Speaking at a glassmaking factory in Cheshire on Friday, Keir Starmer promised to build two carbon capture and storage “clusters” on Merseyside and Teeside. The project will cost £21.7bn, with the promise that they will create 5,000 “good jobs”, boost the economies of the regions where they will be based, and help make Britain a green industry power.
There will be more in Rachel Reeves’s “Budget for investment”. This is a drum the chancellor has been banging while attacking her predecessor Jeremy Hunt, under whom the capital budget was due to decline to 1.6 per cent of the economy from 2.5 per cent per official forecasts.
All this is quite a change from Labour’s gloomy rhetoric about how little money there is, the “hard choices” that need to be made and the potential tax rises and spending cuts that are apparently on the way. It feels like a case of mixed messages, given that pushing investment back up again implies billions of pounds of extra spending.
You would certainly be forgiven for wondering how Reeves is going to pull all this off given how little money is available, and how she has repeatedly made it clear how stringently she plans to stick to her self-imposed fiscal rules. These require that Britain’s vast national debt should be falling as a percentage of GDP by the end of the parliament.
Self-imposed they may be, but they matter nonetheless. Remember what happened to Liz Truss? Her decision to throw things like fiscal frameworks out of the window with her unfunded tax cuts was a big reason why her premiership was outlasted by the Daily Star’s famous lettuce. The markets baulked. Mortgage rates went through the roof, a humiliating “idiot premium” was applied to Britain’s debt and several big pension funds were left teetering on the brink of going bust.
But Reeves has a plan. If she changes the way the national debt is calculated, she will be able to borrow more to invest while still technically sticking to the rules. Borrowing to invest is good borrowing because it implies a return, in contrast to borrowing to cover day-to-day spending.
Here’s how it works. The rules specify that it is public sector “net debt” that must be falling as a share of GDP by the end of the parliament. Currently included in its calculation are all the losses the Bank of England is going to make from selling the bonds it bought to stimulate the economy when interest rates were at rock bottom. It calls this “quantitative easing”.
The Institute for Fiscal Studies reckons that she could free up £16bn if she removes this from the figures, which was how the calculation was done before 2021. It is also in line with what many other countries do. While that is a big number, it is not big enough to scare the markets.
A second option would be to exclude any borrowing by the new national wealth fund and publicly owned banks – something Germany already does.
More radical still would be to swap public sector net debt entirely and replace it with the calculation of public sector net financial liabilities (PSNFL). Doing so could deliver Reeves an extra £50bn of wiggle room.
This may all look like some seriously creative accounting, but pulling Britain from the bottom of the international league tables would help the UK economy and ought to make it worth it.
However, here’s where I think the real risk lies: Reeves has been talking about “big projects”. I’d really rather she focused on “smart projects” and especially on hiring smart people to oversee them. You only need to look at Britain’s dalliance with high-speed rail to see how this could all go horribly wrong. It was a good idea in principle, and a potentially green one, too. But it turned into a money-sucking black hole.
Borrowing for investment is not “good” borrowing if it is used to fund investments characterised by vast overspending and sloppy management. If that happens, the chancellor should be held to account for her accounting – and more besides.
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