington, following a week of headlines about Labour’s bold economic plans, Rachel Reeves has wound back on the proposed investment spending.

It’s one thing to abandon your ambitious plans once you’re actually in office and the nice people in the Treasury start whispering urgently in your ear. It’s another thing entirely to start ditching them a year before the election. It does not bode well for the ability of a future Labour government to stay the course in what is likely to be difficult circumstances.

Scaling back the green prosperity plan will cost Labour votes

It’s an obvious gift for the Greens, whose polling had been in the doldrums since Labour started talking up its green agenda. They now have a low bar to clear for protest votes and, as the ecological crisis worsens, every other news bulletin gives them another argument – from the apocalyptic scenes in New York to the disappearing Arctic icesheets.

It’s a gift for the Tories, too, who have zeroed in on Keir Starmer’s “flip flops” and now have another, rather dramatic example of his apparently wobbly character. If he can’t stand up to Peter Mandelson and Ed Balls, they’ll say, how on earth is he going to stand up to Vladimir Putin or Xi Jinping?

It may be that those running the whispering campaign against the pledge don’t care too much about the environment. But they are supposed to care about votes. And this will now cost Labour votes.

Labour’s high ambitions will unavoidably need higher taxes

The real tragedy here is that this was all so unnecessary. The economic situation is bad, but that is precisely why a big ambition is needed. Instead, Reeves offers two justifications for the rollback in her Times column. Both contain an element of truth, but by mixing up two points that should be kept separate, she opens up her programme to further attacks over the next 12 months.

First, Reeves says that supply chains in Britain are not equipped to cope with a sudden rush of government spending. This is true. After decades of hollowing out our manufacturing and under-providing the skills and training we need, a big increase in government investment would likely turn into a big increase in imports, buying in (say) the wind turbines the government were looking to install. Better to ramp up spending more slowly so supply chains can be developed and training provided.

Second, Reeves says that borrowing costs have risen. This is also true. Government borrowing costs have got back to almost the levels we saw last year, under the brief and unhappy reign of Liz Truss. The decade of cheap money and low inflation after the financial crisis has long gone – not just in Britain, but across the developed world. This means that outside of a pandemic-style crisis, governments will need to raise more through taxation than they needed to in the recent past to achieve what they want.

High ambitions will need higher taxes. There is not some other way round this plausibly open to Labour, expecting to take charge of a highly-indebted economy with a substantial balance of payments deficit on its foreign trade.

Labour had the option to talk more seriously about how the burden of those taxes could be shifted towards the wealthiest. But the party has ruled out some obvious wins, like copying Tory Chancellor Nigel Lawson and equalising capital gains tax (CGT) and income tax. Tax economist Arun Advani estimates this would bring in £16bn a year, more than half of the additional spending the green prosperity plan required, whilst hitting the richest taxpayers who pay the overwhelming bulk of CGT.

Reeves’ justification will invite more criticism of Labour’s platform

The broader point here is that purely financial constraints, like rising borrowing costs, can typically be met by a rich country, if there is the political will to do so. Labour had also floated some novel proposals around government accounting, like adopting a fiscal rule (as recommended by the Resolution Foundation and others) that would take account of government assets as well as debt. Borrowing to invest in new assets, like a new railway line or the GB Energy public electricity company, would then count less heavily against the government’s own targets.

Instead, by mixing up a financial constraint (those rising borrowing costs) with a real economic problem (Britain’s weak supply chains), Reeves has opened the door to continual arguments about the status of every part of Labour’s programme. It’s at least plausible the economic situation will worsen over the next 12 months or so, with slower growth and inflation already remaining stubbornly higher than many economists expected. If and when things worsen, the demands to abandon more of the programme will get louder.

Labour must offer more clarity on its plans – and its fiscal rules

If they want to stop the rot spreading any further, this is what Labour needs to do. First, stop pretending the ecological crisis can be met on the cheap or that economic reconstruction won’t cost anything. State clearly and forcefully now which taxes will rise and who will pay for them. The party has floated emergency windfall taxes on energy companies. It can do the same for tax-funding some of its green prosperity plan. There is already speculation about future Labour tax rises. This can be killed off with clarity, but has to be done soon.

Second, lay out the full fiscal rule, in detail, as soon as possible. Bolt everything in place against this and make the case for any accountancy changes, like introducing a net worth assessment. This needs to be done clearly, publicly and quickly to close down future speculation about what can and cannot be made to fit inside the rule.

Third, start to detail what is in that £28bn (or now less…) that is to be spent. Stop using abstract figures, and start filling in the detail: what investments? Where? What jobs will be created? This will make remaining spend harder to attack and can be used to develop public support. Has the party, for example, drawn up plans for marginal seats, showing how that £28bn will impact on them, using specific, concrete examples that can be campaigned around? The backsliding can be stopped and the party’s ambitions met. But its leadership will have to act fast.

James Meadway is an economist, host of the Macrodose podcast, and a former adviser to Shadow Chancellor John McDonnell MP and former chief economist at the New Economics Foundation.