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.
Policymakers can also introduce less targeted financial taxes such as bank levies, which can help to curb systemic risk and ensure that the taxpayer benefits from the rewards of financial risk-taking rather than simply bearing the costs.
The UK introduced both a corporation tax surcharge for banks and a bank levy in the wake of the financial crisis of 2008. This was levied on the global balance sheets of large banks operating in the UK, but the revenue generated by the tax has fallen since the financial crisis in part due to changes to its structure introduced in 2016.
The principle of financial transactions taxes can also be applied to currency trading. Currency transactions taxes (CTTs) act to slow down currency transactions by raising their cost, thus reducing volatility. This makes them effectively a form of capital control – a tool that can be used to help regulate the flow of money into and out of economies.
As Covid-19 unfolded many countries faced significant capital outflows, strengthening arguments for using CTTs as a partial response, particularly for emerging markets.
A financial transactions tax (FTT) can be used to shift the incentives financial firms face when deciding on their trading strategies. In particular, such taxes can disincentivise high-frequency trading, which is associated with rising volatility in financial markets.
FTTs can also generate significant revenue. At least forty countries already have taxes on financial transactions of one kind or another, including the UK where stamp duty acts as a form of FTT on trading in equities. It was estimated in 2017 that a modest extension of a FTT in the UK could raise an estimated £23.5 billion over the course of a Parliament.
Since the financial crash of 2008 national and international authorities have implemented a range of reforms aimed at reducing the risks which individual financial firms can take, and the systemic risks which the financial system as a whole poses to the rest of the economy.
But critics of the structure and behaviour of the financial system argue that these reforms do not go far enough. They note that the incentives faced by financial companies and the herd-like behaviour of financial markets tend to drive asset bubbles in an upswing and exacerbate recessionary forces when the economy experiences a downturn. Closer regulation of the shadow banking sector and stronger counter-cyclical measures are required if financial instability is to be reduced.
The financial crises of 2008-12 showed that, while shareholders gain the benefit of financial firm profitability, major losses will be borne by debtors, and by society and taxpayers. A number of reform proposals therefore focus on ensuring that financial firms share the liability for failure.
The financial system connects savers and investors. But recent decades have seen the growth of 'agency capitalism', in which a wide range of financial intermediaries manage investment funds. Reformers seek to ensure that such companies have stronger fiduciary duties to act in the interests of savers.
Deeper financial reform proposals centre on the goal of creating a 'purpose-driven' financial system, designed to serve the rest of the economy rather than itself, and in particular which supports efforts to build a more environmentally sustainable and inclusive economy.
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.
In the 1980s and 1990s western governments deregulated the financial system, and removed obstacles to the cross-border movement of capital. One of the results was a significant expansion in the size and profitability of the financial sector relative to the rest of the economy.
As restrictions on banks and other financial institutions were lifted, and the global economy grew, lending increased. Private debt - owed by businesses and households - rose rapidly in the period up to the financial crash of 2008, which revealed the increasingly risky nature of credit practices and the greater financial instability to which it led. Public debt increased after the crash as governments were forced to bail out the financial sector and respond to the recession. In 2021 total global debt had risen to over three and half times the value of global GDP.
The same period saw many financial companies focus on essentially short-term financial activities - trading and speculating in shares, bonds, currencies and other assets - rather than providing investment capital for new and growing businesses.
These processes of financial sector growth - and the increasing use of financial metrics in other parts of the economy - are often described as the 'financialisation' of the economy.
In the UK the City of London and the wider financial sector employ over a million people and make a major contribution to the UK's trade balance. However some analysts argue that the financial sector has now become too large, acting as a drain on the rest of the economy rather than as a net asset. Critics of financialisation argue that the financial sector is now too much focused on extracting value from the economy and not enough on helping create it.
Prior to the pandemic, UK banks lent a smaller proportion of their total lending portfolio to businesses than did banks in other European countries, with a higher proportion going to housing and real estate mortgages. This has helped fuel the growth of house prices while doing little to develop the UK's productive base.
Although bank lending to small and medium sized enterprises (SMEs) has risen sharply during the Covid-19 crisis, it is widely believed that the underlying problem - the difficulty many businesses have in accessing affordable loans from banks - may return once the crisis is over.
A widespread criticism of the UK's financial system is that there is insufficient provision of 'patient capital' - long-term finance for innovation and business development - with too many financial institutions seeking short-term returns.
Reform proposals range from stronger credit guidance policies, to steer lending towards productive sectors, to the development of publicly-owned and other 'stakeholder' banks focused on financing innovation and business development.
Ensuring that banks hold enough capital to withstand a moderate crisis is a critical part of 'macroprudential' policy and was a key response to the 2008 crash.
In 2010 the Basel III regulatory reforms allowed regulators to require banks to increase capital held during financial upswings and reduce it during downturns.
Some argue that the time is right for loosening capital requirements to encourage financial institutions to keep lending, although there are warnings that this will increase the risk of a future crisis.
Leaving the EU means the UK needs to negotiate many new trade agreements – indeed the freedom to do so was one of the main arguments used in favour of Brexit.
Trade deals are no longer only, or even mainly, about reducing tariffs. They primarily focus now on reducing other ‘barriers to trade’, for example by aligning national regulations in areas such as product standards, professional qualifications and environmental protections.
Trade deal proposals are therefore often highly controversial, with many fearing they will lead to a lowering of existing standards and protections. The UK’s early discussions with the US around a post-Brexit deal were a case in point, with warnings that it would lead to the arrival of chlorinated chicken on UK shelves or the risk of further privatisation in the NHS.
One of the elements of trade agreements which has led to particular opposition is the widespread use of ‘Investor-State Dispute Settlement’ (ISDS). This is a mechanism under which a company from one signatory state investing in another can argue that new laws or regulations could negatively affect its expected profits or investment potential, and seek compensation in a binding (and often secret) arbitration tribunal. This effectively elevates the rights of corporations above a country’s democratic right to decide its own laws.
One of the reasons that gig workers have few rights is that it is very difficult to organise and bargain collectively when workers are dispersed and have a fragile relationship with their contracting company. However a number of trade unions have been organising gig economy workers and in some cases winning significant improvements in working conditions and workers’ rights.
The fundamental imbalance between the power of digital work platforms and the workers who use them has led some to call for ‘platform cooperatives’, in which the platforms would be owned by the workers themselves.
Automation is the process by which human work is substituted by machines or software programmes of different kinds. Automation has been occurring continuously since the beginning of the industrial revolution, and in general has been responsible for the overall rise in living standards in that time.
Automation is often associated with job loss, but economists point to the difference between its immediate impact on the jobs of those whose labour is substituted, and its effect in the wider economy. Historically, the increase in productivity brought by automation has tended to lead to higher income and employment in the economy as a whole. Some jobs of certain kinds are lost, but more are created.
Today there are widespread fears that a new wave of technologies, particularly those associated with artificial intelligence (AI), may lead to mass unemployment over the coming years.
Sceptics argue that jobs will certainly change with AI, and are already doing so, but there is no reason to believe that the historical pattern of higher overall employment will not continue. Some do however argue that new technologies could worsen job quality for many people and could exacerbate overall inequality, both between highly-skilled groups of workers and others, and between workers and the owners of the capital.
Proposals for policy responses to automation and AI vary according to the analysis of their impacts. Most speak to the need to 'manage' the process of automation to ensure that its benefits are better shared. This could be through workplace bargaining, higher taxation, or widening the ownership of firms. Those who believe that automation may lead to large-scale unemployment propose the development of institutions that either better share available work (such as through shorter working time) or provide non-work-based income such as a Universal Basic Income (see above).
The Covid-19 pandemic has exposed the large number of jobs in the UK economy which are highly insecure. 5 million people are self-employed, a status which includes many who work on contracts for a single company. Over 900,000 people now work on ‘zero hours contracts’ under which they have no fixed working hours.
Altogether it is estimated that 3.6 million people are in various forms of insecure work, including agency, casual and seasonal workers and the self-employed earning less than the minimum wage. Research suggests that nearly 1 in 10 workers in the UK do ‘platform work’ via an app at least once a week, with nearly two-thirds of those under the age of 35. Many such ‘gig workers’ were among the first to lose their jobs as the economy closed down in the pandemic. But it is estimated that over 1.5 million self-employed people were unable to get government support.
‘Gig economy’ jobs can provide welcome flexibility. But many come with very low pay, and by definition a high degree of insecurity which makes normal household budget planning very difficult. They tend to have few employment rights, such as paid holidays, sickness pay, and protection against unfair dismissal. And it is difficult for gig economy workers to organise collectively, for example through trade unions.
A key route to improving the conditions of gig economy and other insecure workers is to extend to them some or all of the labour rights and protections covering employees and other workers. This was the broad approach taken by the 2017 Taylor Review of Modern Working Practices, which has been partially acted upon by the government. But it was widely criticised for not going far enough.
One idea gaining traction is that of ‘portable benefits’. Attached to the employee and not the employer, a portable benefits account would allow workers and employers – and potentially the government – to pay into services such as sick leave, pension contributions, maternity leave and health insurance.
There is nothing inherently fixed about the standard working week of 9-5 Mondays to Fridays. ‘Normal’ work hours have changed over time, with the weekend and bank holidays as we know them today being the products of campaigning by workers and trade unions in the past.
Reducing working hours has been a longstanding proposal to improve working life and the balance between work, leisure and important unpaid activity such as care.
Supporters note that as productivity rises it is possible to take the gains as increased leisure time rather than income. This would have the additional benefit of spreading the available work more widely. Some advocates argue that it could even help increase productivity, as employees may work harder in their reduced hours.
Some supporters of reduced working time today are proposing a four-day standard working week. Others argue for a reduction in hours per day, which might suit working parents better. Others propose an increase in the number of bank and public holidays.
Critics of working time reductions argue that they would be expensive - even when productivity is rising in some sectors, it is not in all.
A key issue for proponents of reduced working hours is whether this would be accompanied by a proportionate reduction in pay. Workers in many countries (including the UK) already have the right to ask for shorter and more flexible hours, but this is very difficult for those on low wages. A key feature of many shorter working time proposals is therefore that this should not be accompanied by a reduction in pay, especially for low earners. This would increase its cost.
Since the 1970s, in common with many other countries, the UK has seen a declining share of national income go to wages and salaries and a rising proportion returned to the owners of capital and assets. This period has coincided with a dramatic fall in trade union membership.
Many economists argue that the two are closely connected. Through collective bargaining, trade unions are able to raise workers’ wages and to improve their working conditions. Where unions are absent, employers have greater relative power.
This recognition has led to calls for a revival of trade unionism and of collective bargaining. In a more fragmented workforce where many workers are now self-employed or on precarious contracts this is difficult, but many trade unions have been finding ways to organise insecure workers.
Proposals for Universal Basic Services take the principles underlying the NHS - the universal provision of healthcare, free at the point of need - and argue these should be applied to a wider range of public services, such as transport, shelter, food and information (e.g. Internet access).
UBS is often contrasted to UBI (above). While the two proposals are not diametrically opposed, the difference in focus leaves room for disagreement. Some UBS supporters argue, for instance, that the best way to spend our resources and political capital in ensuring people’s core needs are met is in the radical expansion of public services, and that unconditional cash transfers would not achieve the same uplift in living standards.
Conversely, while many progressive proponents of UBI support wider and improved provision of public services - e.g. health, social care, education, information - they take issue with some proposed universal basic services (e.g. food provision) and argue that cash transfers are a more efficient, less paternalistic route to ensuring some basic needs are met.
The proposal for a Universal Basic Income (UBI) is that all adults should receive a regular cash payment without means-testing or a requirement to work.
Supporters of UBI argue that it would simplify the social security system, reducing the bureaucracy, intrusiveness and stigma associated with claiming means-tested and conditional benefits. It would recognise and reward valuable unpaid work (such as care work and voluntary work) and would force up the quality and pay of currently low-paid jobs in order to make them attractive enough for people to do. Supporters often argue that automation will make full employment impossible, so a UBI would ensure everyone had at least a subsistence income.
Critics of UBI question the administrative cost of providing payments to every adult citizen. The government revenue needed to provide such payments would be substantial, requiring higher taxes; many recipients would effectively have the entire benefit taxed back. There would still need to be other benefits (possibly means-tested) for children and special needs such as disability. A UBI, critics argue, might also reduce incentives to work.
There are significant differences between various UBI proposals, for example concerning the size of the payment and the extent to which it would replace existing social security benefits. There are no examples of UBI being implemented at a national state level, but a number of trials and experiments are currently under way in different parts of the world.
The Covid-19 pandemic caused the deepest recession in modern economic history. As lockdowns and other measures to protect public health were introduced, consumption and production slumped and unemployment rose. In the UK the fall in economic output was among the largest in the world, with GDP (Gross Domestic Product) declining by 9.8% in 2020, estimated to be the steepest fall in three hundred years.
Government support measures have kept many businesses going and the job furlough scheme at its height was keeping nearly 9 million workers in employment. But many firms have already gone out of business, and when the furlough scheme comes to an end unemployment is projected to rise to 2.2 million people, or 6.5% of the labour force.
The economic crisis has not affected everyone equally. Workers on insecure employment contracts saw their jobs go first, while many others on low incomes who cannot work from home have been required to continue working in often risky workplaces. Those on good incomes have been able to save. But many of the least well off have seen their debts increase. Many people have been pushed into poverty. Women, young people and those from black and ethnic minority groups are disproportionately represented among those whose living standards have been hit.
The two main provisions for children in the social security system are Child Benefit and the child element of Universal Credit (or child tax credits in the legacy benefits system). Child Benefit is provided for all children, although there is a reduced effective rate for children after the eldest, and for families with one or more higher income earners (over £50,000 p.a.).
Means-tested support for families through Universal Credit or child tax credits is largely limited to two children. This aspect of child support has faced particular criticism for penalising children born into larger families. Nearly half (47%) of children in families with three or more children live in poverty.
Overall there were around 3.4 million children living in poverty in 2019-20. Nearly half (46%) of all children from black and minority ethnic groups are in poverty, compared with a quarter (26%) of children in white British families. 75% of children growing up in poverty live in a household where at least one person works.
Good affordable childcare enables parents to work and provides early years learning. But only a little over half (57%) of local authorities in England have enough childcare places for parents who work full-time, and less than a quarter (22%) have sufficient for those who work atypical hours.
The introduction of Universal Credit in 2013 replaced a number of separate working-age benefit schemes. The stated aim was to simplify the system and to avoid a 'cliff edge' whereby recipients would lose money if they found work - 'making work pay' and smoothing moves in and out of the labour market.
Since then, Universal Credit has been widely criticised, both before and during the pandemic. Targets for criticism include its bureaucracy, its low rates, the 'two child' limit for child support, the delay in receiving the first payment, the harsh nature of its sanctions, and the distribution of benefits at a household, not individual, level - which increases the risk of financial abuse, especially for women.
While some argue for reforms to Universal Credit to address these issues, others call for it to be scrapped altogether due to objections to its core principles (e.g. conditionality and means-testing). One far-reaching reform would be the establishment of a 'Minimum Income Guarantee' - which would set a ‘living income’ floor below which no household would fall and could be implemented within the Universal Credit system.
NB Some households are still on the ‘legacy’ system of benefits. The Government expects all households to have ‘migrated’ to Universal Credit by September 2024.
The multiple drivers of income and wealth inequality mean that many different kinds of policies and approaches are needed to reduce them. One of the core features of the growth of inequality in most high-income countries since the 1970s is the significant fall in the proportion of national income which has gone to wages and salaries (the 'labour share') and the corresponding rise in the proportion which has gone to the owners of capital assets (such as company shares and land and property). This suggests that policy needs to focus, on the one hand, on raising the productivity of labour and the bargaining power of workers; and on the other on reducing the rate at which assets appreciate in value. Both kinds of approach would reduce the growth of 'market' income and wealth, before tax. Reforms to the tax system and welfare measures can then further reduce inequality.
In recent years the growth of low-paid and insecure jobs has led many to argue that there needs to be a revival of the role of trade unions in the labour market, able to bargain collectively on behalf of workers and employees. There is a strong correlation between the decline of union membership in most high-income countries since the 1970s and the rise of income inequality. Productivity improvement - for example through automation - will enhance wages, but only if the benefits are shared between workers and the owners of the automating technologies and software.
Over recent decades there has been an increasing concentration in the ownership of company shares, and the values of stocks and real estate have grown substantially faster than national income (GDP). Companies have become more 'financialised', using more of their profits for dividends and less for investment, and and banks (particularly in the UK and US) have lent increasing sums for land and property. Various proposals have been made to counter these trends, including stronger financial regulation, higher taxation of financial companies and transactions and new forms of corporate governance. There have also been proposals to widen the ownership of company shares, both to their workers and the population as a whole.
Wealth is far more unevenly distributed than income. In 2016-2018 the wealthiest 12% of households owned half of the UK's wealth, while the least wealthy 30% of households held just 2%. The poorest tenth of the households have negative wealth: that is, their debts exceed their assets. Measured by the Gini coefficient, wealth inequality has increased since 2006-8, with financial and property wealth showing the largest rise.
Pension wealth has become more equal in this period, as automatic pension enrolment has been rolled out. The rise in property values has led to a sharp increase in intergenerational inequality. For the most part, income and wealth are closely linked, with high incomes allowing people to accumulate assets, which have consistently grown faster in value than national income over recent decades. The poorest households most exposed to income shocks often have no savings to fall back on.
One consequence is the increase in low income households turning to debt to cover essential needs - rent, food, utility bills - over the past decade, and the increasing use of food banks.
The disruption caused by the pandemic has exposed serious issues in the UK's labour market and social security system.
As more people have had to rely on the social safety net, Covid-19 has drawn attention to its shortfalls - particularly in relation to Universal Credit and statutory sick pay. At the same time the unequal impact of the pandemic has shone a light on sharp inequalities within the labour market, in terms not just of income, but of precarity, flexibility, and exposure to risk. Some people have found new freedoms in being able to work from home; others have been made redundant and then re-hired on worse pay and conditions.
Calls for reform of the welfare system range from proposals to increase the amounts paid by Universal Credit and other benefits to more radical ideas such as a minimum guaranteed income or an unconditional 'Universal Basic Income'. Reform of employment law is often suggested to give self-employed and casual workers more rights, while an increasing number of voices argue that trade unions should be given greater access to workers to organise collective bargaining over wages and conditions.
For information on job and income protection and job creation during and after the pandemic, see our 'Stimulating economic recovery' pages. For more on inequality, see our 'Driving down inequalities' pages.
In the decade before the pandemic, public sector pay fell behind the rising cost of living, so that on average in real terms the UK's 5.5 million public sector workers earned £900 less per year in 2020 than they did in 2010. Some workers have seen particularly sharp falls in real-terms pay, including teachers (£1349), local government residential care workers (almost £1900), firefighters (£2500) and early career nurses (over £3000).
In this context, the Government’s decision in November 2020 to freeze pay levels for most public sector workers has attracted criticism. Many argue that it undervalues the work of millions of 'key workers' who have already seen a decade of declining pay. Many economists have questioned the wisdom of cutting wages while simultaneously trying to stimulate economic recovery. Public sector pay restraint will also exacerbate inequalities, as women, members of ethnic minorities and those living in poorer regions of the UK are disproportionately likely to work in the public sector.
The wider issue is about maintaining public sector capacity and the quality of public services. Low and declining pay makes it harder to recruit and retain high quality public service workers.
A string of well-publicised failures and allegations of 'cronyism' (such as in test-and-trace and other Covid-related procurement) has brought attention to the government’s procurement practices and its use of 'outsourcing' to provide public services.
In the decades prior to the pandemic, the UK had come increasingly to rely on private providers to deliver many public services. Originally motivated by a belief that putting public services out to tender would generate competition and therefore improve efficiency and value for money, the evidence in practice has been mixed, with many questioning whether the profit motive leads corners to be cut and service quality to deteriorate.
As the use of outsourcing has increased, the capacity of the public sector to deliver services ‘in house’ has declined, often leaving authorities with little option but to look to private providers. But so far from increasing competition, a very large proportion of major government contracts go to a very small number of firms which specialise in winning such contracts.
This has led to growing calls for a reassessment of procurement practices and for a return to 'insourcing' (direct service provision) by public authorities.
In the decade before the pandemic, public services saw the longest sustained reduction in public spending on record. In 2019-20 day-to-day spending per person on public services was 7% lower in real terms than a decade before. Outside of health, real-terms public service spending was cut by 20% (25% per person).
Even without any change in policy, the UK's ageing population will require higher spending on health and social care and other services to maintain service quality. There are also widespread demands for better services and higher spending in areas such as schools and further education, childcare, public transport, policing, justice and legal aid and local services such as libraries and youth provision.
The UK spends less on public services (including social security and defence) than most other higher income (OECD) countries. The UK also raises less in tax as a proportion of national income than most others, though government plans are for this to rise in the next few years.
A higher level of spending on public services could be supported by an increase in borrowing (see our pages on 'Stimulating economic recovery'), but a sustained increase is likely to require a higher overall level of taxation. This could be achieved by raising the rates of existing taxes, or by tax reforms which sought to raise more revenue from other sources, such as from asset wealth or multinational companies. Our pages on taxation provide more information.
Over the past 18 months there has been an outpouring of appreciation for NHS staff, carers and other workers delivering key public services under extraordinary strain. Yet at the same time the pandemic has exposed a lack of resilience within many of these services.
It is now widely recognised that the task beyond Covid-19 is to rebuild public services so they are better equipped to handle future challenges: both acute shocks, such as another pandemic, and chronic pressures such as the ageing population. Public services will also play a crucial role in achieving long-term national goals, such as decarbonisation and reducing regional inequality. Other insights from the experience of Covid-19, such as the importance of digital access and data governance, could also inform future public service provision.
Even before Covid many public services were under severe pressure, particularly at local level. A decade of major reductions in public spending had been accompanied by other important trends in service provision, such as outsourcing. At the same time a measure of devolution to city regions had created opportunities for innovation and more integrated service provision.
There are close relationships between public services and the social security or welfare systems. See also our Improving work and welfare pages.
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.
So far most governments have focused their economic policies during the pandemic on keeping businesses alive and workers in jobs, and supporting household incomes.
As social restrictions have been eased and economies opened up again, there has been a sharp recovery in GDP. Consumer spending has risen, particularly in areas where there is pent-up demand such as hospitality and leisure activities. But the loss of many businesses during the crisis, and much higher levels of unemployment, mean that a full-scale recovery will not occur quickly. Although the growth rate is temporarily high, the level of output - national income - remains below pre-pandemic levels, and permanent damage is likely to have occurred.
There remains therefore a strong case for further fiscal stimulus measures to boost economic output and bring unemployment down. Both the OECD and the IMF have urged governments not to return to austerity. They note that with interest rates already near zero, there is little more that monetary policy can do.
An expansionary fiscal policy is needed, they argue, to create demand and boost investment, and thereby to create new jobs. Where interest rates are very low, they note, the ‘multipliers’ from government spending (the mechanism by which spending expands throughout the economy) are particularly strong.
The wide disparities in the distribution of wealth have led to an emerging consensus that the way in which wealth is taxed needs to be reformed. While wealth has soared relative to incomes over recent decades, with these gains concentrated very narrowly among high-income households, the tax take from wealth has remained flat.
Property wealth constitutes an important part of this. House prices in the UK have tripled relative to incomes since the 1970s, a key driver of economic inequality. But soaring property values have been left largely untaxed, with a council tax system still based on 1991 property values. Economists point out that land and property taxation is an efficient mechanism since they are fixed and their rise in value often occurs without any work, effort or skill on the homeowners’ part.
Income from wealth , including dividends and capital gains, is currently taxed at lower rates than income from work, one reason why the very wealthy pay a much lower effective average rate of tax on their remuneration. The system of inheritance tax includes a range of reliefs and exemptions, which can allow the wealthiest estates to avoid it: the effective rate of inheritance tax paid on estates valued at over £10 million is half that paid on those with a value of £2-3 million. Tax avoidance schemes also allow the very wealthiest to circumvent tax. Among the wealthiest 0.01% of household, who hold 5% of national wealth, approximately 30-40% of wealth is held offshore.
Proposals for tax reform include equalising the rates of tax on income from wealth and income from work; reforming land and property taxation; reforming inheritance tax; and proposals for annual or one-off taxation of household wealth.
The UK has one of the highest levels of income inequality in Europe. There was a sharp increase in all measures of economic inequality over the course of the 1980s. Measured by the commonly-used Gini coefficient, relative income inequality has stayed largely flat since 2000. But this means that the real income gap between richer and poorer households has been increasing in absolute terms.
Other measures of income inequality show a continuing rise over the same period. Between 2003-4 and 2018-19, the poorest 20% of non-pensioner households saw no overall rise in their incomes at all, while the incomes of the richest tenth and of the median (typical) household grew around 15%. The poorest fifth did see their incomes rise in 2019-20, but this will almost certainly have been reversed in 2020-21. In this period pensioner poverty has fallen, though it rose to just under a fifth (18%) in 2019-20, while the proportion of children living in poverty has increased to nearly a third (31%).
The Gini coefficient also hides the accelerating incomes of the richest 1%, who now take almost 14% of all national income, compared to around 7% in 1981.
The UK has one of the highest levels of income inequality in Europe, with a sharp and sustained increase in all measures of economic inequality over the course of the 1980s. According to the Gini Coefficient, income inequality has stayed relatively flat since 2000, but other measures tell a different story.
The income gaps between richer and poorer households have been increasing in absolute terms, even if measures of relative inequality have remained stable. You can measure relative inequality itself in different ways. If we focus on the poorest 20% of households, for example, we see that incomes for this group are now no higher than they were 15 years ago, while the average household has seen its income rise 9% over this period.
The Gini coefficient hides the "runaway rise" of the richest 1%, who now take 8% of all national income (compared to 3% in 1970 and 6% in 1990). Changing the way we measure income, by factoring in housing costs or income from capital gains or inheritance, can reveal a widening disparity even over the past decade.
Wealth is far more unevenly distributed than income. From 2016 to 2018, the wealthiest 12% of households owned half of the UK�۪s wealth, while the least wealthy 30% of households held 2%. In the past decade, the wealth gap has increased. The wealthiest 10% hold �2.5m more in wealth per household than the least wealthy, a significant increase from the �1.5m gap in 2006 to 2008.
For the most part, income and wealth are tightly linked, meaning that the households most exposed to income shocks often do not have savings to fall back on. This goes some way to explain the increase in low income households turning to debt to cover essential needs - rent, food, utility bills - over the past decade.
An argument widely made by those seeking to address racial inequalities is that policy is typically made without any assessment of the impact on different ethnic groups, and therefore without specific plans to counter racial inequality. This was a particular criticism of the UK government in relation to Covid-19, given the disproportionate vulnerability of BME groups. Equality impact assessments of policy when it is being made are now widely advocated.
There are now widespread calls for mandatory ethnic pay gap reporting for larger firms, in the same way as gender pay gap reporting.
Research on tackling racial inequalities shows the importance of mandated targets and positive action within equality law, the de-biasing of recruitment and progression processes, mentoring and leadership programmes, diversity and unconscious bias training, and the adoption of explicitly anti-racist and action-oriented approaches to organisational culture. Adoption of the ‘Rooney rule’, under which at least one BME candidate is required to be shortlisted for job vacancies (originally introduced in the US National Football League) is often advocated.
By using social value criteria in procurement processes (requiring high quality practices from suppliers and contractors), governments and public bodies can mandate action on racial equality, including on low pay. Overall, however, more fundamental economic change is likely to be needed if the legacy of historic and structural discrimination is to be eliminated.
The impacts of the Covid-19 pandemic and economic shutdowns have not been evenly experienced. The evidence shows that the effects have largely played out along existing lines of inequality. In the UK people living in the most deprived areas and on the lowest incomes, and those from black and minority ethnic (BME) communities, have been both most likely to die from the disease and most likely to lose their jobs and to face serious financial pressure.
Globally Covid has also been experienced in very uneven ways. Varying national responses to the virus have made a big difference, but within most countries it has been those on the lowest incomes who have experienced the most severe effects, and internationally countries with the poorest health systems.
The extremely unequal distribution of vaccines has exacerbated the crisis, with much slower rates of vaccination between richer and poorer countries. Vaccination rates will largely determine how quickly countries recover economically from the pandemic.
The pandemic has put poorer households under great financial strain. On average, low and high income households have seen similar proportionate falls in income - but this does not mean that the pain has been equally shared. While richer households can cut back on non-essential spending and fall back on their savings, poorer households are unable to do so. Over half of adults in the poorest 20% of families have had to borrow to fund basic costs such as food or housing.
Unless action is taken, the unequal economic impact of Covid-19 will be felt well into the future. Job losses have been concentrated in the poorest households, threatening a longer-term divergence in employment chances. Many of the richest households have been able to build up their savings over the course of the crisis, further widening the gap between them and the increasingly economically insecure poor. They will use these increased savings to buy assets. Even as the economy has tanked, asset markets have remained reasonably buoyant. This divergence can in part be explained by the wealth gap because the asset-owning class has been least affected by the crisis and in part because of policy decisions that protect financial markets, even at the expense of the real economy.
Poorer households have also seen far worse health outcomes than the well-off. In part, this is because they are less likely to be able to work from home and are therefore more exposed to the virus. It is no small irony that the UK’s “key workers” earn, on average, 8% less than the median wage, reflecting in part the freeze on public sector pay under austerity and persistently low pay in sectors such as social care. At the same time, the UK’s high levels of economic inequality have given rise to wide health inequalities, which the Marmot Review found to have widened since 2010. One consequence of this is that the Covid-19 death rate in the most deprived parts of the country is double that of the most well-off.
Women in full-time employment in the UK are paid 7% less on average per hour than their male counterparts. Among employees as a whole, women earn on average 15% less than men per hour. This is largely because women are over-represented in part-time employment, which is less well paid.
One factor behind the gender pay gap is illegal pay discrimination - unequal pay for equal work. Another is the uneven burden of unpaid care work. A key issue is the 'maternity penalty', the economic cost to mothers of taking on more unpaid child-rearing than men, which slows their career progression and leads many women to take on more flexible, less senior and less well-paid roles. Encouraging men to take on more childcare, for example by increasing paternity leave, could help redress this imbalance.
The introduction of mandatory gender pay gap reporting in large employers has generally been recognised as incentivising pay equality. But the pay gap is proportionately much greater among higher-paid jobs than lower-paid, a consequence of the fact that in many sectors senior positions are still dominated by men.
Social infrastructure is the term now commonly given to those sectors of the economy - health, education, adult social care and childcare - which are critical for its effective functioning but which are often neglected in both economic theory and policy. Spending on social systems is rarely classed as ‘investment’, despite the investment-like returns in these areas. It can be argued that this reflects a gender bias in economic policy making.
The majority of jobs in social infrastructure sectors are held by women, and many of them by people of colour. Pay is often very low. Investment in these sectors could therefore help to reduce both gender and racial inequalities. Social infrastructure sectors are also 'green', using less energy and material resources than many other sectors, particularly physical infrastructure.
Improved access to affordable childcare is a critical part of social infrastructure provision, giving parents, particularly women, the ability to take up and stay in paid work.
The pandemic has sharpened the pre-existing economic disparity between men and women. Women are more likely to have lost work and income. They are more likely to work in low-paid, insecure frontline roles. In many of the sectors that have suffered most - retail, hospitality, tourism - women are over-represented.
During the pandemic women have continued to do more unpaid domestic and care work than men. During school closures, for instance, 70% of mothers reported being completely or mostly responsible for homeschooling, and mothers were 50% more likely to be interrupted during paid work hours. Covid disproportionately affected women’s mental health.
Covid lockdowns also sharply increased the incidence of domestic violence. Low income and migrant status both significantly increase women’s vulnerability to domestic abuse, underlining the need for policymakers to understand how gender intersects with other axes of inequality.
Under the Public Sector Equality Duty, public bodies are required to have 'due regard' to gender and other types of equality. Many organisations concerned with equalities argue that this requires public bodies to undertake equality impact assessments (EIAs) to ensure that policy does not discriminate against women, ethnic minorities and other groups protected under the 2010 Equality Act.
Many economists have argued that assessments of policy from government, as well as the media, should be based on a broader account of economic and social progress. This means targeting the reduction of inequalities as well as focussing on GDP growth. 'Gender budgeting', analysing government spending and tax decisions in terms of their impact on women, is one such approach.
It is generally acknowledged that social care services in the UK have suffered from a long period of political neglect, and entered the Covid-19 pandemic in a fragmented, under-funded and under-staffed condition. There is widespread consensus on the need for reform to make the care system more resilient, expanding access to and increasing the quality of services.
Investing in public care services would make a significant contribution to tackling gender inequality. Greater public care provision could relieve the burden on unpaid carers, the majority of whom are women. As 80% of the adult social care workforce are also women, action to tackle recruitment and retention challenges in the sector would so much to improve pay and conditions.
There is evidence of majority public support for extending the principles underlying the NHS to social care, making it free at the point of need and largely taxpayer-funded.
Over recent decades, as most of the UK's social care provision was outsourced from the public sector, private equity companies have taken over a significant proportion of care homes. It is widely argued that the 'financialisation' of care provision has undermined the quality of service.
People born outside the UK make up an estimated 14% of the UK’s population, or 9.5 million people, and just over half of BME residents of the UK were born overseas. Tackling racial inequality is therefore closely connected to improving the economic position of migrants to the UK. Discriminatory practices can particularly affect migrants, and public attitudes to immigration have impacts on the wider BME community.
Covid-19 has highlighted both the positive contribution migrants make to society and the challenges they face. Migrants are disproportionately likely to work in 'key worker' jobs. Notably, around 20% of care workers are foreign nationals, the majority from outside the EU. Many of these roles are low paid.
Migrants often have restricted access to public services and financial support. Many effectively pay twice for NHS care, required to pay an NHS surcharge as well as their taxes. They face significant barriers to care despite their disproportionate contribution to the UK's health and care systems.
Black and minority ethnic (BME) residents of the UK have been disproportionately affected by the pandemic in two distinct ways. First, they have suffered worse health outcomes, with people of colour both more likely to contract the virus and less likely to survive it than white people. Public Health England has highlighted how pre-existing inequalities, including the impact of racism and discrimination, have contributed to these unequal health outcomes. BME people are also more likely to work in frontline, 'key worker' roles where they have been more exposed to the virus.
Second, long-standing economic inequalities between white and BME Britons, a product of structural and historical factors, have been exacerbated by the effects of the economic downturn. People from ethnic minority groups have been more likely to lose their jobs and to experience problem debt as a result of Covid-19. Ethnic minority households on average have far less wealth than white households with which to weather economic hardship.
The UK is more geographically unequal than any other comparable advanced economy. This regional inequality exists across output, income, productivity, employment, and political power.
The UK has long suffered from regional health inequalities. Even before Covid-19 people in the most deprived areas could expect to live 19 fewer years in good health than those in the richest parts of the country. The death rate from Covid-19 in the UK’s poorest regions was over double the rate in the wealthiest.
The economic fallout of Covid-19 could increase regional inequalities, with London and the Southeast experiencing smaller reductions in hours worked during the pandemic. But the increase in working from home, if continued, could benefit smaller towns, and rural and coastal areas, if firms and employees realise they do not need to be located in major cities.
As governments around the world are urged to ‘build back better’, a major focus has been to ensure that their economic recovery packages support environmental objectives. The language varies slightly – green, sustainable, resilient, ‘green and fair’, ‘green and just’, decarbonisation – but the core idea is consistent.
This is that governments should invest and create jobs in sectors and activities which align with long-term greenhouse gas emission goals (notably ‘net zero’ by 2050 or before), improve resilience to climate impacts, slow biodiversity loss, reduce pollution and increase the circularity of resource use.
Analysis of spending programmes of this sort – including those implemented after the financial crash in 2008 – show that green spending tends to have high job creation potential, which can often be geared towards economically disadvantaged people and areas. Many green projects can be delivered relatively quickly.
The ownership of UK firms is highly concentrated. Apart from institutional investors such as pension funds, individual share ownership is dominated by the wealthy, many of whom are based overseas. Since the 1980s successive governments have privatised previously public-owned industries such as rail, water and energy. Few workers hold shares in the firms in which they work and the UK cooperative sector is smaller than in many other countries.
Over recent years there has been increasing interest in how ownership can be widened. One way is through nationalisation, in which the state would take equity stakes in companies in major sectors, such as energy or rail. Another is by giving ownership stakes in companies to their workers. This can be done either through individual or collective employee share ownership schemes.
A particular proposal is for democratic ownership funds, in which firms above a particular size would be required to transfer ownership of a percentage of their equity to funds managed by representatives of their workers. This would widen the distribution of profits and, in the process, give workers a say over how the firm is run.
The idea of widening ownership can also be applied to other assets. For example, in online transactions consumers provide large amounts of personal data for free. This data has considerable commercial value to the firms who collect it. Proposals to reform the regulation of digital companies include making ownership of data a common resource of benefit to the community or requiring private companies to make data publicly available.
Corporate governance in the UK is strongly shaped by the principle of shareholder primacy. This means that the interests of shareholders take priority over those of other stakeholders in a firm, such as workers, suppliers or consumers. There is strong evidence that this encourages an excessive focus on short-term profitability, at the expense of long-term investment.
It is often argued that the UK’s model of corporate governance should better reflect the wider interests of a company’s stakeholders, not just its shareholders. Proposed reforms include giving firms an explicit duty to pursue long-term purpose or value creation, and to tie executive pay to a range of metrics rather than just a firm's profitability or share price.
A particular focus for reform is the make-up of company boards. Advocates of worker representation on company boards - which is commonplace in many European countries - argue that it would tend to strengthen investment, because workers have a longer-term interest in their companies than short-term shareholders. By fostering a culture of cooperation between managers and workers, it would also boost productivity. There are also widespread calls for mandatory improvement in the gender and racial diversity of company boards.
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.
There is a growing awareness of the role the state plays in driving innovation and how industrial policy can foster sustainable economic development.
In the past UK governments have been dismissive of active industrial policies on the grounds that the market was better at determining where capital can be used most productively. But the UK's poor record of research and development, and of investment outside London and the Southeast, has prompted calls for a greater role for the state in steering investment towards economic, social and environmental objectives.
By making strategic investments in particular sectors, such as green industries, an active industrial strategy can kick-start the development and take-up of new technologies, develop new markets for UK companies, trigger greater private sector investment, and tackle major environmental challenges.
A key feature of many economies with a tradition of strong industrial strategy is the presence of state-owned investment banks, with Germany’s KfW often cited as a leading example. This has led to calls for the establishment of a UK national investment bank, to help drive higher investment into innovative firms.
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 UK faced multiple economic challenges even before the onset of the Covid-19 pandemic.
Business investment as a proportion of national income is the lowest in the G7, which helps explain the country’s poor productivity performance. The UK’s manufacturing sector is now under 10% of GDP, contributing to a large structural trade deficit. The UK has some of the largest income and regional inequalities in Europe.
The UK has also become a highly financialised economy, in which the financial sector's growth has outpaced the rest of the economy in recent decades.
One of the arguments often made is that investment and innovation are discouraged by the UK's system of corporate governance, in which the short-term interests of shareholders tend to take precedence over those of other stakeholders. Coupled with low levels of public investment, this has undermined long-term wealth creation in the economy.
Britain has had a relatively good record of jobs creation. But many of those created are low-wage and low-skill. Many workers are now on temporary, part-time or zero-hours contracts with fewer rights and benefits than full-time employees.
Cheap labour and flexible labour markets can discourage firms from making the investments in training or equipment needed to raise productivity. Both the decline of trade union membership and the casualisation of work have undercut workers' bargaining power. One result is the near-stagnation of average real wages since the 2008 financial crisis.
With unemployment likely to rise when the furlough scheme is ended, many organisations have urged the government to introduce a further fiscal stimulus package to create jobs and meet pressing social needs.
Many of these argue for higher government spending on infrastructure, particularly on ‘green’ and low-carbon projects. Since physical infrastructure spending tends to lead to male employment, others have argued for an equal emphasis on ‘social infrastructure’: sectors such as health, education, social care and childcare which are also necessary for the economy to function and have high levels of female and black and minority ethnic employment.
Increasing the minimum wage, giving public sector workers (especially key workers) a pay rise, and raising benefit levels, would all mitigate the unequal impacts of the pandemic and give a boost to consumer demand.
The government’s youth employment scheme, Kickstart, supports 6-month job placements for those aged 16-24. With youth unemployment known to have a long-term scarring effect on life chances, some have argued that this should be much more ambitious, with a stronger emphasis on skills training.
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.
To keep businesses running and people in jobs during the Covid-19 crisis, the UK government established a number of emergency measures.These include the Job Retention Scheme, which supports companies to put workers on furlough rather than lose their jobs; a support scheme for the self-employed; and loan schemes for various sizes of business.
Specific measures and funding were provided for badly affected sectors, such as hospitality and the performing arts. At the same time the government temporarily increased the rate of Universal Credit and Working Tax Credits paid to those on low incomes.
These measures have supported many businesses and households. But there have been a number of criticisms. In January 2021 over 1.5 million self-employed people were estimated not to qualify for support because less than half their incomes came from self-employment or they had not been self-employed long enough.
The government’s business loan schemes have been criticised for favouring landlords, who in many cases continued to be paid rent in full while their tenants had to take out emergency loans. Meanwhile the significant increase in poverty caused by the pandemic has led to a widespread call for permanent increases in Universal Credit and child support levels.
As the UK embarks on agreeing new trade agreements, there are increasing calls for such deals to be designed around clear principles of public interest, not simply on increasing the volume of trade as an end in itself. Many for example argue that trade deals should be used to protect and enhance labour and environmental standards, rather than to reduce them.
With the final Brexit deal rushed through Parliament at the last minute, there have been calls for MPs to have a much stronger scrutiny role in future, and for trade unions to be involved in agreement design where labour standards are at stake. More widely there are calls for the World Trade Organisation to be reformed to focus on major global challenges and greater accountability.
'Community wealth building' is an approach to local economic development which seeks to retain as much wealth and economic activity as possible within a local area, and place local assets and democratic control in the hands of local people. It aims to promote more resilient local economies and local job creation.
Core to this idea is harnessing the spending power of local 'anchor' institutions, such as local authorities, hospitals and universities. By using their procurement budgets to buy wherever possible from local small and medium sized businesses, such institutions can support local economic and civic renewal and retain wealth and jobs within the community. At the same time the local authority can support the development and financing of such businesses.
Many community wealth building initiatives are particularly focused on socially-owned enterprises such as cooperatives and community businesses. The best-known application of the model in the UK is the city of Preston, where the city council has transformed local models of procurement and quadrupled the local spend of its anchor institutions.
A healthy natural world is a necessary precondition for healthy societies. Hunger cannot be kept at bay without fertile soil, long term economic planning is impossible in a world of persistent catastrophic storms. In many ways, the fundamental benefits of nature to our economies is not included in how markets and governments value economic decision-making.
Natural capital, a concept that underpins the Government’s 25 year plan for the environment, seeks to calculate the value of those bits of nature that are typically seen as being free. The idea is that putting a figure on the value of nature will lead to better decisions by government and in markets. Some reject this idea, questioning how a value can be put on the aesthetic beauty of a river or on the value of the global nitrogen cycle.
Even before Covid-19 there were calls for governments to write off some or all of mounting personal debt, on grounds of social justice and the impacts of debt on the poorest in society.
Some governments have now taken measures to guarantee existing or new corporate and/or personal borrowing to prevent defaults. There are two main drawbacks: firstly, the guaranteeing of loans transfers risk from private banks to the state without imposing costs on the former. Secondly, it can create moral hazard by failing to differentiate between more and less creditworthy borrowers. Guaranteeing borrowing may be a less effective measure than other approaches, such as converting corporate loans to equity.
The flip side of reducing debt is to increase incomes. Many governments have already introduced such measures temporarily – for example, the UK’s coronavirus furlough scheme. More broadly, campaigns and proposals for a universal basic income or similar argue for a permanent floor on incomes. One key issue with income support is that unless high outgoings are reduced, much of it will accrue in practice to banks, landlords and other rentiers.
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.
Covid-19 vaccination programmes in most low-income countries have been proceeding much more slowly than in richer countries. This is both because of lack of finance, and because most of the available supply has been bought by the global North. It is generally accepted that the pandemic will only end when almost everyone in the world is vaccinated, since without this there will be a high risk of new variants being transmitted across borders. Universal vaccination will also hasten global economic recovery. But in practice ‘vaccine nationalism’ has so far dominated.
Many proposals for reform focus on the dominant private sector-led model of vaccine development and supply, which it is argued puts profit and the retention of intellectual property rights ahead of meeting human need. New international frameworks for financing and developing vaccines, medicines and health services in the global South have been proposed.
There are few quick fixes for reducing zoonotic transmission of diseases. The causes are linked with the wider impacts of human activity on the natural world. Major global health bodies are calling for a One Health approach, with public health investment being based on the intrinsic connection between the health of people, plant and animals.
A range of policy ideas flow from this agenda. Improving food security, particularly in low-income nations, could stop international markets encouraging environmentally destructive food production.
There are growing calls for companies to do more to prevent deforestation and biodiversity loss. Reducing demand for meat and dairy products could also drastically reduce destruction of nature and improve health globally.
At the same time as neoclassically-based economics has been criticised for its influence over orthodox economic policy, its central role in the teaching of economics has also come under scrutiny.
Complaining that traditional economics courses did not reflect the post-financial crash world they were experiencing, economics students have campaigned for reform of the curriculum. They and others have argued for economic ‘pluralism’, an acknowledgement that there are a variety of economic perspectives, not a single correct one.
New ways of teaching the subject have been developed which start with real world problems and data about them, not stylised theory.
The free market economic ideas and policies which were first introduced in the 1980s under Margaret Thatcher in the UK and Ronald Reagan in the US came to be known as ‘neoliberalism’. Neoliberalism is the doctrine that economic growth and human freedom are best served by the expansion of deregulated markets and private enterprise, and a reduction in the activities and size of the state. It is often described as the dominant paradigm of the last four decades, effectively espoused not just by right-wing governments but by avowedly centre-left ones which (it is often claimed) failed to reverse or challenge its principal policies.
Neoliberalism has been widely criticised. Its economic policies have led to a significant growth in income and wealth inequality and pervasive environmental degradation. The globalisation of commerce and free trade promoted by neoliberalism has in many countries led to the destruction of traditional industries and the communities which have relied on them. Deregulation has led to a huge expansion of the financial sector, and of the influence of financial objectives in companies and society, a process often described as ‘financialisation’.
Though neoliberalism claims to promote market competition, in key sectors (such as digital platforms and public services outsourcing) it has enabled the development of extremely powerful companies operating as near-monopolies. The process by which wealth is extracted from the economy by a relatively small group of financial and monopoly asset owners has led some to describe the neoliberal economy as ‘rentier capitalism’.
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.
Even before Covid-19, the multiple crises experienced by western economies over the last decade and more – the financial crash, the climate emergency and rising inequality – have led some commentators to ask whether a new ‘economic paradigm’ may be in the making.
An economic paradigm is the framework of economic theories, policies and narratives which come to define a particular era. In the 20th century two major periods of economic crisis led to changes in the dominant paradigm. Old economic orthodoxies proved unable to provide solutions, and new economic theories and policies took their place.
In the 1940s, following the Wall Street crash of 1929 and the Great Depression of the 1930s, Keynesian economics replaced the previous orthodoxy of ‘laissez faire’, leading to the ‘post-war consensus’ of full employment and the welfare state. In the 1980s, following the economic crises of the 1970s, free market economics became the new orthodoxy. But free market economics seems to have caused the crises we have recently experienced, and to offer little by way of solutions. Is another ‘paradigm shift’ due?
A number of proposals for solving the housing crisis focus on giving power and ownership of land to communities.
In one model, that of Community Land Trusts, land is gifted to or purchased by a community-run body to develop affordable housing and hold it for the long term. In Scotland such trusts are supported by a Community Right to Buy for neglected land.
A second area of focus is ensuring more land is brought into, or kept in, the public sector. Campaigners call for a halt to the programme of selling off public land for development which, they warn, is leading both to unaffordable housing and a reduction in the state’s ability to decide what gets built where.
Proposals have been made for the establishment of a Public Land Bank or similar body to take an oversight of how best strategically to use land in the public sector, and to bring more land into public ownership.
The ownership of UK firms is highly concentrated. Over the last fifty years there has been a dramatic decline in the proportion of shares held by ordinary individuals. Share ownership is dominated by institutional investors such as pension funds, asset managers (many now operating passive investment funds), and the wealthy, many based overseas. Since the 1980s successive governments have privatised previously public-owned industries such as rail, water and energy. Few workers hold shares in the firms in which they work and the UK cooperative sector is smaller than in many other countries.
In recent years there has been increasing interest in how ownership can be widened. One way is through public ownership, in which the state takes equity stakes in companies in major sectors, such as energy or rail. Another is by giving ownership stakes in companies to their workers. This can be done either through individual employee share ownership schemes, or through collective worker ownership funds which would both widen the distribution of profits and give workers a say in how businesses are run.
Another route increasingly advocated would be through the creation of a national ‘citizen’s wealth fund’, which would build a portfolio of company shares and distribute a dividend to every citizen.
Scotland, Wales and Northern Ireland all have different forms of devolved powers. Each of the devolved governments is seeking to expand its programmes for economic development activities, even though most economic powers are reserved to the Westminster government. Both Scotland and Wales have established national development banks to support their economic investment strategies. (See Stakeholder Banks.)
In England local authorities have some economic development powers but many argue that the geographic scale of government needs to be larger. Since the abolition of the Regional Development Agencies in 2010 semi-independent Local Economic Partnerships (LEPs) have been tasked with supporting business development, but these have widely criticised for inadequate powers, funding and democratic accountability.
Where they have been established, combined authorities and city mayors are developing economic strategies at the 'city region' level; all argue that they need more powers and greater resources to do this properly. Some have called for the creation of larger regions in England comparable to those generally found in other developed countries. But the issues of regional identity and democratic control remain a source of debate.
There is as yet no widely agreed name for a new, post-neoliberal economic paradigm. But those seeking to build one largely agree on its core goals. They seek an economic system which is
In such an economy democratically elected governments would play a significant role, seeking to shape and regulate markets to serve the public interest, and limiting the power of major corporations and financial markets.
These goals cannot be achieved, it is argued, by minor reforms to present economic systems. Fundamental reform is required, a structural transformation which hard-wires these goals into the way the economy works.
The scale of the funding gap in addressing the environmental emergency has led many to suggest that private finance alone is not enough, and that public finance is particularly important.
Some propose that governments should increase their own borrowing to directly invest in critical projects that the private sector is reluctant to support, as well as those that are socially important but do not generate high returns.
Even before the pandemic it was argued that there was a strong case for greater direct public borrowing at a time of record low interest rates, which have since turned negative in many places.
Social housebuilding has declined sharply in recent decades. The 'right to buy' policies of the 1980s and 1990s led to greatly reduced income for local authorities, whose ability to borrow in order to build homes was capped until 2018. Today there are widespread calls for a major new programme of council-led social housing. Housing charity Shelter proposes that 3.1 million homes should be build over the next 20 years. While local authorities now have the power to borrow, the reality of their funding situation means they will need support from national government to deliver on that kind of ambition.
Around 20% of UK homes are privately rented, up from 10% in 1996-97. In 2018 it was estimated that 16% of millennials will end up privately renting 'from cradle to grave'. The booming private rental market includes some of the worst quality housing stock and many renters have insecure housing tenures.
Proposals for tackling this include giving renters legal protection from sharp price increases, maintaining and regulating a central register of private landlords, and bringing in controls on the rents that can be charged. Giving renters indefinite leases – as is currently the norm in Scotland – would allow evictions to be banned except for specified reasons such as the sale of the property.
Corporate governance in the UK and US is based on the principle of shareholder primacy. This means that the interests of shareholders take priority over those of other stakeholders in a firm, such as workers, suppliers or consumers. There is good evidence that this can encourage an excessive focus on short-term profitability, at the expense of long-term investment.
It is widely argued therefore that the Anglo- American model of corporate governance should better reflect the interests of a company’s stakeholders, not just its shareholders. Proposed reforms include giving firms an explicit duty to pursue long-term purpose or value creation, and to tie executive pay to a range of performance metrics rather than just a firm's profitability or share price.
A particular focus for reform is the make-up of company boards. Advocates of worker representation on company boards – which is commonplace in many European countries – argue that it would tend to strengthen investment, because workers have a longer-term interest in their companies than short-term shareholders. By fostering a culture of cooperation between managers and workers, it is said, it would also boost productivity. There are also widespread calls for mandatory improvement in the gender and ethnic diversity of company boards.
The idea of a circular economy turns on the current linear model of resource extraction, usage and disposal on its head.
It aims to design out waste, eliminate toxic chemicals, and transform product design. This means going beyond simply increasing recycling and instead reducing the creation of waste in the first place, intentionally using the waste that remains as new economic inputs.
The rationale for this is economic as well environmental. Global demand for resources is rising, scarcity is increasing, wasteful resource use costs large amounts of money, and digitalisation is allowing for greater disruption of traditional business models.
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.
As multinational corporations throughout the world have grown over recent decades, they have developed complex supply chains. Globally traded commodities and goods may go through many stages of production in different countries before being made into the final products we buy. In this process it is easy for companies to profit from exploitative wages and conditions, forced labour and environmental harm, particularly in the global South where workers and local communities may have little bargaining power and enforcement is difficult.
Most of the initiatives designed to prevent abuses of this kind have been voluntary, where companies commit to codes of ‘corporate social responsibility’. But there is strong evidence to suggest that these are often ineffective. Companies are insufficiently motivated or incentivised to audit their supply chains properly.
One response has been the development of ‘worker driven social responsibility’, where trade unions and workers’ organisations agree higher standards with companies, and are able to enforce them. Another has been the development of ‘due diligence’ laws, by which multinationals are obliged under the law of their home states to audit their supply chains and ensure high standards, in areas such as labour conditions, human rights, environmental impacts and anti-corruption. The evidence suggests that a requirement to report on their supply chains is not enough; companies need to be criminally liable to ensure compliance.
Businesses are fundamental to any economy. They come in all shapes and sizes, from sole traders to multinational giants. But in recent years there has been growing criticism, both of the way some businesses behave, and of how they are governed. Much of this has come from within the business community itself.
A key argument is that many large businesses have lost their sense of ‘purpose’. Increasingly focused on financial metrics of success, many are now seen as prioritising short-term returns above long-term investment, and the interests of their shareholders above those of their wider ‘stakeholders’, such as their workers and consumers.
Partly as a consequence, new models of business have become more prominent. These include companies committed to an explicit statement of purpose. New types of ‘stakeholder’ corporate governance and financial investing are on the agenda, along with new forms of ownership giving a greater stake to workers. In these and other ways, an increasing number of businesses are seeking to change their impact on society and the environment. But some critics have expressed doubt as to whether some of these initiatives are far-reaching enough.
Over recent years there has been a huge increase in the number of companies and financial investors committing to ‘ESG’ principles, under which they aim to achieve not just profit and financial returns but better environmental and social impact and corporate governance. Globally, assets classed as ‘ESG’ were valued at over $30 trillion in 2018, an increase of a third on 2016. ESG investment funds have consistently outperformed the average, and there is strong evidence that an attention to ESG can improve shareholder returns.
ESG principles commit companies and investors to assessing their performance through the ‘triple bottom line’ of ‘people, planet and profit’ (sometimes known as TBL or 3Ps). But there is no universal agreement on the specific standards of behaviour which define ESG, or the metrics which should be used to measure performance. With so many different criteria used by ESG investment funds, critics argue that too many allow for ‘greenwashing’ of companies with unsustainable and socially damaging impacts.
When the US Business Roundtable released a statement in 2019 arguing that US businesses should be committed to a broad range of stakeholders – including customers, employees, suppliers and communities as well as shareholders – this was widely interpreted as a significant shift in business philosophy. But others argued that ‘stakeholder capitalism’ in practice looked insufficiently different from shareholder capitalism. Activist investors, both corporate and individual, are increasingly seeking to hold businesses to account in order to raise ESG standards.
A key part of the green finance equation is ending government support for fossil fuels. This has been described as one of most important measures to deter high carbon investment.
There are a number of ways in which government funding supports the continued use of fossil fuels. UK Export Finance has been criticised for giving loans and guarantees to companies who invest in fossil fuel projects overseas.
While many subsidies exist to encourage the production of fossil fuels – such as tax relief for North Sea oil producers – many exist ostensibly to keep energy prices low for consumers. The pandemic’s impact on oil prices may create a window to reduce subsidies.
Over recent years many countries have reduced their tax rates on businesses, hoping to attract inward investment from multinational corporations. But this can easily lead to a ‘race to the bottom’, in which tax competition leaves all countries with lower revenues. Low-income countries are hurt the most, and corporations are the beneficiaries.
Multinationals anyway find it easy to avoid high tax rates by ‘profit shifting’ and ‘transfer pricing’, the creative accounting methods by which profits are allocated to the countries and states where taxes are lowest. It is estimated that this costs governments globally up to 10% (approximately $240bn) of corporate tax revenues every year, money that could have been spent on public services, or that must instead be found from smaller businesses and citizens. Some large multinationals pay almost no corporate taxes in the UK (and other countries) at all.
At the same time both corporations and wealthy individuals have been able to make extensive of tax havens, usually small nations which seek to attract foreign capital by exempting it from tax altogether.
Proposals for international tax cooperation coordinated by the OECD have been given a boost by President Biden’s commitment to internationally agreed minimum corporation tax rates. A number of proposals have also been made for national taxes on multinationals, and for closing tax havens.
The UK has the lowest rate of corporate taxation in the G7 group of wealthy countries, at just 19%. Despite this, business investment in Britain is easily the lowest in these economies.
Tax rates are not the key factor in determining the profitability and the attractiveness of investments; more important factors are the availability of skilled labour and efficient infrastructure, and the overall demand in the economy. These require government spending and investment.
Corporate taxation can be highly progressive because it is primarily paid by shareholders, and share ownership is concentrated among the wealthiest groups in society. In recent years a number of multinational corporations have paid very low taxes in some countries, because they have managed to shift their declared sales and profits to countries with lower tax rates.
Governments fear losing investment and tax revenues to other countries. This has led them to cut corporate tax rates. This combination of tax avoidance and “tax competition” is eroding overall tax revenues and allowing many of the largest firms to pay very little tax.
Central banks, such as the Bank of England, have a major role to play in combatting the environmental emergency. They can do this through their own lending and by how they regulate the financial system.
An international network of central banks has become increasingly vocal about the risks to finance from climate change. They anticipate that growing economic damage will threaten financial stability. They are also concerned about the potential for a financial crisis when fossil fuels are no longer overvalued.
Proposals for further action include penalising loans to high carbon activity and ensuring that quantitative easing only promotes sustainable investment. The UK government has announced plans for large companies and financial institutions to report climate risk in the next five years.
Tax systems can play a central role in creating fairer and more efficient economies. Economic growth increasingly depends on the quality of public goods that only governments can provide, such as education, healthcare, and childcare. Taxing high incomes too lightly will increase inequality, which can damage social and political cohesion and weaken economic growth, as acknowledged by the IMF.
Many economists agree as to what constitutes a fair and efficient tax system. They believe the tax base, the activities and entities on which taxes are levied, should be as broad as possible, with few ad hoc deductions and exemptions. It could be made more progressive, with taxes levied according to taxpayers’ ability to pay. Some propose that tax systems could penalise activities that do harm, such as pollution or financial speculation.
The idea of ‘wellbeing’ is now widely used to characterise the goal of a flourishing economy.
Wellbeing includes income but is not limited to it: it also includes other factors, including the quality of work, physical and mental health and public goods (such as the natural environment and social cohesion) that make up people’s overall quality of life. The general concept of wellbeing includes both individual life satisfaction and the flourishing of society as a whole.
A common focus of those arguing for a ‘wellbeing economy’ is that we need new indicators to measure economic and social progress, in place of growth of GDP (see below). Economic and social policy needs to be designed to achieve wellbeing directly, rather than relying on economic growth.
A number of countries, including Iceland and New Zealand, are using ‘wellbeing budgets’ and new indicators to try and ensure that this is achieved.
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.
Rather than either ‘green growth’ or ‘degrowth’, some economists have begun to use the term ‘post-growth’ to characterise an economic policy stance focused directly on achieving environmental sustainability and individual and social wellbeing.
A ‘post-growth’ society and economy would be one where economic growth – and its attendant consumption patterns – is not regarded as a good in itself. While some of those using the term believe degrowth is necessary, others are (in Kate Raworth’s phrase) ‘growth agnostic’.
Some analysts have pointed out that western economies have for some time been experiencing much lower growth rates than in the past, with the idea of ‘secular stagnation’ suggesting that this may be a long-term condition. So adjusting to a post-growth economy may be necessary, whether designed or not.
The dependence of current economies on growth to sustain employment and raise tax revenues has led some researchers to model a ‘post-growth’ economy which lives within planetary boundaries and focuses on redistributing wealth and improving wellbeing rather than growing output.
One of the most common arguments in the growth debate is about the value of Gross Domestic Product (GDP) as a measure of economic progress. This was not what GDP, which measures national income and output, was originally designed for. But economic policy and analysis has generally used it as such: GDP growth is the primary (though not only) economic goal of most governments.
The argument against GDP is that it does not measure environmental degradation or the depletion of ‘natural capital’; it ignores productive activity (such as childcare and housework) that occurs outside market transactions; it cannot take into account intangible but important public goods such as social cohesion and trust; it does not reflect subjective happiness or life satisfaction; and does not measure the distribution of income or wealth.
Many attempts have therefore been made to construct alternative metrics of economic and social progress, with the aim of ‘dethroning’ GDP from its paramount position. Some seek to adjust GDP in various ways. Others have compiled an index of various measures.
The most common approach is to use a ‘dashboard’ of multiple economic, environmental and social indicators. These more complex datasets have the ability to track a breadth of concerns, but make it harder to track overall progress and tell a clear narrative story.
For some environmentalists and economists ‘green growth’ and ‘inclusive growth’ are mirages. The root problem in our economy and society, they argue, is the obsession with economic growth. Exponential growth cannot be achieved within the earth’s planetary boundaries, and cannot satisfy human needs.
‘Degrowth’ is the term increasingly used for strategies which seek a deliberate and planned contraction in the economies of high-income countries. Proponents argue that reducing the throughput of materials and energy can be achieved at the same time as maintaining and even improving people’s standards of living. As unplanned recessions exacerbate inequality, a central tenet of degrowth proposals is to ensure social justice by equitably sharing out resources, and reducing consumption and income by reducing working time.
Proponents of the idea of a ‘steady-state economy’ or ‘prosperity without growth’ argue for an economy in which environmental resources and absorptive capacities are sustained at an ecologically healthy level. This will require a contraction in the current size of high-income economies.
With the focus of green growth on environmental sustainability, the concept of ‘inclusive growth’ has been developed to emphasise how growth strategies can be redesigned to achieve reductions in poverty and inequality. The OECD defines inclusive growth as ‘economic growth that is distributed fairly across society and creates opportunities for all’.
Advocates of inclusive growth argue that redistribution through the tax and welfare systems is not sufficient to achieve genuine inclusion. They typically emphasise instead the importance of education and skills, labour market reform, asset ownership, the empowerment of local places and democratic participation.
The modern debate about economic growth first kicked off in 1972, with the publication of the influential Limits to Growth report by the Club of Rome.
The argument of the report was that exponential growth of production and consumption could not be sustained over the long term due to the finite resources and absorptive capacities of the Earth’s environment.
In the half century since then global environmental degradation has greatly worsened, with climate change, soil depletion, deforestation, ocean pollution and the loss of biodiversity all at critical levels.
This has led environmentalists and environmental economists to revisit the question of whether economic growth can be environmentally sustainable.
COP26 is not the only major environmental summit on the horizon. In May 2021 world governments are due to meet in China for a crucial meeting convened by the Convention on Biological Diversity.
It aims to reach ambitious new agreements on the protection and restoration of biodiversity. This meeting is as critical for nature as COP26 is for the climate. Global biodiversity loss has not slowed since the signing of the first biodiversity plan in 2010, with the world having missed all of its twenty targets.
Tackling the climate emergency has become the focus of recovery efforts around the world.
Global greenhouse gas emissions must be nearly halved by 2030 in order to limit global temperature rises to 1.5 degrees celsius above pre-industrial levels.
However, climate change is just one part a wider environmental emergency being driven by economic systems around the world.
The planet also faces major challenges with depleted soil quality, water shortages, and mass species extinction.
These crises are expected to pose a greater threat to health, society and the economy than the Covid-19 pandemic.
Responding to the environmental emergency requires changes in many aspects of everyday life, such as how we eat, with concerns growing over the high environmental impact of meat and dairy.
It can be politically challenging to increase environmental ambition without growing inequalities or negatively impacting people who depend on environmentally unsustainable work.
A particular concern is the fate of workers in high carbon industries. Trade unions call for a just transition for these workers to avoid the lasting impacts on people and places resulting from the closure of coal mines in the 1980s.
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.
One of the most insistent criticisms of trade agreements has been in relation to their impacts on the environment. International trade is of its nature carbon-generating, as goods are transported around the world. But trade agreements can also open up new markets for commodities produced in unsustainable ways, from fish to palm oil, tropical timber to cement.
Many people therefore argue that environmental protection should be a core principle of trade agreements. Indeed, trade deals could be a powerful mechanism to promote stronger commitments on climate change or biodiversity conservation, rather than weaker ones.
One proposal gaining increased attention is for ‘border carbon adjustment’. This would enable countries with strong climate policies to impose tariffs on imports of goods from countries with lower standards. This would ensure that trade did not become a ‘race to the bottom’ in which lower standards were effectively incentivised. But many developing countries are worried that any such border tax could simply turn into a form of trade protectionism which froze them out of developed country markets.
Far more money needs to be mobilised to avoid the worst impacts of the environmental emergency. Not only must investment in green activity increase, funding for environmentally destructive activity must decrease.
Governments are committing to a green recovery from the pandemic and interest rates are at a record low - so a range of voices argue that there is a case for greater public and private spending on sustainable investments.
Evidence shows that sustainable investments deliver high financial returns and can create lots of quality jobs, offering an opportunity to improve social and economic outcomes as well as restoring the environment.
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.
Burning fossil fuels can have economic, environmental and social costs. It is widely considered fair and efficient to require energy users to bear some of 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. 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.
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.
Rapid and sustained action is now needed if we are to avoid the very worst outcomes of the environmental emergency. Carbon emissions, including those of the UK, are not falling rapidly enough and sufficient action is not being taken to tackle other environmental destruction.
The UK aims to be a world leader and has committed to net zero emissions by 2050, offsetting any remaining emissions. Some still consider this deadline too far away.
The COP26 UN climate talks will be hosted by the UK in 2021. These crucial talks will determine whether countries' climate plans will keep the world on track to limit heating to 1.5 degrees celsius. Wealthier nations must also agree on how to unlock more financial support for poorer countries. More green investment is needed as investors continue to fund polluting industries.
The environmental emergency is already causing a range of major problems around the world. Even if rapid action is taken, environmental destabilisation will increase, and societies must be ready for the resultant impacts. The Covid-19 pandemic has given an insight into events that can happen quickly, impacting all areas of society and overwhelming the ability to respond.
Adapting to the growing impacts of climate breakdown has been recognised as a priority by people across society in the UK for years. The government’s official advisors, the Committee on Climate Change, have previously concluded that the UK is not prepared for even a 2 degrees Celsius, let alone the higher global temperature rises that are likely to happen. Preparation is also needed to ensure the UK is resilient to the social, political and economic impacts of an environmentally destabilising world. There are potentially huge benefits of doing so; more resilient societies can be healthier and happier.