It was not by chance that Rachel Reeves, who hopes to become Britain’s first female chancellor, chose to launch Labour’s new economic plan last month while she was in Washington DC.

“It’s going to be Bidenomics on steroids,” says one adviser to the UK’s opposition party — a reference to the large subsidies for technology and green energy that the administration has introduced.

As they try to chart a path back to power for the first time in almost 15 years, Reeves and Sir Keir Starmer, Labour’s leader, have been accused of playing it safe — the economist Reeves was once famously dubbed “boring snoring” by a BBC editor.

But the shadow chancellor’s visit to Washington was a signal that a prospective Labour government wants to introduce a significantly more interventionist industrial policy and has a bolder plan for the economy than many had anticipated.

Senior figures at the helm of Britain’s main opposition party are piecing together a manifesto which, despite the soothing, pro-business rhetoric, would still represent a striking shift in the way the economy is run. 

“I think it’s much more radical than people give him credit for,” says Gary Smith, general secretary of the GMB union, a major donor to Labour. 

With Labour now consistently more than 15 percentage points ahead in the opinion polls in the run-up to an election expected next year, Starmer’s agenda for a future Labour government is starting to come under close scrutiny.

Allies say that when he first became leader, Starmer felt the need to reassure the public he had control over his party — which until 2020 was led by the unreconstructed, hard-left leader Jeremy Corbyn.

At times, he has chosen to deliver socially conservative messages on issues like defence, law and order, and patriotism while standing in front of a Union Jack. Allies say this has helped create the political space to be bolder on economic policy.

Alastair Campbell, who was communications chief to former prime minister Tony Blair, says Starmer has successfully carried out the first two parts of a three-stage process; disassociating from his predecessor and proving the Conservatives are “not fit for the job”. Now, says Campbell, “he needs to answer the question of what Labour would do differently.” 

That answer is beginning to take shape. Little remarked upon until recently, Starmer put his most radical proposal on the table back in September 2021 — a plan to borrow £28bn a year until 2030 to spend on green transition policies such as subsidising wind farms, insulating homes, building battery factories and accelerating Britain’s nuclear programme.

It will be by far the most costly policy in Labour’s draft manifesto for the next election, currently dwarfing in financial terms its plans to improve Britain’s creaking schools, hospitals, police and other public services.

A blizzard of other policies are now being rolled out, as Starmer scents power: an overhaul of Britain’s stifling planning rules; a rewrite of swaths of employment law; some targeted higher taxes on the wealthy; and constitutional reforms including scrapping the House of Lords.

There are still important gaps in the likely prospectus. Although there has been a shift in public opinion against Brexit, Starmer has so far only set out limited plans for forging a closer relationship with the EU.

But with an election coming into focus for voters, Campbell says, it is time for the party to narrow its policy prospectus. “Labour needs to be able to condense its message and say what are the three things they are going to do in power,” he says. 

Green prosperity plan

Starmer’s team says the first 100 days of a Labour government would be about the “economy, economy, economy” — with the “green prosperity plan” at its heart. 

Although the plan was unveiled before the US Inflation Reduction Act, it is being set out in similarly ambitious terms as the “Bidenomics”-style industrial policy. “I think we should learn a lot from the Biden example,” says Ed Miliband, the former Labour leader and shadow energy secretary, who has championed the plan.

In fact, the Labour plan, as currently conceived, is even more ambitious than the US IRA in relative terms. Labour’s green subsidies would cost £28bn a year against Washington’s proposed $37bn a year — even though the US has five times the population and eight times the GDP (although some estimates put the cost of the IRA’s incentives much higher).

The money would fund the launch of a new state-run company called Great British Energy — modelled on EDF of France — to invest directly in renewable and nuclear projects and accelerate Britain’s move towards energy self-sufficiency. A Labour government would also stop the issue of new licences for oil and gas in the North Sea, a move which has prompted fury from both industry and unions.

“[Biden] is turning the Rust Belt into an electric vehicle belt, creating good manufacturing jobs in former industrialised heartlands and getting businesses to invest in the US,” Reeves says. “I want to see some of that action here in the UK.”

But there are signs that the party is starting to get cold feet about the sheer scale of what it has proposed.

The plan was born in an era of 0.1 per cent interest rates, when the idea of borrowing £28bn a year until 2030 attracted relatively little comment. Rates now stand at 4.5 per cent and are expected to rise further. 

Some in Labour’s team are starting to wonder whether, given the sharp rise in borrowing costs and the competing demands to spend scarce funds on public services, the plan is still affordable. “I’m not convinced it’s the best use of that money, given the deadweight costs, which could be spent elsewhere for example hospitals or schools,” says one influential Labour politician.

Another question is how the capital markets will react, given the Labour plan could theoretically involve an extra £140bn of debt over five years. Gilt yields spiked last autumn when the then Tory prime minister Liz Truss and her chancellor Kwasi Kwarteng announced huge unfunded tax cuts. 

Greg Hands, the Conservative chair, has already started pointing to that pledge as proof of Labour’s fiscal irresponsibility. One shadow cabinet member says the Tories would do a “Borrowing Bombshell” campaign ahead of the election: “But the fact that the US is going down this road makes the political sell easier.”

Alistair Darling, chancellor in the last Labour government, says markets are unlikely to be fazed by extra borrowing for capital investment rather than day-to-day spending. Darling says bond traders should be reassured by the “competent” manner of both Starmer and Reeves, who “are not going to scare the horses”.

But Mike Riddell, a global bond fund manager at Allianz Global Investors, says an increase in issuance of green gilts could push up yields: “Any additional unexpected borrowing risks another gilt meltdown.” 

While Labour’s plans have been flagged in advance, Riddell says they have not been fully “priced in” by investors and could make investors “jittery” as they become headline news.

Quentin Fitzsimmons, a senior portfolio manager at T Rowe Price, says Britain’s tax burden is now at its highest level as a percentage of GDP since the 1940s.

“Labour has a really difficult position here,” he said. “If the government is so reliant on capital markets and will continue to tap capital markets for choice . . . other things being equal that means higher yields and that drives up the level of borrowing for corporates and other individuals.”

Starmer and Reeves are still committed to the plan; indeed a pledge to pursue an active industrial policy was a key part of Reeves’s message in Washington last month. But it is rare now to hear senior party figures still commit to spending £28bn a year.

Labour officials point out it would take a couple of years to ramp up spending to the £28bn target. Others say that if Sunak announced new proposals for the green economy before the election, that spending would be deducted from the Labour target. 

And, most crucially, Reeves made it clear that the spending would in any event have to comply with the fiscal rule Labour has outlined, which would see debt falling as a share of GDP after five years. 

“If it’s a choice between the green prosperity plan and the fiscal rules, the fiscal rules would trump the former,” says one Starmer aide.

Employment rights

Labour’s ambitious industrial activism is in stark contrast to Sunak’s refusal to utter the phrase “industrial strategy” and marks perhaps the biggest shift in approach between the two parties.

But a second major plank of Labour’s policy prospectus — the manifesto is as yet unfinalised — is a raft of policies aimed at shifting power from employers towards workers.

Workers would have employment rights from day one, with an end to the qualifying time for unfair dismissal, sick pay and parental leave. Companies would be banned from using zero-hours contracts or “fire and rehire” practices. 

Statutory maternity and paternity leave would be extended, there would be a new right to bereavement leave, a new “right to switch off” outside working hours and protections from remote surveillance by their employer. It would also be unlawful to dismiss a woman who is pregnant for six months after her return to work. 

In another move that could be controversial given the recent wave of strikes, Starmer would also repeal a swath of antitrade union legislation which has made it more difficult for workers to take industrial action. 

As prime minister he would scrap the recent legislation which means that public services have to keep a certain level of services running during strikes. He would also reverse the Trade Union Act 2016 which lifted the threshold for strike action. 

Those policies will be seized upon by the Conservative party and its media allies given that Britain has been convulsed by strikes for the past year or so. 

Other employment changes from Labour will include a single body to enforce workers’ rights, while companies with over 250 staff would have to publish ethnicity pay gaps.

Although business groups have held back from much criticism of the package, some have quietly lobbied against it behind the scenes — arguing it would impose unwelcome burdens on employers. 

The Institute of Directors says it backs the Tory government’s plan to give workers the “right to request” flexible working but believes that enforcing flexible working would be “problematic” for some employers.

Public services caution

The most obvious area where Labour might be expected to distinguish itself from the government is in the provision of public services.

But on the crucial electoral battlegrounds of health and education, the emphasis from Starmer and Reeves on fiscal probity means the party is still treading cautiously. 

Starmer has signalled that he will drop Corbyn’s promise to abolish university tuition fees in favour of more modest reforms — such as cutting monthly loan repayments.

“All we really know about Labour’s education policy is that they want to invest in and improve childcare . . . but we don’t even have any detail on this yet,” says Sam Freedman, an education specialist. 

On health, Wes Streeting, shadow health secretary, has promised the “biggest expansion of NHS staff in history” to tackle a shortfall in the service — doubling the number of places for would-be doctors to 15,000 and training 10,000 new nurses and midwives each year.

The funding would be provided by scrapping “non-dom status” for wealthy foreigners living in the UK.

There would also be the “biggest wave of insourcing of public services in a generation”, Reeves has said, to the detriment of outsourcing companies.

Beyond this, however, neither Starmer nor Reeves has suggested any major boost in funding for the NHS given the constraints on the public finances, an issue that is starting to chafe with some Labour MPs. 

One senior shadow cabinet member says the lack of money means that Labour would have to shake up the delivery of public services, adding: “Keir has been clear on the need to find reforming policies instead — that will be a big drive during the summer.”

In terms of wider public spending, the current Tory administration has pencilled in huge cuts in the years following the general election, setting an electoral trap for Labour — will it cut services or raise taxes to avoid this?

A Labour party would also be taking office at a time when economic growth is still projected to be sluggish. The IMF predicts growth will top out at around 2 per cent in 2025-26, and settle at 1.5 per cent thereafter.

One Starmer aide says: “We want to be offering people hope, and sunny uplands, but we are constantly coming up against fiscal rules . . . we know what we are going to inherit,” he says.

He added: “The reform mantra is not just political positioning . . . it is going to have to do a lot of the heavy lifting of change when we get into government.”

Blair talked about the “scars on my back” from trying to undertake radical public service reform. It will not be easy.

These are just some of the questions that will come to the fore during the party’s laborious process of agreeing the final manifesto document which will be put to the public in an election expected in 2024. Campbell compares the task to “carrying a Ming vase . . . across the floor very tenderly, very gingerly, don’t drop it”.

But after 13 years in the wilderness some MPs are starting to believe that Starmer will end up in Downing Street by the end of next year.

“The thing is that we’ve had so many false dawns since 2010 that none of us are taking it for granted that we will win,” says one member of the shadow cabinet. “But maybe, just maybe, this time it will really happen.”

Additional reporting by Mary McDougall and Jonathan Wheatley

Data visualisation by Amy Borrett

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