The Green Transition: A green budget?
Weekly analysis of the shift towards a new economy.
Dear Readers,
Happy Friday from the Spotlight team.
Welcome to a later addition of the weekly GT newsletter, delayed to report on the fallout from what was billed as the most significant Budget since the heady days of 2010, when the country was set on a long course of austerity and small-state conservatism. This one will prove just as impactful.
Let’s get right into it.
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A very green budget?
What is a Labour government for? Since they took office in July, the front bench has almost been at pains to dampen expectations: the tone has been one of wall-to-wall miserabilism, “difficult choices”, “black holes”, “fixing the foundations”, and jam tomorrow. The cut in the winter fuel payments, and pre-briefed news that the bus fare cap will rise by 50 per cent, were about very loudly signalling (to the gilt markets, as well as voters) – “we are prepared to make tough, unpopular decisions to balance day-to-day spending”.
It was all beginning to feel a bit Osbornite, a bit (whisper it) austere. But this week’s Budget has put paid to that.
Back in April, Steve Coulter, an economist at the Green Alliance think tank, wrote for the GT about the accounting tweak that could unlock green investment. Following a review by the Office for Budget Responsibility, the measure of public assets versus public liabilities on the Treasury balance sheet could be altered to privilege a better, more generous calculation on public capital investment returns, he wrote. The tweak could open up tens of billions of investment in long-term infrastructure projects, which, crucially, would not break Rachel Reeves’ “iron-clad fiscal rules”.
Coulter was right. That is precisely what has come to pass. For those who want to get technical, Number 11’s bean-counters have chosen to use a public accounting method known as “public sector net financial liabilities” rather than the previous “public sector debt” rules. Laurie Macfarlane, a fellow at the Institute for Innovation and Public Purpose at UCL, has a great X thread running down the differences between three different public accounting measures. (He comes out in favour of “public sector net worth”, which offers up the potential of an even more generous investment splurge – if you don’t yet have a favourite measure of public accounting then what’s wrong with you? Sort it out, fast).
The previous measure, used by HMT for many years, imposed severe constraints on capital spending, and helped solidify our position near the bottom of the pile of advanced economies for investment-as-a-percent-of-GDP. Today, post-Budget, we look set to move up that table fairly rapidly, like a relegation-fodder football team that’s finally got some last-minute fire in their bellies.
This was a very old-fashioned Labour budget. It saw the definitive return of tax-and-spend, pro-investment interventionism, which we haven’t seen at least since the downfall of Boris Johnson (remember even before Covid, one Rishi Sunak splashed £30bn extra on infrastructure when he was Johnson’s Chancellor).
Reeves has committed £100bn extra for investment over the next five years. That is significant. It will make Starmer the highest-investing PM since Wilson.
And which sectors and government departments are likely to benefit?
You guessed it. It’s those “industries of the future” GT readers know so well, the transition-adjacent energy sectors, wind, solar, carbon capture, gigafactories, ports, green hydrogen, pylons, and much else besides. A lot has been made of the enormous cash injection into the day-to-day NHS budget of £22bn, but the government’s own Budget figures show that the Department for Energy Security and Net Zero will see the biggest increase in its fiscal powers, a 22 per cent rise according to Utility Weekly, an industry title.
The government will be hoping that raising public investment will “crowd in” yet more private capital to create a virtuous circle of sustainable growth. The Chancellor was keen to highlight the pledged influx of billions in FDI from its international investment summit last month. However, the Confederation of British Industry has judged that upping public capital spending will, conversely, likely “crowd out” private activity. Time will tell.
But while investment spending saw significant rises across the board, day-to-day Whitehall budgets will remain tight. The rise in the bus fare cap will save just over £100m – negligible in overall government spending terms – but it will damage cost incentives for using low-carbon transport. £40bn in tax rises will largely go towards keeping services at their current level, with real terms departmental increases limited to 1.5 per cent per year over the course of the parliament. That’s enough for the government to be able to claim there’s “no return to austerity”, but not enough to initiate the kind of public services rescue package that some might pine after.
Ultimately, Downing Street will be hoping that its investment splurge coupled with their supply-side planning and deregulatory reforms pay off more than the OBR predict. The independent forecaster says that initial Budget stimulus effects will improve immediate growth forecasts in the first year (and therefore help boost government revenues), but then that GDP rises will tail off in subsequent financial years.
Reeves has made a bet that the costs of her investments will pay off, however. She’s got five years for the bet to pay off, and prove what a Labour government is for.
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The Green Transition is produced by Spotlight, the New Statesman's online policy section and print supplement. Spotlight reports on policy for the people who shape it and the business leaders it affects. Explore our in-depth reporting and analysis here.
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