The UK Labor party has pledged to spend £28 billion a year on green investment during its first term in power; conservatives have attacked the plan as fiscally reckless. The debate will undoubtedly feature prominently in the upcoming general election campaign. But this is not a parochial struggle. It is one of the first examples of a political battle that is increasingly being fought around the world: the battle over whether today’s economic demands on governments require them to “go big” or move gradually.
Labour’s approach is consciously modeled on US President Joe Biden’s economic policy, as Labor chancellor Rachel Reeves has made clear. “Bidenomics” departs from decades of US economic policy thinking not only in its willingness to be interventionist and redistributive, but in the scale of its interventions, from pandemic support to the green industrial policy of the Downsizing Act of inflation.
But relative to the size of the two economies, Reeves’ plan dwarfs the IRA. The £28bn Labor pledge is equivalent to 1.1 per cent of Britain’s gross domestic product, proportionally seven times higher than the IRA price tag of 0.15 per cent of US GDP. If enacted, it will also be nearly double the size of the EU’s post-pandemic recovery facility of the same measure.
However, if Labour’s plan is anything but grand, treat it less as an outlier than as a sign of the times. Many countries are increasingly facing enormous new demands on the public purse, for reasons that go beyond climate to economic security and defense imperatives.
So the questions that arise about Labour’s green package are ones that all countries must soon be asking about their own spending intentions. Are tax packages of several percent of GDP economically prudent, compared to more incremental policies? Are they politically feasible?
It’s not hard to find good reasons for skepticism about “going big.” The risk that a government will throw public money at bad projects increases exponentially with the amount of money it has committed to disbursing.
The potential “shock factor” of going up may also be more fiscally unsustainable, at least if it’s financed by deficits rather than higher taxes, and if it’s the bond markets that are hit. It may also be politically more unsustainable. Shifting a large part of society’s resources to new uses means shifting it from old ones. Getting older creates more losers and more affected among those who previously benefited.
And yet, what choice do we have? Just to decarbonize our energy use, almost 3% of global GDP must be allocated to green energy investments, according to the International Energy Agency. Add to that the capital needed for a successful digital transition, political commitments to more defense spending and more secure supply chains, and the cost of making up for decades of declining investment rates in rich countries.
This means that the economic task ahead is to find—that is, reallocate—economic resources that represent at least 5-10 percent of our economies. That the majority of these are private resources does not make things easier for governments. The political task is to decide how to achieve this transformation with the greatest possible social consent.
Advanced economy democracies are not well set up for large and rapid reallocations of resources. Our political processes generate legitimacy by taking time and moving forward incrementally, correcting course, addressing problems and compensating losers along the way. Deliberate major economic transformations have only been possible in deep crisis: wars, as with the post-1945 New Economic Settlement, or protracted economic failures, as in the 1980s, the abandonment of this arrangement.
Have we reached such a moment today? In terms of economic necessity, the answer is undoubtedly yes. Politically, it is less clear.
The good news is that tough policies can work. The IRA, although modest in size in relation to the investments that governments will increasingly have to undertake, has been incredibly effective so far. Since last summer, when the law was agreed, it has the amount that American manufacturers have spent on construction almost doubledmaking the rate of factory construction the highest by a wide margin since records began 20 years ago.
And it’s not clear what will work at the required scale other than going big. Therefore, our times demand not only much greater government commitments, but the necessary status to make it politically possible. To think that the resource changes we have committed to will happen on their own, let alone as quickly as they need to, without massive government intervention is the most reckless policy of all.
martin.sandbu@ft.com
