The Catch 22 Chancellor

It feels weird to write this as an environmentalist in the week day the Chancellor announced the government wants to see a new runway built at Heathrow, but I am starting to feel quite a bit of sympathy for Rachel Reeves. 

Everything the government tries to do to revive the UK's flat-lining economy is undermined by the sheer depth of the economic hole it inherited from the Conservative government. From the fiscal shortfall and record high tax rates through crumbling infrastructure and ballooning NHS waiting lists to Brexit trade barriers and overflowing prisons, the Tories handed over an economic chasm of Mariana Trench proportions. Labour may want to move on from the overly despondent tone that marked its first few months in office, but the sluggish economic performance of the past six months does still need to be seen in this bleak context. Very few of the UK's current economic woes are Reeves' fault.   

This point was hammered home yesterday by an easily overlooked component of the sweeping package of pro-growth policies and investments announced by Reeves, many of which were overshadowed by the political row that will inevitably triggered by the government's Heathrow expansion plans. The Environment Agency confirmed an agreement with the water industry for £22bn of investment over the next five years in environmental improvements, which represented a four-fold increase on the previous five years. Blink and you would miss it - and many did - but how can this be interpreted as anything other than evidence of state failure from the previous government?

How was underinvestment in critical water and environmental infrastructure allowed to become so chronic that a four-fold investment is now required? Confirmation of this essential spending on the absolute basics of trying to keep waterways clean comes just weeks after Ofwat had to sign off on over £100bn of investment in new water infrastructure to meet rising demand and combat worsening climate risks. Water bills will now have to rise significantly, and Labour will inevitably cop a lot of the resulting consumer outrage. 

But this investment is critical in the way only clean water can be critical. It was notable yesterday how the primary thing that allowed Reeves to announce the government will finally proceed with the plans for the Oxford-Cambridge Arc - plans that have made economic sense for decades - was the commitment the government has secured for new reservoirs to actually be built for the first time since the 90s.

The plans are further evidence of how on multiple fronts the government is quietly pursuing sensible investments and policies that will help enable crucial infrastructure and unleash pent up economic activity. Witness also yesterday's confirmation of fresh investments in electric vehicle (EV) charging infrastructure, reforms that promise to fast-track new offshore wind farms while improving marine habitat protection, mooted proposals for EV financing offers, and support for new critical mineral projects. And that's just from this week. A government getting on with governing feels like a radical act compared to much of the past decade.    

But the years of underinvestment have also created a political trap that will be impossible for the government to avoid.

If Labour fails to invest, revive the economy, tackle the sewage in the rivers, and improve public services, then it will lose the next election - and it will deserve to do so. But equally, doing all these things will require higher taxes, increased water bills, plenty of new wind and solar farms, a lot more house building, and a continuation of the high levels of immigration that will be essential to tackle a skills crisis that will only be exacerbated by the combination of Labour's infrastructure boom and the UK's ageing population. All these things are necessary, but they are also anathema to the Conservatives, Reform, and their media, who will now seek to weaponise every move Labour makes. 

The only way to break this Catch-22 is to first deliver genuine economic improvements, but then to also break with the Labour right's instinctive defensive crouch and proactively make the case for investment that may well necessitate tax reform, higher bills, planning reform, more borrowing, a faster pursuit of net zero, and continued immigration, alongside investment in domestic skills programmes. There needs to be honesty about the trade-offs and a clear explanation about why they are necessary - a clear appraisal of why we cannot continue with the Tories' failed approach or succumb to Reform's populist fantasies. 

In fairness, Reeves did a pretty good job yesterday of confidently talking up the government's economic strategy and was emphatic on the centrality of net zero to Labour's recovery plans. It was notable how the speech received a very warm welcome from business groups. But too many other components of the government's strategy - be it on trade, migration and skills, or departmental spending - appear to be underpowered or pulling in slightly different directions to today's plans.

Which brings us to Heathrow and airport expansion. It is just about possible to make the case that by the time a third runway is built the aviation industry should have made huge advances towards its net zero targets. Indeed, if sustainable aviation fuels, carbon removal technologies, and zero emission aircraft are not widespread by 2040 then the UK's overarching net zero by 2050 goal will be at risk.  

But the problem for the government is the current Climate Change Committee (CCC) modelling already assumes significant improvements in aircraft efficiency and green fuels will take place. The government would have to show it can go faster than expected in delivering low carbon aviation technologies, and do it at a time when the industry is arguably going slower than expected in deploying such breakthroughs.  

Consequently, to try and build more runways without convincing evidence that these technologies are truly scalable would be an extremely risky venture. The UK's Carbon Budgets are legally binding and High Court judges - who, without a change in the law, will ultimately get to decide whether Heathrow expansion can proceed - are not known for a 'just give it a go and hope for the best' mentality.

The government has evidently decided it can credibly argue that it can decarbonise aviation so quickly that it can deliver new runways and still meet emissions targets. To do so it will have to invest a lot more in the still very nascent technologies that provide the only route to delivering net zero emission flights. But even then its modelling may not be sufficiently convincing for the courts. It is also unclear whether the signal Heathrow expansion supposedly sends about Reeves' commitment to growth is worth the massive political row that will now be triggered. There is a worse case scenario where the government's arguments fail, Heathrow is blocked by the courts, and that gives the Conservatives and Reform all the reason they need to turn the next election into a referendum on the Climate Change Act and the Paris Agreement. 

At a time when Labour's genuinely essential economic and building plans will be under constant fire from the right wing of British politics and its powerful media, its support for Heathrow risks opening up a second front with environmentalists and many of its own MPs. It could also serve to distract from an infrastructure and investment programme that might just pull the UK out of the economic trough that it has been stuck in for far too long. A third runway would almost certainly be bad for the climate; it could also prove to be very bad politics.