Labour’s victory in last week’s local elections, combined with its strong lead in national polls, suggest an inevitable government change later this year after 14 years of Tory leadership.
Should Labour win, it will be the first time it has governed in post-Brexit Britain, with the additional challenges and opportunities that brings. It will inherit an economy displaying anaemic growth and weighed down by poor productivity and high taxation, a public sector that’s creaking at the seams but draining government coffers, and a debt to GDP ratio that curtails fiscal options.
It’s hardly a good fit for a party associated with higher taxes, higher spending and a preference for a bigger state.
Labour leader Keir Starmer and shadow chancellor Rachel Reeves have stressed they do not want to increase taxes on working people. They have committed to implement a tight fiscal policy that will be subject to independent review. But it will be impossible for the state not to get bigger given Labour’s plans for, among other things, a new state-owned energy company, a national wealth fund, a British Infrastructure Council to unlock private investment for big national projects, and a state programme to upgrade the nation’s cold, draughty homes.
There is a lot of ground to cover in terms of assessing the impact of Labour’s stated policies on investors and taxpayers, and on businesses and the economy. In this first peek into what a new Labour government might mean for investors and taxpayers, I have chosen to focus on its green energy plan, one of Labour’s most ambitious policies.
While it has reined back on its original £28bn-a-year green investment plan, Labour is committed to transforming the UK by harnessing the resources of sun, waves, wind, nuclear and green hydrogen with a new publicly owned Great British Energy company delivering cheap, homegrown green power. Leaving aside the feasibility of such a gargantuan transformation (a similar plan by the German government in 2022 earmarked $220bn over four years for its project), and disruption and supply risks for homes, businesses and industry, the rub here is the cost. The benefactor has already been identified – North Sea oil and gas companies from which an additional £11bn will be extracted through an increase in the energy profits levy.
This windfall tax, introduced by Rishi Sunak when he was chancellor, has already been blamed for significant cuts in production and investment, and for causing producers – from tiny Baron Oil to leading player Harbour Energy – to ramp up their investments elsewhere, away from the UK. Harbour says much of its profits have been wiped out by the tax and its $11bn acquisition of Wintershall Dea was made explicitly to help it shift its operations overseas. Aim-traded Deltic has also flagged up problems with stalled investments and operational commitments, which it attributes to rising North Sea uncertainty.
But it’s not just a tax rate of 78 per cent that’s causing consternation in the sector. Labour says it will also close levy “loopholes”. These are believed to be deductible capital expenditure allowances (to ensure oil keeps flowing), without which, says Wood MacKenzie, the government would be helping itself to companies’ revenues rather than their profits. Industry leaders claim up to 100,000 North Sea jobs could go under Labour’s plans. Stifel has estimated that £20bn in tax revenues would vanish. Jobs, of course, are likely to be created elsewhere, and there could be an economic boost if Britain can establish itself as a leader in, say, floating offshore power.
Other aspects of the green prosperity plan include a (less controversial) end to all new oil and gas extraction licences, a reinstatement of the ban on sales of new petrol and diesel cars by 2030 and extra tough laws to force all companies to stringently monitor their carbon footprints. This, however, could leave big oil and airlines – and the banks that lend to them – at risk of government fines and/or lawsuits.
The difficult truth is that the UK’s traditional leading industries may struggle in Labour’s ideal new world. This might not be an issue that troubles the electorate, but it could be the thing that tips companies such as Shell to quit the UK for a less complicated life in New York.
However, Starmer is no Corbyn, and he has promised to listen to business leaders and to put economic stability at the heart of everything his government does. Investors must hope he keeps his word.
