Rebuilding to last: UK must not go back to the old normal

Today, the Aldersgate Group launches a new report, Rebuilding to Last [1], commissioned to James Rydge and Dimitri Zenghelis at the Grantham Research Institute, London School of Economics and Political Science. This report provides one of the most in-depth economic analyses to date on the current economic situation facing the UK and the investment and policy decisions the government needs to take in the run up to the Autumn Budget if it is to deliver an inclusive, resilient and sustainable recovery after COVID-19.

The report, which comes days after the initial stimulus measures outlined by the Chancellor of the Exchequer in the Summer Economic Update, sets out compelling economic evidence showing that a durable economic recovery needs to be closely aligned with the UK’s climate, environmental, and clean growth ambitions. Building on last week’s public stimulus announcements, the authors argue that key institutional changes and major policy commitments will be needed to deliver a transformative and long-term recovery and urge the government to consider these carefully in the run up to the Autumn Budget.

Reacting to the publication of the report, Nick Molho, Executive Director of the Aldersgate Group, said: “The UK did not seize the opportunity to transform its economy for the better when it responded to the 2008 Global Financial Crisis. Twelve years on, there is mounting economic evidence that a recovery plan based on investment in low carbon infrastructure and industries is one of the most effective ways of creating jobs in the near term and driving greater productivity, innovation and resilience in the long-term. The Government has rightly committed some of its early stimulus spending in areas such as energy efficiency but it must now move to make key policy commitments in areas such as carbon pricing, clean transport, low carbon heating and industrial decarbonisation if it is to deliver lasting and positive change.”

The report argues that stimulating greater investment in low carbon infrastructure, goods and services delivers higher short run economic growth multipliers compared to alternative stimulus investments. The government must avoid returning the UK economy to the short-sighted and unproductive ‘cut public spending’ policies of the past that led to more inequality, historically low productivity growth, and failed to support the UK’s climate targets, with high levels of public sector debt to GDP remaining a decade on. There can be no going back to the old normal.

Dimitri Zenghelis, Senior Visiting Fellow at the London School of Economics and co-author of the report, said: “This is a rare moment in history where the UK has an opportunity to rebuild on a path of clean, resilient and inclusive growth, aligned with the UK’s long term objectives while generating skilled jobs today. The government has made a good start with the summer statement and early stimulus measures will help shore up a more resilient economy over the next two years.

But the government must now turn its rhetoric on green recovery into predictable and credible commitments to build a sustainable economy over the next decade and beyond. A clear strategic plan is necessary to develop the skills for the coming decades and leverage private investment. Restoring confidence requires a clear macroeconomic vision to rebuild an economy for everyone, designed to last, creating jobs and generating wealth of real value out of the post-COVID recession.”

Dimitri Zenghelis added: “Sustainable investment creates durable competitive jobs where they are needed most, while also helping to achieve long term objectives around net zero, resilience, productivity and levelling up. It’s time to end unproductive investment in the old, dirty, divided economy and rebuild to last after COVID-19. The government’s strategy needs to expand beyond retrofitting to invest in clean innovation, the roll out of smart systems to manage energy demand, upgrade the electricity grid, replace gas, expand EV facilities, encourage pedestrianisation and cycling in cities as well as manage natural capital.”

The report puts forward a four-point plan of action for government to ensure an inclusive, resilient and sustainable recovery from the COVID-19 crisis and calls for:

• A programme of near-term public investments that will deliver net job creation across the regions, targeted in particular at energy efficiency retrofits, and natural improvement projects such as tree planting and wetland restoration, while rolling out networks of the future based on fast broadband and smart connectivity, electric vehicle charging infrastructure and expanding public transport connections to low-income regions;
• The creation of new institutions, including a new National Investment Bank with £20bn in paid capital. This Bank would work closely with the National Infrastructure Commission to establish a clean infrastructure pipeline. It would focus on crowding in private sector investment towards complex low carbon projects, such as CCS and hydrogen and attracting investment towards regions in need of economic regeneration. The response to COVID-19 has also highlighted the need to devolve power from Whitehall to the regions, where decision-makers are closer to their citizens both physically and socially, building on the Cities and Local Government Devolution Act 2016;
• A ‘low carbon skills and levelling up strategy’ to avoid workers falling into long-run unemployment or underemployment after the crisis, including through job guarantees, reskilling support and human capital tax credits for employers. To ensure existing and future workers are fully equipped for the low-carbon transition, measures should be taken to embed sustainability across the educational curriculum, reform apprenticeship standards and T-levels and set up sustainability metrics for tertiary level education courses;
• Bold and comprehensive policies to drive long-term private sector investment towards low carbon infrastructure, goods and services. This includes setting up a rising carbon price starting at £40 per tonne to align a future UK Emissions Trading Scheme with the net zero target, and rapidly introducing binding regulatory standards to drive emission cuts in areas such as buildings and vehicles. Public procurement, fiscal and monetary policies must all be made wholly consistent with climate and environmental goals, and the government should bring forward its 2027 target of 2.4% of GDP spend on R&D to support large scale demonstration projects in sectors that are hard to decarbonise such as heavy industry.

James Rydge, Policy Fellow at the Grantham Research Institute and co-author of the report, said: “It is important that institutional reforms are undertaken to expand capacity, rebuild the economy for the long term, create new opportunities for all and manage long-run risks. This requires building a credible industrial strategy to drive the investment forward, rolling out efficient networks on energy, communications and transport and ensuring that all this investment is compatible with a low-carbon economy.”

James Rydge added: “The private sector can drive much of the investment that is needed but it is seeking clarity and certainty from government to start investing again. If adopted, the recovery package this paper sets out will plug important institutional and policy gaps and provide the private sector with the clarity and confidence it needs to invest in productive assets that improve labour productivity and grow jobs now and over the long term.”