The Labour Party should proclaim its £28bn green industrial plan from the rooftops

Raising public investment by 1pc of GDP will lift the country on to a higher economic trajectory

In the year and a half since Labour pledged an extra 1pc of GDP each year on a clean-tech industrial policy, the US and China have pulled far ahead in what has become a global arms race for 21st century economic supremacy.

The sums being mobilised are colossal. The world’s two giants are in effect on a wartime footing, modernising their industrial systems and energy infrastructure at break-neck speed. The EU now fears that its Green New Deal is too timid to keep pace.

Sir Keir Starmer’s £28bn plan looked ambitious on a per capita basis when first unveiled in 2022. At this stage it is barely enough to keep Britain in the global game of post-carbon technology, let alone to turn it into a “clean energy superpower”. The Inflation Reduction Act (IRA) in the US offers unlimited tax credits. Goldman Sachs thinks the tally will reach $1.2 trillion (£950bn), triggering $3trillion of investment in clean-tech industries over 10 years.

It will not be reversed even if Donald Trump is elected. Republican districts have won the lion’s share of the investment. Congress has authorised $280bn to restore US sovereignty in semiconductor manufacturing, and another $1.2trillion on an infrastructure act, all inspired by Roosevelt’s Works Progress Administration in 1935.

This multitrillion-dollar industrial strategy is why the US federal deficit is near 8pc of GDP at the top of the cycle. You can argue that it will crowd out the bond markets and push the debt ratio to treacherous levels, but historians may judge the IRA to have been the turning point when America rebuilt its strategic base. Rachel Reeves, the shadow chancellor, says much has changed since Labour came up with its £28bn figure. Indeed. It has become even clearer that China is running away with the global EV market and renewable technology.

What Reeves meant, of course, is that higher interest costs and lower fiscal “headroom” in the UK have made it harder to stick to the £28bn strategy, but it is curious that a party running 22 points ahead in the polls lacks the confidence to stick to its signature policy. It is equally curious that the Conservatives think it a winning strategy to rail against technology, or to defend an obsolete energy system.

I have no idea how the electoral calculus stacks up but the economic case for boosting public investment by 1pc of GDP is overwhelming. It is what the Tories promised in their 2019 manifesto and were still advocating less than two years ago. The London School of Economics (LSE) has just published a report proposing much the same sum as Labour, arguing that an extra 1pc of GDP in public spending will lever twice as much again in private investment, enough to set off a sustained “growth acceleration”. Dimitri Zenghelis, the lead author and former Treasury official, said: “The name of the game is leveraging private assets. You need some public money to show that the Government has skin in the game.”

This is what it will take to lift the UK out of its bad equilibrium: stagnant productivity; a chronic trade deficit and reliance on foreign capital to cover the breach; and a collapse in the country’s net international investment position. Successive governments have slashed public investment during recessions, the worst thing to do in every respect. Economic slack turbo-charges the fiscal multiplier during downturns. OECD high-flyers such as South Korea and the Nordics stay the course through thick and thin. The Conservatives repeated this pro-cyclical error during the Osborne austerity from 2010 onwards, with an added twist from the Office for Budget Responsibility (OBR), an engine for tail-chasing contractionary policies during bad times. This is a self-defeating strategy that leads to a higher debt-to-gdp ratio in the end through the denominator effect.

Britain missed a chance to rebuild its infrastructure at a time of abundant global capital and near-zero rates. The LSE says it will be harder today but not as hard as puritans claim. Inflation and real interest rates will revert to very low levels as the shock fades from Covid and Putin’s war. “It is far from clear that the era of secular stagnation is entirely behind us,” it said.

Public and private capital formation in Britain has lagged the G7 average by 4.7 percentage points of GDP on average over three decades, barely matching Italy even in the eurozone debt crisis. Global best practice is net public sector investment above 3pc of GDP. Britain has rarely been anywhere close. It was 1.9pc in 2022-2023 and will – after a brief rise – decline to 1.8pc by 2027-2028 under current plans.

That, in a nutshell, is the British disease. Labour should proclaim its £28bn plan from the rooftops rather than ducking and weaving. The Tories may claw back a few votes with a pre-electoral tax cut, but who seriously thinks that running down public investment to trim national insurance will lift Britain on to a higher economic growth trajectory? Furthermore, Labour should change the OBR’S mandate. Public investment should be a plus for long-term solvency. The LSE says the public sector net worth turned negative in 2010 and hit minus £614bn in 2022-2023. It is beyond belief that the Treasury-obr nexus looks at the debt side of the ledger without giving equal attention to vanishing state assets. The framework has led to a destructive set of false incentives.

The Tories are right that the state is too big and the tax burden exorbitant. The answer is to tackle the pre-modern productivity of the public sector and to seize on new technology. You could slash healthcare costs over time by sequencing the whole genome of the entire population, but you do not achieve such gains by starving public investment or clinging to obsolete infrastructure as the world moves on.

The debate we should be having is whether Labour will invest its £28bn in the best way, not whether it is affordable. And please, let us expunge the term “fiscal headroom” from the lexicon. It is economic nonsense.