Monday, 25 March 2013

Osborne v. Growth. The Chancellor and the new green economy

Michael Jacobs

The most telling comment on last week’s Budget came from the Government’s very own Office for Budget Responsibility. It acknowledged that the Chancellor’s measures would have no impact on growth: on the contrary, it now forecasts this to be just 0.6% in 2013, half the figure it was predicting only three months ago. We knew that George Osborne could not publicly abandon ‘Plan A’. But his populist tax cuts, paid for among other things by a little-noticed £5bn raid on contracted-out pensions, will actually yield no net stimulus to the economy at all.

Unwilling to assist growth himself, you would have thought the Chancellor would welcome it wherever it could be found – and particularly in the manufacturing sector, whose weak performance in recent years has kept the UK mired in trade deficit. Yet remarkably, just before the Budget, Osborne was accused of actively preventing the creation of tens of thousands of British manufacturing jobs. The episode illustrates the extraordinary role which this most political of Chancellors is now playing.

The charge is levelled in an extraordinary letter sent to Osborne (along with Business Secretary Vince Cable and Energy Secretary Ed Davey) by six of the world’s largest energy manufacturers earlier this month. These companies – Alstom, Mitsubishi, Doosan, Areva, Vestas and Gamesa – between them already employ over 12,000 people in the UK. For the past few years they have all been developing investment plans, collectively worth hundreds of millions of pounds, to build factories in Britain to supply the country with low carbon energy equipment, in fields such as offshore wind, nuclear power, energy efficiency and carbon capture and storage. But in their open letter they warn that these investments, and the jobs they will create, will not go ahead if the Government does not commit to a long-term low carbon electricity target in its Energy Bill now passing through Parliament. And it is no secret that it is Osborne who is blocking that commitment.

Energy policy can be an arcane affair, but this issue is pretty straightforward. Since Labour’s pioneering Climate Change Act in 2008, UK energy policy has been on a long-term trajectory to cutting greenhouse gas emissions by shifting supply towards renewables (particularly wind), along with some nuclear, and gas fired power stations fitted ultimately with carbon capture and storage. As a result, global manufacturers in these fields have been looking to build factories in Britain to supply the required equipment – with at least six companies developing sites on the east coast to manufacture offshore wind turbines alone. But over the last six months uncertainty has suddenly crept in, putting these investments at risk. And the reason is George Osborne.

At present the UK only has an energy policy out to 2020. But investors need a longer timeframe than that – anything they plan now will barely be in operation by then. So the policy they are calling for is a legal limit to the emissions which the electricity sector will be allowed by 2030. This will give certainty to energy companies and their suppliers about the technologies to be installed. There is remarkable unanimity around the need for such a ‘decarbonisation target’ – last month 35 companies, NGOs and other organisations signed a joint statement in support. It is well known that Ed Davey, the Lib Dem Energy Minister, wanted such a target in the Energy Bill, but George Osborne objected. Hence the very pointed addressing of the letter from the six global manufacturers this week to the Chancellor as well as to Davey.

The wider context here is rather remarkable. The British economy now produces far more jobs in green industries than it does in brown or dirty ones. Last year the CBI produced a report, The Colour of Growth, estimating that over a third of the UK’s economic growth in 2011-12 came from green business. Now worth £122bn annually to the UK economy, the environmental sector has been growing (despite the recession) at over 2% a year for the last five years. It employs just under a million people and is taking an increasing share of a rapidly growing global market, so also reducing Britain’s trade deficit. These facts have in turn made CBI into a rather remarkable cheerleader for stronger environmental policies.

So why is Osborne setting himself against one of the few job-creating sectors of the otherwise flatlining British economy? (He has also interfered to obstruct new regulations enduring that new homes are low-carbon.) The answer appears to be entirely political. Fired up by rural opposition to onshore windfarms and a more general anxiety about rising energy bills, and backed by an increasingly strident campaign in the Daily Telegraph and Daily Mail, a revolt against low carbon policy has developed among a number of backbench Tories, and it’s their support that Osborne is now after.

His alternative energy policy is the so-called ‘dash for gas’, for which he gave generous tax incentives in the budget. In the US the exploitation of cheap shale gas has revolutionised energy supply, displacing coal, and this has led to hopes that the same might happen in the UK. But there is no evidence that we have anything like the reserves found in the US, and being part of a competitive European market there is no guarantee that they would be cheap. On the contrary, a report by the IPPR this month showed that relying on volatile gas markets would cost the economy more than the decarbonisation target if gas prices rise in line with market expectations – and much more if gas prices are higher. It is high wholesale gas prices which have been responsible for almost the entire rise in energy bills over recent years, not green policy.

But Osborne is now under pressure. For the Tory Chairman of the Energy Select Committee, Tim Yeo, has tabled an amendment to the Energy Bill inserting a 2030 decarbonisation target. Labour have committed to supporting it. Now six Liberal Democrats, defying agreed Coalition policy, have done the same, with the party’s president, Tim Farron, indicating that he too will vote for it. It will take only a few more Lib Dems to break ranks in support of their own party policy and the government will be facing defeat.

This may come down to the increasingly abrasive relationship between Nick Clegg and David Cameron. Buoyed by the Eastleigh by-election, the newly assertive Lib Dem leader faces intense pressure from his own party to tell Cameron that he must finally make good on his tattered promise to lead ‘the greenest government ever’. But in doing so the Prime Minister knows that he would have to defeat his own Chancellor.

An earlier version of this piece first appeared in the Staggers blog of the New Statesman

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