Rachel Reeves has the power to turn the UK economy green

It’s often said that it’s good to have a boring chancellor of the exchequer. Rachel Reeves must have missed this memo. The UK’s first female, and self-styled ‘green’, chancellor hit the ground running with a flurry of first week announcements aimed at stimulating investment and GDP growth.

It’s needed. The economy and public finances are not in a good state. Why? In part because the UK has a capital investment problem. Since 1990, the UK has invested at a level on average four percentage points below other G7 economies. If public investment was at the OECD average since 2005, £500 billion more would have been invested in the UK. Just think what that money could have done? For one, it could have turned the UK into Europe’s leading renewable power exporter. This really matters. Chronic underinvestment by government and private companies has undermined UK productivity and GDP growth compared to other countries.

But why should an environment organisation care about this? Simply, because well designed climate and nature policies can serve to raise private investment, improve productivity and reduce our exposure to volatile energy costs. This could help to bring about the renewed GDP growth Labour craves to pay for improvements to public services.

Here are a few places the Treasury could focus to achieve higher green growth:

Make a sensible change to fiscal rulesFiscal rules are designed to show that a chancellor is sensible with the public finances. But they are usually set excessively tight. This is partly to blame for the low levels of public investment which have been holding the economy back, as day to day spending is prioritised over capital investment when rules are at risk of being breached.

Updating fiscal rules to exempt green public investment from the sustainable debt rule, or including a mandate to increase public sector net worth and the stock of natural capital, can help achieve our nature and climate targets, while stimulating green economic growth. It would also align the economy more closely with the recommendations of the highly respected 2021 Dasgupta review of the economics of biodiversity, which the Treasury commissioned.

Investment benefits increase over time which isn’t fully captured in the Office for Budget Responsibility’s (OBR) fiscal forecasts, because of its conservative approach and short, five year assessment horizon. These forecasts are what the government uses to assess if it will meet its fiscal rules. To end short termism in investment decisions, revised fiscal rules should be accompanied by an update to the OBR’s methodology for assessing the benefits of capital investment on economic growth.

Tax effectively to achieve economy-wide aimsThe tax system is not set up to help to achieve green growth or meet the UK’s climate and nature targets. In fact, in places, it actively hinders these aims, with businesses, buildings and beyond held back by a tax system that incentivises damaging behaviour. Using the tax system to stimulate greener approaches and lessen environmental impacts could be achieved quickly.

The government could stimulate business investment with an enhanced super-deduction, aligned with the forthcoming Green Taxonomy framework, and build the necessary workforce to achieve this economic growth with a 130 per cent tax relief on green skills training. Zero rating VAT on repairs and providing tax incentives for businesses investing in activities like reuse, repair and recycling would, likewise, also steer towards a more circular economy, retaining more value and reducing resource use impacts across the UK.

Longer term, transport tax reform is inevitable as the electric transition will mean falling fuel duty revenues predicted to lose the government £28 billion per year without action. This is equivalent to the whole 2022-23 Department for Transport budget. A new independent commission should start work now to design an equitable road pricing scheme to replace lost fuel duty revenue. Aviation is another area ripe for reform. It hasn’t paid its fair share of tax compared to other forms of transport, so the effective subsidy it receives should end if the government is serious about fairness and meeting its climate commitments. An immediate £1 per litre tax on kerosene for private jets could raise up to £200 million annually which could be spent on developing lower emission aviation technologies. Eventually, introducing a kerosene tax on domestic, EU and UK bound aviation, and all other jurisdictions where air service agreements allow, could raise £800 million in its first year and £8.5 billion by 2035.

Use the power of the CityThe UK is a financial powerhouse. For all the banker bashing that goes on, the finance sector is one of the UK’s big success stories. But this industry is also funding activities causing nature’s destruction and climate breakdown. Finance can be directed for good, if the right frameworks are put in place.

Labour committed to restore the Bank of England’s climate mandate in its manifesto, which is a necessary step. But it should also look to incorporate nature too, as nature’s decline is a significant risk to the financial sector and the economy.

To direct private investment towards environmentally positive action, the government should fast track a science based package of finance reforms, to move investment away from fossil fuels and deforestation, building on existing intent in the City to make the UK a world leading green finance centre. These should include immediate publication of the Green Taxonomy and a timeline for mandatory reporting under the Taskforce on Nature-related Financial Disclosures (TNFD).

Driving more private sector spending in nature positive activity could be done through a new joint departmental commission, under which the Treasury, the Department for Environment, Food and Rural Affairs and the Department for Energy Security and Net Zero work directly with industry and sector experts on the options that would help meet targets under the Environment Act 2021 and international nature agreements.

Early actions we are seeing from Rachel Reeves, including creating a National Wealth Fund, look positive for green growth. But, as the options above show, she has much more power in her hands to move the UK closer to the cleaner, greener future it voted for on 4 July.

 

Image credits: HM Treasury on Flickr