Shadow chancellor’s green investment deal strikes the right notes

While Rachel Reeves did not actually use the soundbite “prudence for a purpose” first coined by Gordon Brown, she might as well have done.

The shadow chancellor’s speech to the Labour party conference in Brighton was all about balancing a series of seemingly contradictory ideas: how to convince voters that she can be trusted to run the economy, while at at the same time putting forward some striking new policies; how to keep the party faithful happy, while at the same time reassuring business.

Every shadow chancellor in living memory has faced this challenge, and Reeves tackled it by delving into the New Labour playbook. Back in 1997, Brown sought to address the trust issue by granting the Bank of England the freedom to set interest rates. Reeves said she would create an office for value for money, with powers to ensure taxpayers’ cash is properly spent.

She felt the need to provide this reassurance for two reasons. Firstly, voters clearly need some convincing about Labour’s approach to running the economy. Secondly, she also announced in her speech plans to spend £28bn a year for the rest of the decade to help Britain’s net zero transition. Although she didn’t actually use the words, this represents a Labour green new deal.

The sums involved are considerable. The Office for Budget Responsibility (OBR) expects capital spending to be just shy of £120bn in the current financial year, so Labour’s plans would involve a 25% increase.

When he was shadow chancellor at the 2019 general election, John McDonnell said he would cover day-to-day government spending on items such as public sector pay through taxation, but was prepared to borrow for investment. Reeves would stick to that formula, with her plans for green investment resulting in higher government debt.

The OBR’s recent fiscal risks report provides Reeves with some political cover for her approach. The spending watchdog said financing the net-zero transition would add 21% of gross domestic product to the national debt, but delaying action could double the cost.

Reeves seemed to strike the right note with business groups, who also liked her pledge to scrap business rates and replace them with an alternative – as yet unspecified – form of taxation. Rain Newton-Smith, the CBI’s chief economist, said the green investment sent the “right signal at the right time”.

Some aspects of the plan require fleshing out. The money would be spent on everything from giga-factories that would supply batteries for electric vehicles to planting trees, and at some point Reeves will need to specify how much gets spent on all the items on her green agenda.

Labour also seems to assume that all green investment is, by definition, good investment, but it is entirely possible that an independent office for value for money would say that billions of pounds are being squandered. Those are problems for another day, however.

In the meantime, the fact that there was little immediate pushback from the Conservatives suggests Reeves has stolen a march on Rishi Sunak, who has plans for green investment of his own in next month’s spending review.