The global economy is facing an unprecedented challenge, with the risk of a protracted depression following the response to COVID-19. Economic growth and debt sustainability will be a high priority for all countries in the months and years to come. However, there are grounds for optimism that a coordinated and ambitious transition to net zero emissions can significantly contribute to a strong, sustainable, inclusive and resilient recovery.
This requires a comprehensive policy response which delivers investment at the scale and quality necessary. This investment can get people back to work and stimulate domestic spending and demand in the short run, while building capacity – and ultimately, supply – into the medium and long run. This delivers a strong bang for every publicly borrowed buck. Each percentage point of GDP spent on investment can, if sustained, be expected to increase UK GDP ultimately by around 2 to 3 percent.
Crucially, these returns are higher than comparable investments in high-carbon infrastructure which is more limited in productivity and innovation potential. By restoring confidence and supporting growth, these policies are particularly well-placed to generate public revenues which enhance medium-term debt sustainability.
In order to ‘build back better’, investment should extend beyond just physical and produced capital to include human capital – by investing in the skills and jobs necessary for the 21st century economy – and social capital, to tackle inequalities and rebuild trust in the social contract between people and institutions.
Pulling the world out of recession and setting it on a satisfactorily rapid, sustainable, inclusive and resilient path requires a coordinated strategy to restore confidence and guide investor expectations. The opportunities to boost productivity by investing in resource-efficient, clean innovation are not new, but the pandemic has given this vision a new and urgent dimension.
Dimitri Zenghelis is Senior Advisor for the Wealth Economy Project at the Bennett Institute, University of Cambridge, and a Senior Visiting Fellow at the Grantham Research Institute, London School of Economics. He headed the Stern Review Team at the Office of Climate Change and was a lead author on the Stern Review on the Economics of Climate Change. Previously he was Head of Economic Forecasting at HM Treasury.