The UK Labour party has pledged to spend £28bn a year on green investments within its first term in power; the Conservatives have attacked the plan as fiscally reckless. The debate will no doubt feature prominently in the next general election campaign. But this is no parochial fight. It is an early instance of a political battle increasingly being fought all over the world: the battle over whether today’s economic demands on governments require them to “go big” or move incrementally.
Labour’s approach is self-consciously modelled on US president Joe Biden’s economic policy, as Labour shadow chancellor Rachel Reeves has made clear. “Bidenomics” departs from decades of US economic policy thinking not just in its willingness to be interventionist and redistributive, but in the scale of its interventions, from pandemic support to the green industrial policy of the Inflation Reduction Act.
But relative to the size of the two economies, Reeves’s plan dwarfs the IRA. Labour’s £28bn promise amounts to 1.1 per cent of British gross domestic product — proportionately seven times bigger than the IRA’s price tag of 0.15 per cent of US GDP. If enacted, it will also be nearly twice the size of the EU’s post-pandemic recovery facility by the same measure.
Yet if Labour’s plan is uniquely big, treat it less as an outlier than a sign of the times. Many countries are increasingly facing up to huge new demands on the public purse, for reasons ranging beyond climate to economic security and defence imperatives.
So the questions that arise over Labour’s green package are ones that all countries must soon ask about their own spending intentions. Are fiscal packages amounting to several per cent of GDP economically wise, compared with more incrementalist policies? Are they politically feasible?
It’s not hard to find good grounds for scepticism about “going big”. The risk of a government throwing public money at bad projects rises exponentially with the amount of money it has committed to disburse.
The potential “shock factor” of going big can also be more fiscally unsustainable — at least if it is funded by deficits rather than higher taxes, and if it is bond markets that are shocked. It may be politically more unsustainable, too. Shifting a large share of society’s resources into new uses means shifting it away from old ones. Going big creates more and harder-hit losers among those who previously benefited.
And yet, what choice do we have? Just to decarbonise our energy use, nearly 3 per cent of global GDP needs to be shifted into green energy investments, according to the International Energy Agency. Add to that the capital needed for a successful digital transition, political commitments to more defence spending and safer supply chains, and the cost of making up for rich countries’ decades of declining investment rates.
This means the economic task ahead is to find — that is, to reallocate — economic resources amounting to at least 5-10 per cent of our economies. That the bulk of these will be private resources does not make things easier for governments. The political task is to decide how to achieve such a transformation with the greatest possible social consent.
Advanced-economy democracies are not well set up for speedy, large reallocations of resources. Our political processes generate legitimacy by taking time and moving incrementally, correcting course, addressing problems and compensating losers along the way. Big, deliberate economic transformations have usually only been possible in deep crisis — wars, as with the new economic settlement post-1945, or protracted economic failures, as with the 1980s shift away from that settlement.
Have we arrived at such a moment today? In terms of economic necessity the answer is undoubtedly yes. Politically, it is less clear.
The good news is that forceful policies can work. The IRA, while modest in size relative to the investments governments will increasingly have to take on, has been stunningly effective so far. Since last summer, when the law was agreed, the amount US manufacturers have spent on construction has nearly doubled, making the rate of factory-building the highest by a wide margin since records began 20 years ago.
And it is not clear what will work at the scale required other than going big. So our times demand not just much greater government commitments, but the statecraft needed to make this politically possible. To think that the resource shifts we have committed to will happen by themselves, let alone as fast as they need, without massive government intervention is the most reckless policy of all.