Shadow chancellor Rachel Reeves on Friday scaled back Labour’s commitment to borrow £28bn a year for a flagship green transition programme, amid growing concerns about taking on extra government debt at a time of higher interest rates.
Reeves said while Labour was still committed to its “green prosperity plan”, it would only gradually “ramp up” borrowing to £28bn a year and that the target would be achieved in the “second half of the first parliament” if the party wins the next general election.
The plan is by far Labour’s biggest single spending commitment and was first announced in 2021 when interest rates were close to zero — but they have since risen to 4.5 per cent as the Bank of England tries to curb high inflation.
The party’s original plan was to borrow £28bn annually in the gilt market from the first year of a Labour government until 2030, so as to accelerate the UK’s shift towards its 2050 net zero emissions target by backing projects including renewable energy and home insulation.
But the Financial Times this week reported growing nerves in the gilt market about the prospects of the extra government borrowing under Labour.
Mike Riddell, a global bond fund manager at Allianz Global Investors, said an increase in the issuance of gilts could push up yields. “Any additional unexpected borrowing risks another gilt meltdown,” he added.
Labour’s policies are coming under increasing scrutiny ahead of a general election expected next year as opinion polls give the party a commanding lead over the Conservatives.
Reeves has argued that Labour’s green prosperity plan has always been contingent on borrowing complying with the party’s fiscal rule that debt must be falling as a share of national income after five years.
On Friday she told the BBC that interest rates had gone up 12 times because “the Tories have crashed our economy”, adding Labour’s fiscal rules were non-negotiable.
“I did not foresee what the Tories would do to the economy, maybe that was foolish of me,” said Reeves.
“To make sure there is time to build the supply chains we need, skill our workforce, and ensure the taxpayer gets value for money, the right way to deliver our green prosperity plan is to ramp up the investment over time.”
Reeves said the scale of Labour’s green transition programme in the first few years would depend on Britain’s public finances after the election.
“We haven’t had the final set of numbers from the government,” she added. “I’m not going to give you a number when I don’t know how much more damage the Tory government is going to do.”
The FT reported last week that some senior Labour figures were pushing for a rebrand of the “green prosperity plan” to put more focus on job opportunities and less on climate change.
Some of the party’s MPs are concerned that Labour is prepared to devote so much money to the green transition and not to other areas such as health and education services.
Chancellor Jeremy Hunt said Labour’s revised stance on its green prosperity plan could still fuel higher inflation.
“This superficial change from Rachel Reeves still adds around £100bn to our national debt — meaning higher mortgages for families and higher debt interest bills for taxpayers,” he added.
Torsten Bell, chief executive of the Resolution Foundation think-tank, said a Labour government would have always struggled to hit £28bn of borrowing and green spending in its first year in power.
“Anyone thinking a new government was going to be able to ramp up £28bn a year from day one hasn’t met the British state,” he added.
Rebecca Newsom, head of politics at Greenpeace UK, the campaign group, criticised what she described as Labour’s “U-turn”.
She said “this prevarication on confirming the scale of investment needed from the start of a new Labour government risks throwing in the towel on the global race in green tech”.
