Bleak economic backdrop and raw politics explain Labour's looming climbdown on key pledge

Margaret Thatcher was the Iron Lady, Theresa May was “strong and stable” and on Thursday, Rachel Reeves sought to emulate aspects of both these former Conservative prime ministers.

As she addressed Labour’s annual business conference in central London, she threw out what have become the watchwords of her shadow chancellorship.

She will run the economy with “iron discipline” while repeatedly promising “stability” and “certainty” for business. Labour will be a “pro-business” party and govern in that way.

That Conservative language isn’t just rhetoric: for many on the Labour left, Ms Reeves is emulating the Tories in policy.

On Thursday, her big announcement was to rule out a rise in corporation tax – currently the lowest in the G7 – over the course of the next parliament.

To put that in context, the last Labour manifesto proposed to raise it by, at the time, seven percentage points to 25% (back in 2019 corporation tax was 19%).

She also U-turned on Labour’s plan to reintroduce the cap on bankers’ bonuses and spoke repeatedly of sticking to her fiscal rules – even if that means less investment in public services, and green energy.

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From all accounts, neither Sir Keir Starmer nor Ms Reeves are much bothered by the complaints from within the Labour movement that the corporation tax commitment is “bad policy and bad politics”, according to the left-wing group Momentum, or the decision not to cap bankers’ bonuses is “wrong” (that was from Scottish Labour leader Anas Sarwar).

But where Labour does have an issue that is chipping away at its economic credibility is on the matter of investing up to £28bn a year in green energy.

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The leadership knows it has to deal with what has become a massive stick the Tories are using to beat them with.

Back in September 2021, Ms Reeves promised to invest £28bn a year, while sticking to her fiscal rules, to ramp up green energy in the UK by 2030 so that all electricity supply came from renewable sources.

But then in June 2023, she diluted the pledge to say Labour would “ramp up” the £28bn investment.

A pledge that has been used as the main weapon for the Tories to hammer Labour’s economic credentials, the big question being asked isn’t if, but when Labour is going to ditch it.

That’s not to say it’s a settled view.

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One shadow cabinet figure (not Ed Miliband) told me they thought Labour “should lean into it, double down and make the case for funding this green transformation”, telling me Labour “needs to get business involved to argue the case”.

But it’s pretty clear Ms Reeves and the shadow Treasury team want to ditch the pledge, with one senior Labour figure telling me the pledge is “just a stick for the Tories to beat us with” and that the shadow Treasury team have recommended to Sir Keir he drops the pledge.

“It’ll be a tough couple of days, but we can argue the Tories have crashed the economy and so we have to shift the position,” they said.

Another figure told me Labour will do this after the budget, so Labour can blame the decision on the state of the public finances – rather than admitting it’s taking political fright, hence the pitch rolling from Ms Reeves without actually nailing her colours to the mast.

In our short interview on Thursday, I asked her every which way what she was thinking about the green investment pledge, each time she refused to state whether she stood by the plan.

Instead, Ms Reeves appeared to pave the way to backtrack from the commitment, telling me “the fiscal rules will come first and all of our policies will be subject to iron discipline”.

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But ask Torsten Bell of the Resolution Foundation and he is clear Labour’s fiscal rule to get debt falling at the end of five years, means Ms Reeves is unlikely to be able to borrow £28bn in the final year of the Labour government (obviously not all the investment would have to necessarily come from borrowing), which points to some sort of further climbdown on the policy.

Of course, there is a bigger question here: Ms Reeves made the pledge in 2021 and said she would be Britain’s first green chancellor.

She said, while keeping to fiscal rules, failing to invest in green energy and tackle climate change would be short changing future generations.

In her own words: “I will not shirk our responsibility to future generations. No dither, no delay. Labour will meet the challenge head on and seize the opportunities of the green transition.”

Two and a bit years on, Labour are dithering, and look set to delay their investment commitments as they face into a bleak economic backdrop and recoil from the raw politics of the Conservatives weaponising the pledge to try to undo all the progress Ms Reeves has made to get Labour trusted on the economy.

Many want the shadow chancellor to be bold and face down the critics.

But, with the prospect of an election win in her grasp, Ms Reeves doesn’t seem to want to take the risk.

New economic forecasts in the March budget could well be her escape route.

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