Labour’s £28bn green investment plan at risk from UK Budget tax cuts

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The Labour party’s plan to spend £28bn on green capital investment could be delivered a hammer blow by Jeremy Hunt’s Budget if, as expected, the UK chancellor uses his fiscal “headroom” to give away billions of pounds of tax cuts.

Senior Labour figures have admitted they will look again at the £28bn-a-year spending promise if Hunt spends any fiscal flex that might be available to an incoming Labour government to cut income tax or national insurance.

Hunt’s allies also expect Labour leader Sir Keir Starmer to use the March 6 Budget as an “excuse” to drop the target, which has been repeatedly watered down in recent months.

“We have got our fiscal rules, they come first,” said a Labour official. “This is a Budget we are not writing.”

The Financial Times reported on Friday that Hunt is set to be handed a multibillion-pound boost by the independent Office for Budget Responsibility, paving the way for tax cuts in the March 6 Budget.

Leading economists have estimated Hunt’s fiscal “headroom” could rise by £6bn-£10bn from the £13bn left over after the chancellor’s Autumn Statement in November, thanks to lower interest rates and debt servicing costs.

Although official fiscal forecasts by the OBR are likely to move sharply in the coming weeks, Hunt could have more than £20bn of headroom against his target of cutting debt as a share of gross domestic product in the fifth year of the forecast.

Hunt said on Sunday he was now in a position to “start cutting taxes”, while he could also spend some of the headroom on struggling public services, including those provided by local councils.

“Labour will use the Budget as an excuse to say they can no longer afford to do the £28bn and that we’ve spent everything,” one ally of Hunt said, arguing that the green programme had never been affordable.

Shadow chancellor Rachel Reeves pledged in 2021 that a Labour government would borrow £28bn a year for green capital spending but that plan has already been reined in with various caveats as interest rates have risen.

Given that Labour is also committed under its fiscal rules to cut debt in the fifth year, Starmer could accuse Hunt of leaving Labour a scorched earth fiscal inheritance.

Labour said it had made it clear that its ambition to spend £28bn in the final year of the next parliament on a green energy transition would only be met if it complied with the party’s fiscal rules.

“We will be more fiscally responsible and understand the importance of fiscal responsibility more than this government has over the last five years,” said the Labour official.

Labour has already indicated it would not oppose any income tax or national insurance cuts in the Budget. “I have long argued that taxes on working people are too high,” Reeves said in response to the Autumn Statement.

In November, Hunt spent £10bn on cutting national insurance rates; a 1p cut in the 20p basic rate of income tax would cost about £7bn. A move on either of those taxes in the Budget would quickly erode fiscal headroom.

Labour would keep its green investment plan but shift its focus away from the £28bn figure on to the kinds of projects it wants to fund. “I’ve never seen the point of that precise number,” said one senior party figure.

If Hunt spends a large amount of his headroom, an incoming Labour government would also have little cushion against the demands for higher public spending that would follow any election.

Tom Smith, director of economic policy at the Tony Blair Institute, said the OBR forecasts showed some “quite severe cuts” in public spending after the election.

Once some departments, such as the NHS and education, are ringfenced, he said there could be cuts to other departments such as justice and transport of about 10 per cent over four years.

Torsten Bell, chief executive of the Resolution Foundation think-tank, said government spending plans pencilled in for after the election were “a fiscal fiction” that would make life hard for any new administration.

Hunt, writing for the ConservativeHome blog, said the election year would crystallise the choice confronting voters: “Conservatives proposing a path to lower taxes and Labour pretending they wouldn’t raise them.”

Meanwhile, Prime Minister Rishi Sunak confirmed that he expected Hunt to remain as chancellor until the next election: “Yes, I’ve said that multiple times,” he told reporters.

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