The Covid pandemic has forced governments across the world to spend huge amounts of money supporting their health systems and emergency public services, and sustaining business and household incomes. In the UK, the government spent an estimated £372bn in 2020-21 tackling the crisis.
This money has come from increased government borrowing. In the fiscal year 2020-21, the budget deficit (the gap between revenue and expenditure) was £298 billion (14.2% of GDP), its highest peacetime level, and total public debt rose to 99.7% of GDP, the highest since 1961.
Unsurprisingly, this has led to questions about how and when this money should be repaid. Some people have argued (or assumed) that there will need to be a return to austerity – public spending cuts and tax rises – to reduce the deficit and the debt.
But most macroeconomists, including international economic institutions such as the OECD and IMF, argue that at current very low interest rates, high levels of debt can be supported for a long period. This is what happened after the second world war, when UK debt reached nearly 250% of GDP. It came down gradually with growth, to around 50% of GDP in the early 1970s.
Since the pandemic started the Bank of England has bought £450 billion of government bonds, equating to almost all of the new debt issued by the government. This has kept the interest rate low, thereby making the debt much cheaper for the government. Some argue for this arrangement to become permanent, a mechanism known as ‘monetary financing’.
The chief economist of the OECD has urged governments not to return to austerity to reduce deficits and debt levels. Laurence Boone said that the austerity policies brought in after the financial crash were wrong and that fiscal policy should play the primary role for recovery.
The IMF says that fiscal rules limiting debt to GDP ratios are inappropriate in today’s conditions and should be abandoned. Ultra-low interest rates mean that servicing debt (paying the interest) is cheaper now than it was when debt levels were much lower.
In an editorial the Financial Times has admitted it was wrong to advocate austerity after the financial crash, and that balancing the budget should be no longer be a fiscal goal.
Economist Daniela Gabor shows why the frequently heard idea that the government budget is like a household budget, and that the UK has now 'maxed out on its credit card ', are misguided economics and lead to the wrong policy conclusion.
Former chair of the Financial Services Authority Adair Turner argues that monetary financing of public debt by central banks is both necessary and inevitable, and in today’s conditions economically appropriate. (A shorter version here.)
The Economist argues that Chancellor Rishi Sunak should not worry about the prospect of an interest rate rise raising borrowing costs because of the maturity of UK debt.
Burning fossil fuels can have economic, environmental and social costs. It is widely considered fair and efficient to require energy users to bear these costs.
Carbon and other environmental taxes also encourage more efficient use of energy and resources, reducing environmental impact. Under the EU’s Emissions Trading Scheme, carbon emissions from the power and industrial sectors are effectively taxed, though not at a very high rate.
Petrol and diesel are taxed more highly, but these taxes have been frozen in the UK in recent years. Aircraft fuel is not taxed at all. So there is a strong case for a more comprehensive system of carbon taxation.
Taxes on consumption are regressive, with poorer consumers tending to pay more as a proportion of their income. Carbon and environmental taxes need to be carefully designed to ensure that they are perceived as fair.
The Grantham Institute at Imperial College London has designed a framework for fiscal reform for climate action, including tax reform. It argues that the public may be more prepared to pay higher taxes if it is earmarked for specific green investment.
Common Wealth and the New Economics Foundation set out principles for green tax reform. They argue that doing so must help to contribute to rapid decarbonisation, address inequalities, and support global solidarity.
The ‘A Free Ride’ campaign is behind proposals for a frequent flyer levy, with underlying modelling conducted by the New Economics Foundation. Under the levy aviation taxes would increase for every additional flight taken by an individual in a year.
Tax Justice UK, along with a range of partners from the Green Alliance to Greenpeace and Oxfam, have outlined a set of principles for reforming the UK tax system to help achieve net zero goals, in a way that is fair, popular and effective.
Many proposals for delivering a green recovery argue for a significant increase in government spending and investment.
This could be done through direct stimulus of key sectors critical to environmental and climate action, such as improving the energy efficiency of buildings or repairing local ecosystems. Record low interest rates and the high social, economic and environmental return from these investments mean any increased borrowing could be money well spent.
Measures can also be taken to unlock investment from the private sector, including by creating a green national investment bank.
Bloomberg Green explain 26 different ways in which countries are attempting to build a green recovery from the pandemic. They ask where the money is going, who has taken action already and what experts think about green stimulus.
Carbon Brief has a rolling tally of nations’ green stimulus spending, which it notes is not always easy to compare. The tracker is updated to include any stimulus measures that have a direct bearing on climate change or energy.
Transition Economics, for the TUC, model an £85 billion green stimulus package that they state could create 1.24 million jobs. The report calls for a national recovery council to be formed with unions and employers.
The call for a green recovery has been widely supported in the UK, by businesses, environmental organisations, and think tanks on both left and right.
For some green recovery is a way of rebooting the existing economy. For others it offers a chance for more radical change in the objectives and outcomes of economic policy.
The CBI has published a ‘Green recovery roadmap’, outlining six priorities to ‘reignite business investment’ and create jobs. These include government investment in a battery manufacturing ‘gigafactory’, carbon capture, utilisation and storage (CCUS) and sustainable aviation fuels.
The UK Climate Coalition, an alliance of over 75 organisations, has produced a ten-point plan for a ‘green, healthy and fair recovery’, including policies for homes, transport, renewable energy, nature and global cooperation.
A report by Onward on the labour market challenge of the net zero transition shows the better pay and gender make-up of clean economy jobs compared to carbon intensive sectors. It proposes the funding 'net zero aligned' PhDs in engineering and establishing 'net zero academies' in regions with a high proportion of carbon intensive industries.
Although the focus of most governments in the crisis so far has been keeping businesses and jobs alive, many have included environmental components in their stimulus and recovery plans.
This includes the EU, which has made its ‘Green Deal’ investment programme a centrepiece of its economic ambition and climate goals.
However analysis of plans published so far shows that the overall environmental impact of government plans in most countries is likely to be negative.
Carbon Brief has produced an interactive tracker of different countries ‘green recovery’ plans, detailing policies planned and implemented.
Vivid Economics have analysed 25 countries’ Covid-19 stimulus packages for their ‘greenness’. They find that, despite governments’ rhetoric, most will have a net negative environmental impact.
Both the Scottish and Welsh governments have committed to green recoveries. In Northern Ireland a plan has been proposed by a group of environmental NGOs.
The Scottish Government has published a draft five-year infrastructure investment plan to stimulate job creation and enable ‘inclusive, net zero and sustainable growth’.
A group of environmental NGOs has published a 5-point plan for green recovery in Northern Ireland.
Proposals presented to the Welsh Government by its green recovery task force include natural climate solutions, circular economy policies and measures to ‘transform socio-economic systems’ such as food and transport.
Many cities around the world have used the Covid crisis to prioritise walking and cycling and the provision of green space.
There is a growing global movement of cities committed to improving the quality of urban life through environmental improvement and decarbonisation, particularly of buildings and transport.
Many local authorities in the UK are looking to pursue a more sustainable form of economic development.
Led by the mayors of Los Angeles and Milan, major cities across the world have set out principles for a ‘green and just recovery’ and showcased what they are doing to deliver it.
Former CLES employee Jonty Leibowitz explores how UK regions and local authorities can develop green recovery plans centred on social, economic, and environmental justice.
The Green New Deal is a broad term that describes a concerted, state-led programme of green economic stimulus with a specific focus on social justice.
Originally proposed in 2008 as a response to the looming financial crash, today's version stems from its 2018 adoption by the Sunrise Movement in the USA. Backing from influential USA Congresswoman Alexandra Ocasio-Cortez has brought it to a global audience.
There are different conceptions of the Green New Deal, but common to all are commitments to ambitious decarbonisation, a significantly enhanced role for the state, and a focus on the just transition for those particularly affected.
The original Green New Deal plan was put together by the UK Green New Deal Group and published by the New Economics Foundation in 2008. It proposed the creation of hundreds of thousands of jobs in clean industries and significant regulation of the financial sector.
A Green New Deal for Europe sets out a manifesto for a Brussels-led Green New Deal, with a particular focus on a green public works programme and a European Environmental Justice Commission.
New Consensus and the Sunrise Movement summarise American proposals for a Green New Deal. Data for Progress have put together an extensive manifesto.
One response to concerns about environmental degradation has been to argue, not that economic growth per se is impossible, but only its current patterns and forms.
If the world switches to renewable energy, becomes much more resource-efficient and institutes a ‘circular economy’ in which resources are reused and recycled, GDP growth can continue at the same time as environmental damage is reduced.
Growth in global income remains morally necessary, it is argued, to end poverty and give everyone on the planet a decent living standard.
Advocates of ‘green growth’ include major economic institutions such as the World Bank, and many governments and companies.
They acknowledge that the world is very far from achieving green growth now.
But they maintain both that it is possible to ‘decouple’ GDP growth from environmental damage, and that it is politically and socially infeasible to call for growth to cease.
The OECD adopted a ‘green growth strategy’ in 2011 and has a programme of work focused on how to implement it.
The Global Green Growth Institute supports governments to define and implement green growth strategies, while the Green Growth Knowledge Platform hosts a range of analytical and policy studies.
Political economist Michael Jacobs explores the origins of the concept of green growth, why it took hold and its relationship to the concept of sustainable development.
Tim Jackson and Peter Victor explain the difference between relative and absolute decoupling of environmental impact from GDP, finding ‘no evidence at all’ for global absolute decoupling.
Reviewing the evidence for decoupling of GDP growth and environmental impact, Jason Hickel and Giorgos Kallis ask ‘Is green growth possible?’ With ‘net zero’ by mid-century requiring global carbon emissions to fall by 7-10% per year – far beyond anything achieved so far – they conclude that it isn’t.
Achieving an environmentally sustainable and net zero economy requires a significant increase in investment in green technologies and sectors. This in turn will require much larger financial flows into these investments. At the same time, investment in high-carbon and polluting activities needs to diminish.
Over recent years the Bank of England other central banks have begun to pay attention to the risks to financial stability posed by climate change and climate change policy. They have sought in particular to ensure that financial institutions disclose their exposure to climate risk.
Some reformers are now calling for financial regulation to be tightened for financial firms with significant exposure to assets - for example investments in fossil fuels - which could become devalued or 'stranded' as a result of future climate change policy.
Various proposals are now being made to incentivise financial investment in green technologies and sectors. The European Commission has set out a taxonomy of sustainable economic activity to underpin its 'Green Deal' strategy.
A paper for the Climate Change Committee sets out a series of recommendations to enable the UK to build a "net zero financial system". It argues that both sector-specific strategies and system-wide instruments are required to enable market innovation and increase demand for climate-aligned financial products. It proposes that the Bank of England should fully integrate climate risk and net-zero into financial regulation and monetary policy, and net-zero targets should be made mandatory for financial institutions.
UCL’s Institute for Innovation and Public Purpose and the EIC-Climate KIC set out a comprehensive framework for green financial reform, including the stress-testing of UK financial institutions for how resilient they are to climate change.
Finance Watch calls on regulators to break the "climate finance doom loop", in which financing of fossil fuels causes climate change, and climate change threatens financial stability. It argues that higher capital requirements should be required for banks exposed to stranded assets. By the same token, Breugel propose that central banks offer a lower cost of capital to low carbon firms.
Columbia University historian Adam Tooze argues that central banks need to move from managing the financial risk posed by climate change to altering the direction of economic growth so as to minimise those risks arising in the first place
