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

(Press-News.org) A new report by researchers from the University of Cambridge and the London School of Economics and Political Science (LSE) argues 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.

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 modernised to spur the innovation needed for UK prosperity.

The report argues that the Treasury should not be captive to an inaccurate UK narrative which 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 decision-makers 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 government, which could integrate strategies on net zero, digitalisation, and AI to boost productivity and growth.

Zenghelis says: “Choices have to be made. Inaction or delay is the more risky choice.”

ENDS

Notes for editors

Dimitri Zenghelis is Special Advisor to the Bennett Institute at the University of Cambridge and a Senior Visiting Fellow at the Grantham Research Institute at the London School of Economics. He is also a Partner at Independent Economics. He was a lead author on the Stern Review on the Economics of Climate Change and headed the Stern Review Team at the Office of Climate Change. Previously he was Head of Economic Forecasting at HM Treasury. He is a Senior Associate at the Cambridge Institute for Sustainability Leadership and a Fellow of the Academy of Social Science. He advises governments, financial institutions and international organisations, including the UN, World Bank and regional development banks, the Mayor of London and the UK Committee on Climate Change. Cambridge Zero was founded in 2019 to maximise the University of Cambridge’s contribution towards achieving a resilient and sustainable zero-carbon world. Cambridge Zero is harnessing the full range and breadth of the Collegiate University’s capabilities, both in the UK and globally, to develop solutions that work for our lives, our society and our economy. A bold response to the climate crisis, we do this by acting as both a hub and an umbrella, integrating and enhancing the University’s activities through research and innovation, education and training, engaging with a broad coalition of stakeholders, and leading by example by supporting ambitious decarbonisation. The Grantham Research Institute on Climate Change and the Environment was established in 2008 at the London School of Economics and Political Science. The Institute brings together international expertise on economics, as well as finance, geography, the environment, international development and political economy to establish a world-leading centre for policy-relevant research, teaching and training in climate change and the environment. It is funded by the Grantham Foundation for the Protection of the Environment, which also funds the Grantham Institute – Climate Change and the Environment at Imperial College London www.lse.ac.uk/grantham/.   END