Today, Rachel Reeves announced that she is delaying plans to borrow £28bn a year for a green prosperity fund under a Labour government. There may be some influential people in the Labour party who never supported the plan in the first place – maybe because it looked so much like the 2019 manifesto. And now, perhaps as a result, we’re seeing any excuse being used to undermine it.
The argument being put forward is that the bond markets will react to Labour’s borrowing in the same way they responded to Liz Truss’s fantasy budget. This would make the necessary borrowing too expensive to deal with, and anyway, it’s impractical to spend on that scale in the early years of a government.
Both of these arguments need exposing for what they really are – attempts to sabotage the central plank of the next Labour government. The bond markets reacted negatively to the Truss budget because the figures just didn’t stack up. The tax cuts were unfunded and, to add to the uncertainty, the then chancellor Kwasi Kwarteng had failed to put them through the normal Office for Budget Responsibility (OBR) assessment. It’s no wonder, then, that they lacked credibility in the eyes of the international markets.
After five years touring round the City in meeting after meeting with asset managers and investor bodies, I learned that the markets may not like the policies a government wants to pursue, but if they see you are determined, have a practical plan and they can see some investment opportunities, they will live with it. Signalling that you won’t be swept off course is also critical because investors want certainty and they need to know that sometimes you are prepared to face down threats.
Here is an anecdote, which I don’t think is betraying a confidence. On election day in 2019 I received a call from Mark Carney, then governor of the Bank of England, who in the normal course of events I had met regularly as shadow chancellor and with whom I had established a helpful working relationship. The call was to reassure me that the Bank, with its resources, stood ready for whatever the outcome the election would produce.
For me this message to the markets, that the central bank stood behind us, would be critical in securing a stable transfer of political power. This wasn’t the message the Bank of England sent to the markets about the Truss budget.
What is needed now to overcome concerns about market reactions is the publication of a more detailed step-by-step plan for the implementation of Labour’s green prosperity plan over the lifetime of the next two parliaments, as proposed. This would set out in more detail what the government’s expenditure and financial needs would be, how they could be met, and how any borrowing would be paid back.
It does mean the Labour party coming out of purdah on the range of tax measures that will be in place, both to invest and pay back lenders. This would reassure markets that any costs would be covered and funded even within its existing fiscal rule.
As shadow chancellor, I committed to offering opposition parties access to the OBR to assess their budget proposals. Labour should demand of the government the opportunity to put its plans now to the OBR for scrutiny and assessment. This would have an overall benefit to the country’s standing in the world markets by reassuring them that all potential outcomes of the next election have been fully assessed independently.
As important as the programme’s financing plan is, it is now certainly time that the practical implementation of the plan and schedule is drafted, consulted upon and published. This will stand the opposition in good stead, in that any practical implementation issues can be ironed out before the policy proposals are provided to the civil service in the normal manner for their pre-election preparations for a possible change of government.
This implementation plan must inevitably recognise that spending will be limited in the early years as the physical resources, especially workforce recruitment and training, are put in place. Total spend should remain the same and any smaller spending in the early years can be made up in the later years as the programme becomes fully geared up. This is the usual process of any programme of which capital spend is a heavy ingredient.
The key challenge, and one we must not lose sight of, is ensuring that our climate change targets are met. If the clouds of smoke that are choking New Yorkers tell us anything, it is that there is no time to lose, no delay that can be countenanced, and there must be no reduction in the level of financial commitment to what is needed if we are to save our planet.
John McDonnell has been the Labour MP for Hayes and Harlington since 1997. He was shadow chancellor from 2015 to 2020
