New analysis by leading economists concludes that UK government should increase sustainable public investment by £26 billion a year to boost growth and productivity – Grantham Research Institute on climate change and the environment

The UK Government should increase annual public investment by the equivalent of about 1% of GDP, or £26 billion at current prices, in tackling climate change, biodiversity loss and environmental degradation to improve productivity and economic growth, according to a new report today (22 January 2024) by Professor Lord Nicholas Stern and other leading experts at the London School of Economics and Political Science and the University of Cambridge.

The report on ‘Boosting growth and productivity in the United Kingdom through investments in the sustainable economy’ warns that current plans to cut public investment over the next few years will likely mean a continuation of stagnant productivity and weak economic growth. It states: “Continued low public investment, as laid out in the Chancellor’s Autumn Statement of 2023, and ongoing barriers to business investment in productive and sustainable assets, are inconsistent with success in international markets and will likely lead to more stagnation”.

It adds: “We estimate that the UK needs to increase annual public investment by around 1% of GDP (£26 billion at current prices) to make up for decades of underinvestment in its physical, natural, social, knowledge and human capital, to deliver on the need to tackle climate change, biodiversity loss and environmental degradation, and to be economically productive, efficient and competitive in the future”.

The authors, Dimitri Zenghelis, Esin Serin, Professor Lord Nicholas Stern, Professor John van Reenen, Dr Anna Valero and Bob Ward, point out that this public investment would encourage more private investment. It states: “Together with a coherent set of public policies to drive innovation and address gross systemic inefficiency, this would help crowd in private investment in tackling climate change, biodiversity loss and environmental degradation, and could form part of a rise in annual overall public and private investment that taken together is equivalent to at least 3% of GDP, or £77 billion”.

The authors draw attention to the fact that investment in the transition to a sustainable, inclusive and resilient economy will drive gains in productivity and growth: “Productivity is driven by efficiency, and investment in resource and energy efficiency gets more out of the country’s resources and drives competitiveness in global markets. The investments inevitably will be front-loaded, substituting capital for fossil fuels, and reducing waste and pollution.”

The report also concludes that investments in the transition to a sustainable, inclusive and resilient economy will improve the UK’s public finances: “The direct public finance required to support this transition should not be expected to worsen public debt/GDP dynamics. Indeed, by facilitating long-term resilient growth, borrowing to invest is the only way to secure enduring public debt sustainability.”

It adds: “There will be upfront investment costs to delivering the transition to sustainable, inclusive and resilient growth, but targeted and temporary borrowing for good public net investment reduces the debt-to-GDP ratio over time and is fiscally responsible”.

“Once the UK’s sustainable innovation system is up and running, government support can be phased down, as new, more efficient and productive industries increasingly outcompete the old and generate their own global revenues and inward investment. By contrast, inaction would likely prove costly to economic competitiveness and financial resilience and require costly remedial support later on.”

The report argues that unsustainable investments will damage the UK economy: “Too much current investment continues to be in the unsustainable economy, such as development of new oil and gas fields in the North Sea and the construction of homes and offices that are not energy-efficient or climate-resilient. This risks creating stranded assets, significant financial losses in polluting and emissions-intensive sectors, and an insecure, unaffordable and unsustainable energy supply. It will also mean that the UK fails to adequately tackle climate change, biodiversity loss and environmental degradation, including water and air pollution.

“In contrast, a sustainable, inclusive and resilient economy would produce significant benefits for productivity growth, driven by innovation and efficiency, which would reduce harmful waste and pollution and support people’s health by planning more liveable cities and by improving access to nature.”

The report also highlights that “the UK’s innovative strengths in clean technologies are heavily concentrated in less productive parts of the country, so on top of their environmental benefits, new clean innovations could also support local prosperity and help address longstanding regional inequalities.” 

The authors note that the “UK’s weak productivity growth has directly translated into lost growth in wages and income, and as the UK’s productivity growth and investment levels have stagnated, inequality between both households and geographical places remains very high.”

ENDS

Notes to editors  

• The Grantham Research Institute on Climate Change and the Environment was established in 2008 at the London School of Economics and Political Science. The Institute brings together international expertise on economics, as well as finance, geography, the environment, international development and political economy to establish a world-leading centre for policy-relevant research, teaching and training in climate change and the environment. It is funded by the Grantham Foundation for the Protection of the Environment, which also funds the Grantham Institute – Climate Change and the Environment at Imperial College London www.lse.ac.uk/grantham/. 
• The Centre for Economic Performance (CEP) carries out policy-focused research on the causes of economic growth and effective ways to create a fair, inclusive and sustainable society. https://cep.lse.ac.uk/_new/about/
• The Productivity Institute are a UK-wide research organisation exploring what productivity means for business, for workers and for communities – how it is measured and how it truly contributes to increased living standards and well-being. https://www.productivity.ac.uk/
• The Bennett Institute for Public Policy at the University of Cambridge aims to become a world leader in achieving successful and sustainable solutions to some of the most pressing problems of our time. Our goal is to rethink public policy in an era of turbulence and growing inequality. https://www.bennettinstitute.cam.ac.uk/