The Treasury must take the risks of the climate emergency more seriously and develop a new set of targets for government debt and borrowing that allow for public investment to prevent major crises and transform industries, according to a new report from the New Economics Foundation (NEF), published today.

This would require the Treasury to establish an entirely new set of fiscal rules’ which reflect the need to use government borrowing to prevent crises as well as to respond to them. NEF’s report comes on the same day as the Office for Budget Responsibility (OBR) includes climate in its assessment of the UK’s fiscal risks for the very first time.

The UK’s current fiscal rules assume that the best time to use so-called fiscal space’ is always after a crisis has already taken place. This steers policy makers towards holding back space to borrow in reserve for the future, and makes it harder to borrow for preventative investment for things such as dealing with the climate emergency.

Today, and given the speed and scale of industrial transition required to avert climate chaos, the current fiscal rules are a real limiting factor for sufficient public finance. Even the Treasury has reportedly acknowledged that the CCC’s new target of meeting net zero’ greenhouse gas emissions by 2050 would not be credible without plans for increased government spending’.

In normal’ times, public borrowing has historically been around 1.3% of GDP per year. Yet by the mid-2020s, even this level of net borrowing would be precluded by the government’s current fiscal rules. If a future Chancellor remains committed to these rules, sufficient public investment to support climate transition will necessitate cuts elsewhere. In view of growing pressures on public resources from aging population, technological change and globalisation – happening at the same time as the climate emergency — such trade-offs are likely to prove intolerable.

The report by the New Economics Foundation recommends three measures that Treasury officials and a future Chancellor should adopt:

  • The development of a framework for assessing, measuring and forecasting fiscal space’: defined in terms of the threshold beyond which there is a significant risk of adverse economic effects. Such a framework would allow the Treasury to more accurately (and more accountably) assess the level of fiscal space available to the UK at a given point in time.
  • A method for conducting a form of cost-benefit analysis of using fiscal space at a given point in time. Such a tool would allow policymakers to accurately assess the implications of holding back fiscal space compared with the implications of borrowing for investment, and therefore allow politicians to come to an informed view on the best combination of fiscal intervention or fiscal prudence at a given point in time, including with respect to climate related risks.
  • More explicit cooperation between the Bank of England and the Treasury in managing, maximising and deploying fiscal space. Part of this arrangement could make use of a new public investment bank (or network of banks) such as a green national investment bank (GNIB) – to increase commercial lending to green industries. The GNIB could be used as a backstop against political negligence from government in the form of underusing fiscal space for ideological reasons.

Alfie Stirling, Head of Economics at the New Economics Foundation said:

Even meeting the UK’s legal commitments to net zero’ greenhouse gas emissions by 2050, which are themselves likely to prove too unambitious, will require the largest peacetime mobilisation of resources in the country’s history.

This will simply not be possible without the support of public finance. But at present, the UK’s fiscal rules essentially prevent this support from happening. Rather than making our policy makers more responsible, the current fiscal rules are an exemplar of irresponsibility.

At a minimum, fiscal policy should be managed with at least a similar level of sophistication as monetary policy. Just as it is considered equally harmful to overshoot or undershoot the inflation target, so too should it be considered just as irresponsible to underuse fiscal space as it is to overuse it.”

Contact

Sofie Jenkinson, 07981023031, sofie.​jenkinson@​neweconomics.​org

Notes to editors

The report Changing the Fiscal Rules’ is available here https://​newe​co​nom​ics​.org/​2019/… 

This NEF working paper was adapted from an essay written by the same authors for Common Wealth

The CCC estimates a total resource cost to transition of between 1 – 2% of GDP per year on average by 2050 – between around £20 billion and £40 billion in 2019/​20 terms (although the Department for Business, Energy and Industry estimates are reportedly higher) – which will need to come from a mixture of public and private finance.

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