TO NO ONE’S surprise, Ed Miliband has ruled out resigning if the Cabinet decides in favour of a third runway at Heathrow. After all, this is the man who stabbed his brother in the back in order to lead the Labour party to its worst electoral defeat since 1983. Perhaps his motivation for dreaming up Net Zero was revenge on the electorate. However the question does reveal some of the idiocies of the UK’s policy.
The non-argument between Miliband and Rachel Reeves over the expansion of Heathrow illustrates the conflict between delivering growth and delivering Net Zero. Economic activity requires energy and in the UK that means oil and gas. Three-quarters (77 per cent) of the UK’s energy comes from hydrocarbons. Growth today means consuming more hydrocarbons and emitting more CO2.
As Reeves is finding out the hard way, without growth there is no hope of the government balancing the books. That inexorably leads to financial collapse as the individuals who buy British bonds (i.e. lend the UK government money) decide to invest elsewhere. In the short term they demand a higher rate of interest. That is happening already, as the chart below from Trading Economics shows.
The post-financial-crash era of cheap money is over. Worse, under this government yields are at a 25-year high and climbing.
President Trump has withdrawn the United States from the Paris Agreement and will increase American production of oil and gas, driving the price down. Cheaper energy makes economic growth easier. Unfortunately green energy is not cheap; offshore wind is entirely reliant upon subsidies to be profitable for the generator. In 2023 wind power operators refused to build at £44/MWh. In 2024 the price was raised to £73/MWh, a 66 per cent increase. The wholesale price of electricity in the United States was between $30 and $40 per MWh, about half the UK price. Economic growth in the USA was 3.1 per cent in the last quarter of 2024. In the UK it was 0 per cent. Go figure.
The UK, or rather its benighted government, has a stark choice: Net Zero or economic survival.
If the economy doesn’t grow significantly, and soon, we will be in a debt death spiral. We already have to borrow to pay the interest on the national debt, thereby increasing it. As our indebtedness increases, the amount we must borrow to pay the interest increases. Thus the national debt increases and the quantum of the interest we must pay increases. If, as is happening, the market decides the UK should pay more interest then interest rates will rise too. That further increases the UK’s borrowing need.
At some point the number of people who want to buy a UK bond starts to fall and then it’s game over. We’re not there yet. At last week’s debt auction interest rates (yields) were up and demand was the lowest seen since 2023. That’s not reassuring.
Unfortunately for all Chancellors of the Exchequer, economic growth is not something that they can order. If they’re lucky and wise they can create the conditions for it, but that’s about it. In theory a government could borrow to spend, which would increase GDP and indeed the UK has been doing that for 25 years. The problem is that the taxation necessary to pay the interest shrinks the private sector and reduces GDP, leaving the country with stagnant growth, an expanded public sector, rising national debt and a shrinking tax base. If that sounds familiar (and it should) it’s been delivered by Conservative Chancellors building on the Blair/Brown legacy.
Genuine economic growth happens when people buy more stuff or more people buy the same amount of stuff each. Given a rising population, growth should be automatic. It isn’t, because someone must make or import the extra stuff to feed the increasing demand. That requires companies to take a commercial risk and making an investment.
Finding the investment is getting harder. Interest rates are rising and the millionaires (who are investors) are leaving the UK at record rates courtesy of the government’s cack-handed approach to the non-dom rules. Rachel Reeves may now tweak the policy and that might or might not stem the flow.
Some firms could perhaps fund expansion from retained profits held in cash. However in a recession that cash is the company’s insurance policy that will keep a company afloat when customers default or suppliers fail. Swapping current certainty of survival for a possible future gain is a brave decision for any board. The Reeves budget gave them little confidence.
Reeves seems to hope that a third runway at Heathrow will stimulate growth. It might, but not until it’s been through the inevitable planning inquiries and redesigns. There’s also the question of who will pay for it. The owners include private investment companies and sovereign wealth funds. They may or may not stump up the estimated £14billion, although they will no doubt seek support from the government. They’ve already had permission to charge the airlines for the £500million of recent expansion work that includes planning the third runway. Given the experience of HS2, few can be confident that the numbers won’t increase and timetables slip.
Runway Three won’t deliver growth now. Neither will the paltry £600million of Chinese investment Reeves claimed to have raised on her recent trip, nor will the risible proceeds of the largely forgotten investment summit last year.
The government could help deliver growth by engineering more customers with more to spend. This is the thinking behind tax breaks, particularly on income tax. The current fashion in government, which means in the Treasury, is to tinker about with the top rates. While that is sensible in some regards (wealthy people spend more than the poor) it doesn’t always work and it certainly takes a while for the extra spending of the wealthy to trickle down in the UK. (If the extra income goes on foreign holidays, imported goods or savings the trickle-down is much reduced, as is growth.)
What would work more quickly and surely would be to raise the income tax thresholds at the bottom. If the threshold were raised from current levels to £20,000 all taxpayers would be better off by about £1,500 a year. While that’s not much to someone earning £100,000, it’s a 5 per cent increase in take-home pay to someone on the median wage of £35,000 and proportionately more than that for those on lower wages. For a minimum wage earner on £23,500, it’s closer to 10 per cent. That’s transformative.
By definition, people on the breadline spend all they earn on staying alive. Give them more and they will spend more, and that has three benefits. Firstly the earner’s quality of life will improve enormously. Secondly their need for benefits will reduce, saving the Treasury money. Finally their additional spending will immediately deliver economic growth.
Moreover much of the spend would stay in the UK, as it would probably be on essentials such as food. That means a fair amount of it would trickle up, thereby increasing the turnover, profits and tax bill of the suppliers of the essentials. Combined with the reduction in welfare bills, this approach might even pay for itself over a short term.
The only party that proposed such a policy at the General Election was Reform, which is also the only party opposed to the lunacy of Net Zero. As the country is discovering, it’s a great shame that the electoral system delivered only five Reform MPs.
This article appeared in Views From My Cab on January 24, 2025, and is republished by kind permission.
