Labour Slashes Green Plan to £4.7 Billion Amid Tory Attacks

By Bloomberg

Feb 08, 2024

image is BloomburgMedia_S8JB9MDWLU6900_08-02-2024_19-00-22_638429472000000000.png

Labour’s UK Election Prospects Hinge On Winning Over Older, Richer Voters

Opposition leader Keir Starmer shredded his pledge to spend £28 billion ($35 billion) a year transitioning the UK to green energy, the clearest sign yet of his poll-leading Labour Party’s determination to avoid Conservative attacks over taxes that have shaped the outcome of past elections.

Following weeks of speculation, Labour confirmed Thursday the new annual spending target would be £4.74 billion, even as Starmer insisted the party is committed to the broader aim of de-carbonizing the electricity network by 2030 and creating a publicly-owned clean energy company. Breaking down the annual figure, Labour said about £2.2 billion would come from an extended windfall tax on oil and gas companies, and about £2.6 billion from borrowing.

“If we come into power, we’re going to inherit an economy that’s very broken,” Starmer told reporters Thursday, standing alongside Labour shadow chancellor Rachel Reeves. “We have to adjust according to the circumstances.”

Under the so-called “Green Prosperity Plan,” a Labour government in its first term in office would set up a new £8.3 billion public company to work with the private sector to accelerate the rollout of clean energy, create a new £7.3 billion wealth fund to invest in manufacturing and spend an extra £6.6 billion on energy efficiency in homes.

The dramatically scaled-back plan is likely to underwhelm the energy industry, and anger those who want Labour to take the lead on tackling climate change. 

“The exact figure is not the issue here, it’s the signal it sends,” Emma Pinchbeck, chief executive of industry association Energy UK, said in a statement. “When returns come over years and decades, business needs to know that politicians won’t pull the rug from under them.”

Labour’s £28 billion figure, announced in late 2021 as a part of a promise to make the UK a “clean energy superpower,” was one of its most concrete and recognized policy goals and a clear dividing line with the Tories — especially after Rishi Sunak watered down the government’s green agenda during one of the prime minister’s periodic forays into so-called cultural wars and populism.

But the number became a political target for Sunak’s party, which is building an election campaign around tax cuts and presenting Labour as a threat to struggling Britons. The strategy has two strands: despite raising the tax burden to a postwar high, Sunak is telling voters that a payroll tax cut last November is just the start if voters keep the Tories in power. By cutting taxes, the Tories also make it harder for Labour to show it has the money for its green pledge.

“The uncertainty about what a Labour government would do is a real risk to our country’s future,” Sunak said in a statement after Starmer’s announcement.

There are plenty in Starmer’s party who argue that with a 20-point poll lead, Labour can afford to be bold and ignore the Tories on tax. They also warn that Starmer is merely swapping one fight with Sunak over spending, for another over political conviction and U-turns.

“Great parties have great causes,” John McTernan, a former adviser to Labour’s totemic former premier Tony Blair, told the BBC.

Yet the source of Starmer’s caution is littered throughout Labour’s history, which has mostly been spent in opposition. Pivotal moments when the party have been in power have shaped the prevailing view in British politics, that the Conservatives are the party to trust on the economy.

Labour’s UK Election Prospects Hinge On Winning Over Older, Richer VotersSource: Bloomberg

They include James Callaghan’s government borrowing from the International Monetary Fund in the 1970s, and a tongue-in-cheek note left by Labour after the global financial crisis to the incoming Conservative-Liberal Democrat coalition: “I’m afraid there is no money.” The Tories’ decision to weaponize that note politically was controversial at the time, but effective.

“There is something baked into the national psyche,” Matt Whittaker, chief executive of the charity Pro Bono Economics. told Bloomberg. “There is just this perception that Labour will spend, spend, spend.”

The 1992 general election looms large in Labour’s thinking. Then, as now, the economy was struggling and Labour led John Major’s Conservatives in the polls. But an infamous “Labour’s Tax Bombshell” poster campaign helped the Tories inflict a shock defeat on Neil Kinnock’s party. The lesson Labour took from that was evident in Blair’s landslide win five years later, when the party promised to retain the spending plans it inherited from Major for two years.

Starmer doesn’t want an “action replay of 1992,” Peter Hain, a Cabinet minister under Blair, told the BBC. “We desperately need the public investment to drive the private investment and rebuild confidence in Britain’s economy — but we’re not going to attach a figure to it that we don’t think we can deliver. I mean, that’s common sense isn’t it.”

The problem for Starmer is that Labour did put a figure on it, even as he has spent much of the past four years trying to distance the party from his left-wing predecessor Jeremy Corbyn, who promised a high-spend, high tax agenda and led the party to its worst electoral defeat since World War II.

The decision to price the green investment plan was “odd,” said Paul Johnson, director of the Institute of Fiscal Studies, given the spending pressures across health, local government, defense and criminal justice. “How can you afford to talk about that and not the rest?”

Starmer’s argument — which is relevant to its election campaign as well as his efforts to keep his party onside — is that the economic conditions have changed. While borrowing costs have dropped recently, the UK’s 10-year bond yields almost 4%, compared to around 0.1% in 2020 and a 10-year average of 1.66%.

“When we announced the £28 billion two-and-a-half years ago or so, interest rates were very low,” Starmer told reporters. He also accused the Tories of planning to “max out the credit card” with tax cuts at next month’s budget — a line that looks aimed at the Conservative Party’s jibe that Labour could simply opt to reverse the tax cuts to fund the green plan.

Pointing out the economic damage under the Tories is central to his strategy, especially the financial market turmoil caused by former premier Liz Truss’s unfunded tax cuts and her decision to circumvent scrutiny from the UK’s fiscal watchdog. That explains why Starmer has promised Labour will stick to so-called fiscal rules — a stance that history tells him is a selling point with voters, but which has led him to take a sledgehammer to Labour’s green spending plan.

The risk is that the move alienates supporters as well as businesses, who Labour are trying to win over by promising consistency and predictability.

But arguably the biggest warning came from data from the European Union’s Earth observation agency Copernicus, which found that global temperatures over the past 12 months were the highest ever recorded — 1.52C above the average between 1850 and 1900. 

Despite Starmer’s insistence that he’s not watering down Labour’s ambitions, the reality is that months out from an election, Britain’s two biggest parties are setting out a route to power that involves down playing green spending.

“We need to invest,” Bob Watson, former chair of the UN’s climate body, told BBC Radio. “We can’t simply go and transition to a low carbon economy.”

(Updates with industry reaction in seventh paragraph, Sunak comment in ninth.)

©2024 Bloomberg L.P.

By Emily Ashton, Joe Mayes , Philip Aldrick

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