The UK will emerge from lock-down with high and rising public debt, disrupted supply chains, and rising unemployment. Oil and gas prices are likely to stay low as stocks are full and supply is potentially greater than demand. The Government may be tempted to restore Business as Usual and downplay its commitment to Net Zero in its short-run effort to get the economy up and running, but some careful thought now should help meet both these short and longer-term ambitions.
If resources are under-employed, public expenditure has a large multiplier effect. For every £1 of public expenditure, GDP could increase by £2-3, with taxes on that extra income paying for the initial expenditure, leaving the deficit eventually unchanged. If productively invested, the public balance sheet – the net worth of the value of assets less the cost of the debt – would increase not deteriorate.
Investment raises productivity more than current expenditure. Past underinvestment may partly account for past poor productivity growth. Investment in durable capital locks in future emissions and needs to be green, not carbon intensive. Shovel-ready projects are attractive in the short run, but many low-carbon investments take time to plan and deliver. If companies are to be able to deliver such projects, they need assurance now that these projects will be financed. A National Infrastructure Bank charged to put us on a Net Zero path, underwritten by the Government and offering a mixture of debt and equity at low cost, may be the best way of delivering that.
David Newbery, CBE, FBA, is an Emeritus Professor of Economics at the Faculty of Economics, University of Cambridge; Director of the Energy Policy Research Group at the University of Cambridge; and a Member of Energy Transitions@Cambridge Strategic Advisory Board.