ALEX BRUMMER: Labour beats a green retreat

Keir Starmer is a happy leader. Labour’s U-turn on climate change spending has been remarkably absent from the public eye.

It’s hugely important because Labor leader and shadow chancellor Rachel Reeves chose to put a green investment commitment of £28bn a year at the heart of a plan to rebuild Britain as an industrial, regional and zero-carbon powerhouse.

Labor also plans to catapult the UK to the top of the Group of Seven (G7) growth league in its first term.

At the heart of Securonomics’ Reeves Blueprint is the “Green Prosperity Plan.” As originally conceived and pushed by the Shadow Energy Secretary Ed Miliband, it envisioned spending £28bn a year, or £140bn in capital spending in the next parliament.

To put that in context, it’s about more than the much-discussed £98 billion cost of the HS2 high-speed infrastructure project.

It matches President Biden’s spending of £28.9 billion a year in subsidies designed to shift carbon-neutral manufacturing, such as battery factories, from other geographies to the US.

Given that America’s total output is five times greater than Britain’s, one better understands the audacity of the original Labor proposal.

It was eight days ago — June 9 — that Reeves did her backtrack.

Speaking on Radio 4, she said ‘economic stability must come first’ and there would be a slower build-up to the £28bn annual spending, which would be reached halfway through the Labor period in power.

The shadow chancellor noted that high UK interest rates, due to the Tories’ high inflation, had increased the current cost of government spending.

People began to understand the magnitude of the retreat when the silver-tongued Lord Mandelson, a veteran of the Blair-Brown years, took to the airwaves.

Labour’s former finance minister – and a European trade commissioner – told us all that the move was a good thing, because investing slowly and building to the big numbers was better than spending more.

Voters committed to the climate-neutral goals may find the ‘less is more’ message disappointing.

Labor is rightly nervous about the size of the green pledge.

Inflation poses a huge threat to public finances.

It raises the cost of welfare bills, anchors higher wages in deals with the public sector, and raises the cost of borrowing the nation’s borrowings.

The UK is uniquely exposed to the government or government bond market due to its heavy reliance on bonds indexed to the retail price index (RPI), which is hotter than consumer prices.

Nearly 25 percent of the country’s accumulated debt is in this form.

Ever since the Trussonomics tax cuts were blown out of the water, sending government bond yields – the yield on British government bonds – soaring to record levels in October 2022, markets have been hypersensitive to developments in the political economy. The current turmoil was triggered by cost-of-living data from April, which showed core inflation — excluding energy and food costs — has stalled at 6.2 percent.

The spillover of shaky wage agreements and an element of ‘greed’ in the services sector are taking their toll.

The panic swings in the fixed rate mortgage market have been triggered by the surge in government bond yields, with two-year, five-year and ten-year bond yields currently at levels not seen since the Truss tantrum last September seen.

Current market and conventional wisdom is that Bank of England rates will have to rise from the current 4.5% to 5.75% this year, triggering a recession.

A further rise of a quarter of a percentage point is expected next week, despite the US Federal Reserve’s decision on Wednesday to hit the pause button in the US.

All of this threatens Reeves’ plan to balance the current budget, leaving room for long-term green spending.

It is becoming increasingly difficult for the numbers to make sense and there are fears that the extravagance of the £28bn carbon-free investment pledge could leach into market psychology.

With a year or more to go until the next general election, Labor’s pledge to rebuild greener prosperity for the whole of the UK is already on the slow track.