How does the UK respond to Bidenomics?

It’s day two of Rishi Sunak’s trip the United States, where he met with President Joe Biden in his first visit to the White House as UK PM. On the agenda was a variety of geo-political issues, including the need to arm Ukraine in the long-term and counter the security threat of China. From Sunak’s perspective, he was also hoping to secure the President’s backing for his proposals on artificial intelligence and greater cooperation on tech innovation. As part of this, the Prime Minister will be hoping to unveil that Britain will be hosting the first global summit on the regulation of AI this Autumn, although the previously mooted plans for a US-UK digital trade deal have now been played down, given US opposition.

Perhaps the more fundamental issue is how the two countries can work together to build ‘economic security’ and ensure that they can reinvigorate their economies, while being less dependent on countries such as China in supply chains for key sectors. This is an issue where the UK does not appear have a clear strategy.

President Biden may have a significantly greater commitment to strengthening international alliances than his predecessor, but his economic agenda is arguably not a million miles away from Trump’s ‘America First’ approach, with aggressive policies to prioritise domestic production and job creation. The centrepiece of this, the Inflation Reduction Act – which includes $369bn of subsidies for green technologies, covering energy infrastructure, EV vehicles and battery production – is continuing to spread concern in the UK, Europe and elsewhere that subsidies on this scale will suck investment away from them and ultimately lead to a “zero sum” subsidy race.

This concern has been apparent at the top of UK government. Earlier this year, Chancellor Jeremy Hunt referred to the IRA as an example of protectionism and that the UK would not go toe-to-toe with the US on subsidies. Yet, it is not entirely clear what the government’s response will actually involve. Hunt himself said the UK would instead rely on “fantastic science, innovation-rich companies and a pro-growth regulatory regime” and details would be unveiled in the Autumn Statement. Critics have argued that this approach fundamentally ignores the urgency of challenge – aspects of the green transition (such as scaling up EV battery production) requires action now and we cannot afford to wait another five months for a series of underwhelming measures.

The Labour Party meanwhile, sees the IRA as the template to be copied. Last month, Rachel Reeves declared that Bidenomics were the blueprint for a Labour Government and outlined how their modern industrial strategy would include similar measures through its ‘Green Prosperity Plan’, which would include £28 billion a year additional capital spending

(her own coined phrase ‘securonomics’ was perhaps meant to be a UK-version of Bidenomics). Yet, as my colleague Imogen Shaw has highlighted, there are doubts creeping in among the Labour frontbench about the extent of this commitment, not least because of the potential implications that borrowing on that level would have on public finances and capital markets.

The Biden Administration has been willing to spend freely, but this is fundamentally less risky for a nation with a reserve currency than for the UK (and even then, it has involved fractious political arguments about the need to suspend the debt ceiling). Capital markets are far less forgiving of the UK, and no Prime Minister or Chancellor wants to be responsible for another spike in Gilt yields or sharp decrease in the value of the Pound. Labour will need to reassure markets and voters that intervention on this scale can be made without damaging public finances in the long-term.

That said, economic policy based on large-scale subsidies remains a highly contested issue and the extent to which the UK should emulates ‘Bidenomics’ is likely to be one of the big economic dividing lines in the run up to the next election.