The economic crises of the last decade have generated significant reassessment in the discipline of economics. The failure of mainstream analysis to anticipate the financial crash of 2008, the growth of inequality, the unexpected stalling of productivity and wage growth, and the increasing evidence of environmental breakdown, have led to a questioning of the theoretical foundations upon which much economic policy has been based. Mainstream economics has increasingly taken new perspectives on board, while alternative or ‘heterodox’ schools have become increasingly prominent.  

In macroeconomics, ‘post-Keynesian’ analysis has emphasised the critical role of the financial sector and of uncertainty. Institutional and political economists have focused on the role of institutions and power relationships. Evolutionary and complexity economists have sought to understand the economy as a complex, adaptive system with a path-dependent history of technological and institutional development. Ecological economics has pointed out the environmental basis of all economic activity. Feminist economists have forced attention on its gendered nature. Behavioural economists have shown how people actually behave, contradicting the neoclassical model of ‘rational economic man’.

These developments have not yet led to any grand synthesis, but economics is in greater flux, and generating more interesting ideas, than it has for a generation.

The UK Government has legislated for net zero carbon emissions by the year 2050, upping the ambition of the existing 2008 Climate Change Act’s target of an 80% reduction.

Britain is not on course to meet even its previous commitments, and many believe that a 2050 net zero date is too late. Meeting net zero will require more concerted action in all of the main areas critical to decarbonisation: energy generation, transport, industry, buildings, and land use and agriculture. This is a challenge facing all countries.

Many local authorities have declared “climate emergencies” and are pushing ahead with their own ambitious plans for meeting them, although there are limits to how far they can go by themselves.  

Natural climate solutions, such as planting trees and restoring wetlands, are increasingly popular with governments, campaigners and businesses. If carried out properly they can absorb large amounts of carbon and address wider environmental destruction, such as biodiversity loss. 

These programmes should not be seen as a way for polluting industries to avoid changing their behaviour. Natural solutions are instead seen as something to be implemented alongside wider emissions cuts and other actions to repair the environment, not instead of them.

State-backed investment banks exist to provide finance where private banks may be reluctant to do so – in disadvantaged regions, new technologies or in sectors where returns are not considered high enough or too risky.

They are particularly valuable for providing 'patient' capital. This is long-term finance that is beyond the time horizon of most commercial banking but which is essential for innovation and strategic economic development. In very different circumstances, China and Germany both provide evidence. 

The UK is unique among major advanced economies in not having a national investment bank. Its advocates argue that such a bank would increase investment in innovation and meeting major mission-focused industrial transformations, such as building a green economy. The depth of the economic crisis caused by Covid-19, and its potential impacts on private finance, has added new urgency to these proposals.  

Over the long term, there are proposals for the better use of macroprudential tools, financial policies that aim to ensure the stability of the system as a whole, to strengthen the resilience of the finance sector and equip it to better deliver on wider social objectives, such as building a net zero economy.

This includes rehabilitating credit guidance – rules on how credit should flow to particular parts of the economy, such as green investments.

The Covid-19 pandemic has placed a renewed focus on how governments can use fiscal policy to stabilise their economies and create jobs.

With the base interest rate at near-zero (which means that when inflation is taken into account it is actually negative) the principal tool of monetary policy - changes in interest rates - has reached its limit. The IMF and OECD have therefore recommended that governments continue with public spending to support hard-hit economies until the recovery is well established. 

The policy of 'austerity' - spending cuts and tax rises - instituted in many countries after the financial crisis is now widely seen as having failed. It slowed the recovery and damaged long-term growth, which in the end is needed to reduce debt, by weakening public services and investment. It also widened inequality. 

It is widely argued now that governments should exploit low borrowing costs to boost public investment. The Bank of England has been financing a large part of government borrowing during the pandemic and can continue to do so. It can hold public debt on its balance sheet indefinitely, a phenomenon known as 'monetary financing'. (See Stimulating economic recovery.) 

There is also growing interest in how central banks could stimulate economic activity by transferring money directly into the hands of households. At the same time there are strong calls for central banks to use their position in the financial system to steer capital away from carbon-intensive sectors.

The United Kingdom - especially England - has a highly centralised political system and economic geography. Decision-making power is more concentrated in central government than in comparable Western countries, and regional inequalities in income, wealth and health are larger.  

The centralised management of public services has been a contentious topic during the pandemic. Many have argued the Government’s centralised response impeded effective provision of services, particularly with respect to public health and test-and-trace.

At the same time, the last decade has seen a degree of enhanced devolution, particularly to English city-regions. This has allowed new kinds of more integrated service provision and 'joined-up' policy making.

Covid-19 has also drawn attention to the financial fragility of many local authorities. In 2020-21, English local authorities’ spending power was 26% lower than a decade prior. This period also saw population growth of 7%, with rising demand and cost pressures, and new statutory duties for councils relating to public health, social care and homelessness.

For more information see our sections on 'Stronger local economies' and regional inequality.

Geographically-focused banks can play a major role in boosting investment, particularly in disadvantaged areas. They can help to retain wealth within local areas and support greater economic resilience. Distinct from merely the local branch of a high street bank, there are two types of such bank.  

The first are localised branches of publicly-owned national investment banks, with a specific remit to support the investment needs of local areas. In the UK it has been proposed that this could be done by creating publicly-owned Post Banks through the Post Office network, or by the government retaining its stake in the Royal Bank of Scotland (RBS) and repurposing it as a series of local banks.  

An alternative model would see the expansion of locally-focused cooperative, credit union and community finance organisations. Such institutions have a greater emphasis on high-street and branch banking and excel at lending to smaller businesses.

There is a growing movement to create a network of regionally owned and controlled mutual banks, where customers automatically become co-owners.

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The UK government’s commitment to what it calls ‘levelling up’, improving living standards and economic prospects in England’s disadvantaged regions, has led to widespread calls for the government to prioritise stimulus spending in those areas where unemployment is highest and incomes lowest.

In England city region mayors and others have called for greater resources to be given to local authorities to boost local employment. There is increasing interest in the idea of ‘community wealth building’, generating local economic development by focusing public procurement and business support on local firms, including social enterprises.

For more on local economic development, see our page Stronger local economies.

The UK’s system of property and land taxation is regressive. This is particularly the case for council tax, where the poorest tenth of the population pay 8% of their income in council tax while the richest 40% pay 2-3%.

While noting that any change to the current system would be politically difficult, there is widespread agreement that the system needs overhaul and many proposals have been made for reform.

One option would be increase the number of council tax bands at the top end, making the tax less regressive. An alternative would be to replace council tax with a proportional tax on the value of housing.

A different option would be to tax the land, not the property. A land value tax is a levy on the rental value of land, rather than the buildings on it. A longstanding reform proposal, this would help ensure that land with housing planning permission was not left derelict or undeveloped. It would also capture the uplift in land value that occurs when infrastructure is built or planning permission granted which has nothing to do with the landowner's own efforts.

Other proposals include the reduction or abolition of stamp duty, which reduces the volume of house sales and acts to discourage older people from downsizing.