The UK Labour Party's green-energy debacle

LONDON — Following months of speculation and infighting, the United Kingdom’s Labour Party has officially abandoned its pledge to borrow £28 billion annually to invest in green-energy initiatives if it wins the next general election.

Although the British media quickly dubbed it the “mother of all U-turns”, Labour’s announcement was hardly surprising. The party has been gradually scaling back its Green Prosperity Plan, first unveiled by Shadow Chancellor Rachel Reeves in September 2021, since June 2023.

Instead of spending an additional £28 billion annually on green investments for five years, as initially proposed, the party now plans to spend just £23.7 billion, less than £5 billion per year. Moreover, while the original plan relied solely on government borrowing, the updated version aims to raise £10.8 billion through windfall taxes on major oil and gas companies.

Initially promoted as Labour’s flagship economic policy, the Green Prosperity Plan aimed to foster private-public investments in low-carbon energy sources through the establishment of a new state-owned energy company and a national wealth fund. But the annual funding outlined in the revised plan amounts to just 0.2 per cent of 2022 GDP and roughly 0.4 per cent of annual government spending. By contrast, Italy — with a debt-to-GDP ratio of 144 per cent, compared to Britain’s 100 per cent — is allocating €11.8 billion ($12.7 billion) annually to green projects. These investments, equivalent to 0.6 per cent of Italy’s 2022 GDP, are financed through the European Union’s Recovery and Resilience Facility.

In retrospect, Labour’s plan was doomed after former Prime Minister Liz Truss announced her disastrous mini-budget and nearly crashed the entire UK economy in 2022, costing the country roughly £30 billion. In a November 2023 commentary in The Economist, Reeves emphasised the party’s adherence to its “fiscal rules.” Echoing former Prime Minister Gordon Brown, she vowed, “We will not borrow to fund day-to-day spending and we will reduce the national debt as a share of [GDP].”

The Tory counterargument was obvious: How could Labour reduce the debt-to-GDP ratio while simultaneously planning to borrow an additional £140 billion?

But, contrary to Conservative claims, Labour’s original pledge was economically sound. It is a testament to the superficiality of British media that while commentators obsessively covered Labour’s U-turn, few actually tried to assess the economic validity of its proposals. Instead, they merely echoed the Conservative refrain that the figures “do not add up.”

Labour’s green investment strategy was heavily influenced by the Institute for Public Policy Research (IPPR), a progressive think tank. In July 2021, the IPPR’s Environmental Justice Commission projected that to achieve net-zero emissions by 2050, the UK’s annual investment in renewable energy would need to increase from £10 billion to £50 billion.

The IPPR report estimated that meeting the government’s climate targets would require annual public investment of £30 billion “until at least 2030”. The increased investment in green energy, though funded through borrowing, was projected to catalyse additional private-sector investments, reduce environmental costs, increase tax revenues and reduce welfare-related public spending.

To be sure, Labour’s plan was not aligned with the party’s pledge to reduce the debt-to-GDP ratio. Nevertheless, the party should have loosened its fiscal rules for two main reasons. First, it is absurd to apply accounting conventions to the existential threat of climate change. Second, increased government spending could stimulate the anemic British economy and investing in low-carbon technologies would yield significantly higher returns than investing in high-carbon industries.

Taken together, both arguments could have made a compelling case for Labour to stick with its original plan. But Labour’s leaders struggled to articulate a coherent response to Conservative critiques, owing to their eagerness to appear fiscally responsible.

What Labour leaders fail to recognise is that sound public-finance management requires deviating from established fiscal rules in times of crisis. The standard Keynesian position, as Cambridge economist Robert Rowthorn explains, is that while a recession “may leave a harmful legacy lasting for many years”, a temporary fiscal stimulus could boost output “long after the stimulus is removed”, significantly increasing tax revenues.

At first glance, with unemployment at 3.9 per cent and annual inflation at 4 per cent, the British economy may appear robust enough to render additional government spending unnecessary. But this fails to account for the fact that the UK has teetered on the edge of recession for the past two years. Moreover, the share of working-age Britons not actively looking for work increased to 21.9 per cent in late 2023, underscoring the country’s economic fragility.

At the very least, investing in green infrastructure has the potential to create new jobs that are more meaningful and productive than many of the unfulfilling “bullshit jobs” prevalent in the UK economy, which often drive workers to opt for early retirement. Moreover, since the primary objective of clean-energy investments is to increase supply by boosting power generation, they are less likely to trigger inflation.

But Labour leaders failed to articulate the Keynesian rationale behind their green investment plan. This can be partly attributed to the lasting dominance of neoclassical economics and its assumption of full employment. According to the prevailing narrative, boosting public investment is an inefficient way to increase supply. Consequently, Labour’s proposed green spending would have to be funded through tax hikes.

There is another, deeper reason why Labour politicians are so reluctant to embrace Keynesianism. Ever since Brown established the party’s fiscal rules in 1997, its leaders have tried to counter the widespread perception of Labour as hostile to private enterprise by adopting a façade of fiscal conservatism.

Consequently, Labour leaders now find themselves in the unenviable position of being chastised by markets and the media for revolutionary goals they never embraced while being constrained from implementing the progressive policies their voters want. The only way to escape this dilemma is for the party to make a persuasive Keynesian case for investing in green growth.

Robert Skidelsky, a member of the British House of Lords, is Professor Emeritus of Political Economy at Warwick University. He is the author of an award-winning biography of John Maynard Keynes and The Machine Age: An Idea, a History, a Warning (Allen Lane, 2023). Copyright: Project Syndicate, 2024. www.project-syndicate.org