Green finance. While most proposals for funding the green transition focus on fiscal policy, private financing will also play a key role as the need for more green investment intensifies. Creating the conditions for that private green investment is a key policy challenge, and one that governments around the world are grappling with. Much of the debate so far has occurred in an era of historically low interest rates, but that era may be coming to a close with rising base rates in response to high inflation. How to adapt to this new lending environment becomes increasingly urgent as there is a risk of vital green investment slowing down at a point where we need it to accelerate.

Greening targeted credit policy. The Bank of England must adapt its “policy toolkit” to combat the climate and cost of living crises, according to a new report by the New Economics Foundation (NEF). NEF argues that instead of “demand management relying on a blunt single interest rate tool”, green targeted credit policy interventions could both help the transition to net zero while also enabling the bank to better meet its price and financial stability targets. The report notes that both China and Japan have recently greened their targeted credit policy in the form of refinancing operations providing cheap credit to banks to lend for sustainable investments. NEF makes five recommendations for how to green targeted credit policy: 

  • Repurposing the Term Funding Scheme (TFS). The TFS offers funding to banks lending to businesses and households on specific conditions on rates either close to or at the base rate. The TFS could be used to incentivise projects such as retrofitting or investment in electric vehicles and related infrastructure. 
  • Decarbonise the existing TFS. As well as steering the TFS towards green investment, NEF also suggests ensuring that the current TFS is not implicitly subsidising banks to lend to carbon intensive activities. 
  • Additional TFS conditionality. The TFS already requires banks to prove that they are using the TFS to expand their lending to households and firms, so a green TFS must also require evidence of lending to green initiatives, NEF argues. 
  • Bank lending metrics and targets. While the Bank of England’s remit now accounts for climate change, it does not put quantitative targets on the central bank to plug the green investment gap. NEF suggests this should be changed and that a green TFS could be part of new quantitative targets.
  • Lending to state-owned investment banks. Finally, NEF suggests that the TFS could be extended to the state-owned investment banks: the UK Infrastructure Bank and the British Business Bank in order to boost lending to the alternative banking sector and transition activities by small businesses.
Weekly Updates

Energy and inflation

Truss’ energy plan. New Prime Minister Liz Truss is expected to announce a £100 billion + plan to cap energy bills. According to a Bloomberg exclusive, Truss is planning to set a fixed unit price for energy suppliers to sell gas and electricity to households with the government making up the difference. Bloomberg’s Alex Wickham says that the plan would “effectively replace the current price cap and sideline Ofgem”. It is not yet clear how the plan will be funded and whether it will extend to businesses as well as households.

  • Return to 2021 prices to curb inflation. Research conducted by the Institute for Public Policy Research (IPPR) finds that while maintaining energy bills at current levels could reduce projected inflation by 3.9%, lowering the cap to October 2021 levels could reduce project inflation by 5.6%
  • Free basic energy. The New Economics Foundation (NEF) argues that freezing the cap alone is not enough to combat the energy crisis long term, and proposes a package of free basic energy, a new Universal Credit ‘energy element’ and a cost of living allowance. NEF recommends scrapping the price cap system entirely after a temporary freeze, replacing it with a new system of ‘free basic energy’ and a “redistribution of the cost of household energy bills”.
  • Tiered energy relief. Conservative think tank Policy Exchange has proposed a tiered energy relief scheme to combat the energy crisis. Policy Exchange recommends a set of three price caps, ranging from the lowest which would be set at the 75% of the level of the October 2021 cap to the highest which would be set at the October 2022 or January 2023 price cap level. Policy Exchange’s Josh Buckland summarises the proposal here. However, targeted support can actually exclude the most vulnerable, argues Dr. Neil Simcock of Liverpool John Moore’s University . 
  • Social tariffs. The Resolution Foundation has proposed a social tariff, whereby qualifying households would be offered a 30 per cent on energy bills. The think tank also proposes lowering energy prices for all should the social tariff be too difficult to implement quickly and suggests funding this through an additional 1p on all rates of income tax. 

22% inflation. Inflation could soar to as high as 22% if gas prices don’t fall, according to new estimations by Goldman Sachs. Even if gas prices fall to the level that the bank predicts, Goldman Sachs economists still expect that inflation will reach 14.8% in January. 

  • Personal inflation rate. The ONS has created a personalised inflation rate calculator based on household spending patterns so that people can work out how price increases have specifically affected them over the past year. 
  • Defining stagflation. Speaking to former Bank of England economist Tony Yates, the New Statesman explores the concept of stagflation, including whether we should have known it was coming and how the usual definition applies to the current situation in which unemployment is low. Yates argues that the Government had the ability to take action earlier and that the priority should be ensuring that wages keep pace with inflation. 

A gendered analysis of the cost of living crisis. “Due to lower wages and savings, women are less prepared to face the rise in the cost of living”, the Women’s Budget Group (WBG) finds. In the third in a series of briefings on the gendered dimension of the cost of living crisis, the WBG’s proposals include uprating universal credit, overhauling the energy sector and extending the windfall tax to ease the impact of the crisis. 

Macroeconomic policy

Liz Truss: a free marketeer or a “state capitalist”? As Liz Truss is elected as leader of the Conservative Party and therefore as UK Prime Minister, the Institute for Innovation and Public Purpose’s Craig Berry argues that the new PM may be more comfortable with state intervention “than her mimicry of Margaret Thatcher would lead us to believe”. In practice, this will look like a continuation of the growing Conservative appetite for “state capitalism”, he argues, with state capitalism defined as “the co-constitution of political and economic forces which control both state institutions and the dominant forms of accumulation”. 

‘Trussonomics’ influencers. Cardiff academic Professor Patrick Minford, former Standard Chartered economist Gerard Lyons and the Institute for Economic Affairs’ Julian Jessop are rumoured to be the “trio of economists closest to the Truss campaign”. These influences suggest a dramatic shift away from Treasury “orthodoxy”, with Jessop arguing that Truss has “the vision to do things radically differently”.

Tax and inequality

No new taxes? Before being elected, Liz Truss vowed not to introduce new taxes if successful in becoming Prime Minister. In the final leadership hustings before winning the vote, Truss confirmed that there would be “no new taxes”. 

  • Tax cuts? It has also been reported that the new Prime Minister could introduce emergency cuts to VAT and income tax. Her team have apparently suggested that she could raise the point at which people enter the 40% tax bracket (currently £50,270). 

Excess profits. Energy firms are on track to make excess profits of up to £170 billion in the next two years according to leaked Treasury analysis. The news comes after Liz Truss ruled out a further windfall tax and said “I don’t think profit is a dirty word”. The Treasury has said they do not recognise this figure.

  • Windfall. Based on these figures, Tax Justice UK calculates that a 95% windfall on North Sea oil and gas companies could raise £44bn per year and could make a large contribution to energy bill support.
  • Wealth taxes. If the government taxed the very rich enough to bring their net wealth in line with what it was three years ago, it could give every adult in the country £13,000, says former city trader Gary Stevenson.

CEO pay. Capping CEO pay is the best way to make the UK more equal, argues the High Pay Centre’s Luke Hildyard. Hildyard proposes a statutory wage cap arguing that with “some companies spending in excess of £20 million on just their executive teams, a cap in the low hundreds of thousands would save companies vast sums of money that could be used to support pay increases for thousands of lower earners”.

Local economies

York and North Yorkshire devolution deal. Last month, York and North Yorkshire signed a “historic” devolution deal which will see the region elect its own mayor and receive £540 million in funding. However, the Institute for Public Policy Research (IPPR) has outlined that the fund only represents “roughly £20 per person per year for 30 years not accounting for projected population changes”. “To put this in context”, the IPPR says, “the north of England saw a £413 per person fall on average in annual council service spending in each year between 2009/10 and 2019/20”. The £540 million figure is significantly less than the £750 million investment fund included in the original bid.