A landslide victory for Labour was also a satisfactory result for the vigilantes of the bond market. A Conservative administration that served up Liz Truss’s reckless budget of unfunded giveaways in 2022 has been punished. A Labour party promising fiscal discipline, to the point where it ditched a previous flagship £28bn policy on green investment in case it scared the horses, has been rewarded.
So, yes, one can see why the UK has suddenly acquired haven-like status in the eyes of financial markets. Unlike the US and France, for instance, international investors now know what they’re getting with the UK: a stable government anxious to demonstrate its market-friendly credentials. Meanwhile, inflation is falling and cuts in interest rates lie around the corner. “We believe UK government bonds (gilts) are attractive at current levels,” said Peder Beck-Friis, an economist at Pimco, the enormous bond fund manager.
All that is very helpful for attracting investors, as the incoming chancellor, Rachel Reeves, emphasised throughout the campaign; the big-picture outlook for growth and investment could be worse. Here, though, are two detailed pro-growth targets that look hard to achieve but are central to Labour’s plans. First, the new government wants 1.5m homes to be built in England and Wales in the next five years. Second, it intends to decarbonise the electricity grid by 2030.
On houses, Labour starts from a position where as few as 150,000 might be built this year, half what it needs for a par annual score for its five-year target. Talk to the executives in the housebuilding sector and many think that the ministers will have done well if they get to the implied annual run rate of 300,000 by the end of parliament.
The ingredient that ministers can directly influence is the planning rules. Reeves has called the planning system “the single biggest obstacle to our economic success” and Keir Starmer promised last year to “bulldoze through” the UK’s “restrictive planning system”. The taboo of building on the green belt – or, at least, the “grey” parts of it – will be challenged. So expect a return to local authorities being given mandatory targets for housebuilding, as a first step, and funding for planning officers to follow.
Even so, the 1.5m target looks a stretch: supply chains cannot simply be turned on by government diktat. And Labour’s parallel demand for more affordable houses within the mix may cause tensions with big private-sector housebuilders, which dominate the market to a far greater degree than in the 1970s, the last time the UK was building at such a rate.
On energy infrastructure, there is at least a blueprint for reform. Nick Winser, the electricity commissioner, delivered his report to the previous government last August. But note the size of the job, even when the Conservatives were pursuing a deadline of 2035. “In Great Britain, around four times as much new transmission network will be needed in the next seven years as was built since 1990,” said Winser’s report.
The biggest impediment are blockages created by the “first come, first served” system of allocating hookups to the grid for new wind, solar and battery storage projects. Some developers have been waiting up to 15 years to produce power. The worry is that the system is being gamed by operators who are more interested in selling on a connection rather than building the infrastructure themselves. Ofgem, the regulator, now has rules to kick out such “zombie” schemes but, again, that process does not happen overnight.
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Now consider the scale of Labour’s ambition on the generating side: double onshore wind, triple solar power, and quadruple offshore wind by 2030. Meanwhile, Great British Energy – the state-owned company that will partner with local authorities in local power schemes and with the private sector in novel technologies such as floating off-shore wind – will take time to set up. Nor does its capitalisation of £8.3bn over the life of the parliament sound like gamechanging money when National Grid alone intends to invest £30bn in the same period.
Analysts at the investment bank Jefferies think that “Labour’s goal to have a net zero grid by 2030 appears to be an unrealistic target, even with steady progress”. One energy expert it consulted concluded that “even if the new government executed every project in the pipeline, had linear interconnector growth, and electricity demand on the lowest end of the range, the country would still miss the target by 25%.” The 2030 ambition – one of the central manifesto pledges for growth – looks extremely challenging.