UK budget 'blindness' risks handing green economy future to China, report argues

A new report by researchers from the University of Cambridge and the London School of Economics and Political Science (LSE) argues that the UK government should invest in green infrastructure now or watch productivity lag behind China, the United States and other countries already running away with the benefits.

The report, titled "Is reaching net zero a growth and prosperity plan?" by former Head of Economic Forecasting at the UK Treasury, Dimitri Zenghelis, says the government's self-imposed rules on infrastructure investment must be modernized to spur the innovation needed for UK prosperity.

The report argues that the Treasury should not be captive to an inaccurate UK narrative that assumes that investing in green infrastructure costs too much and that borrowing to finance the transition to a net zero economy will worsen UK public finances in the long-term.

Zenghelis says, "This is in fact, the growth engine of the 21st century. Fiscal responsibility requires investing in assets that generate sustainable private and public returns, while encouraging national savings."

The report takes aim at the UK's fiscal rules, combined with the Treasury's rigid application of "cost benefit analysis" for green investments.

These factors combine to make boosting economic growth virtually impossible and have trapped the UK in a "doom loop of austerity."

Zenghelis says, "Public investment is prone to feast or famine cycles, becoming the soft target that is cut to meet the rules every time there is bad economic news."

Cost benefit analysis is a narrow accounting approach used to assess the advantages (benefits) and disadvantages (costs) associated with a particular decision, project, or policy, assuming the rest of the system stays the same.

Zenghelis says, "We are already in a large-scale, transformative technology revolution, where the whole system is changing. Marginal cost benefit analysis is the wrong tool."

Project-by-project return on investment is not the right measure for decisionmakers in the midst of a massive transformational economic revolution propelled by AI, automation and climate-related innovation, the report says.

Investments must complement each other when building a new network that changes the system and creates a cascade of effects across the economy impacting jobs, productivity and costs.

The report from the Cambridge Zero Policy Forum and the Grantham Research Institute on Climate Change and the Environment at LSE shows how China and the United States have leapt out ahead of the UK and other major economies by setting clear strategic industrial targets and spending hundreds of billions on climate change-related investments and tax credits.

Their investments have already driven massive growth in renewable energy sources, electric vehicles, batteries, heat pumps and other climate sectors.

Zenghelis says, "China and the United States have made strategic and political decisions to use climate mitigation as a tool for growth rather than fixating on cost benefit analysis models that are not appropriate."

The report argues that the multiplying effects of green infrastructure investment are so large that analysts have also systematically under-predicted the scope for raising productivity with clean innovation.

A net zero transition strategy cannot be dealt with as separate from the rest of the economy. Tough policy decisions are also needed on public spending, taxes, debt accumulation and national saving, the report says.

Zenghelis says, "If the Treasury is serious about dealing with the challenges of growth and productivity and climate mitigation, then it must be willing to reassess its decision-making process."

The report recommends a wider range of complementary approaches and says it is not too late for the UK to tap into the ground-breaking research and innovation of its world-leading Universities to reap the opportunities available.

The UK is in a strong position to embrace technological change by leaning on a solid base in scientific innovation, strategic risk management and fluid financial and capital markets.

The UK leads or has the potential to lead in offshore wind, environmental monitoring equipment, natural risk management, turbines, advanced semiconductors and water management treatment, biotech and life sciences, clean aviation, green hydrogen, finance and services.

Zenghelis also proposes a Growth and Transition Team at the heart of the government, which could integrate strategies on net zero, digitalization, and AI to boost productivity and growth.

Zenghelis says, "Choices have to be made. Inaction or delay is the more risky choice."

More information:
Report: Is reaching net zero a growth and prosperity plan? Economics, tools and actions for a rapidly changing world.

Provided by University of Cambridge