Britain’s economy is in a deep rut. After news confirming the country fell into recession late last year, most experts agree the downturn is likely to be shortlived and shallow. Few, though, are betting on a strong recovery from the toughest period for living standards in almost 70 years.
In most of the economic cycles of the past century, robust growth has typically followed each period of recession, as households and businesses get back on their feet after each setback. But as highlighted by Matt Whittaker of the Pro Bono Economics thinktank, the past two decades have been different. Gross domestic product per capita has either fallen or flatlined for the past seven quarters, and it is now 16 years since the last sustained uptick came to an end.
For whoever wins the next general election, making sure Britain can escape this quagmire ought to be the top priority. After more than a decade and a half of flatlining progress, capped by the current cost of living crisis, poverty levels have risen sharply. The proceeds of what little growth has been eked out are unevenly spread and geographically imbalanced, while the UK is slipping behind comparable advanced nations.
To revive the sputtering engine of the economy, the next government will, however, need to keep in mind the kind of growth Britain would benefit from most. The plan will need two priorities in particular: tackling the inequalities entrenched over the past decade, and ensuring the biggest challenge of all – the climate crisis – is addressed.
So far there is reluctance among political leaders to set out a clear roadmap, with Rishi Sunak promising tax cuts that would fail on the first priority while increasingly hacking away at policies that could help address the second.
The prime minister had promised in the first weeks of his premiership to turn Britain into a “clean energy superpower”. Since then, however, Sunak has rowed back on net zero policies and leaned into anti-green politics to pacify the right of his party. Keir Starmer has also staged a managed retreat, having scaled back Labour’s £28bn green investment plan out of fear the Tories could weaponise it in the election campaign.
At the heart of both is a common theme: affordability. The fallout from the 2008 financial crisis, Covid pandemic, Brexit and the cumulative drag on productivity from more than a decade of Tory underinvestment has indeed taken its toll on the exchequer, as has spiralling demand from an ageing population. The government’s budget deficit is historically high, while the national debt has risen to the highest level since the 1960s.
However, it also plays on two falsehoods. First, that inaction is cost-free. This is patently untrue, as the past 15 years of underinvestment have shown, laying the ground for our current weak economic performance. The consequences of the climate crisis are also becoming clearer and costlier for households and businesses. And second, that leaving the private sector alone to kickstart growth and manage the climate transition would be cheaper.
The cost of investing in new technologies does not magically vanish in the private sector. Instead of being borne on the government balance sheet – paid for mostly through taxation – the household balance sheet picks it up instead, in the prices charged for utilities, goods and services.
As a paper from the leftwing Common Wealth thinktank last week showed, state-led investment in clean energy could be substantially cheaper than the private sector equivalent, primarily through the difference in cheaper borrowing costs that nations enjoy over corporate borrowers, helping households to save money on their bills. Investing in the climate transition could also help kickstart economic growth, creating the jobs and industries of the future.
The report set out the case for a more ambitious plan for Labour’s Great British Energy, the party’s publicly owned clean energy generation company. According to the report, Labour’s initial £8.3bn capitalisation of GB Energy could save between £125m and £208m a year on debt interest costs each year compared with equivalent borrowing in the private sector – saving up to £1bn in total.
While Starmer cut back Labour’s overall £28bn investment plan, the decision to keep and prioritise GB Energy is an important move. Plenty of details over its operation still need clarifying. And it could be more ambitious. But a publicly owned firm investing in renewable energy could help optimise the transition to net zero.
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One criticism would be that the state lacks the knowhow big energy companies possess, or would be less efficient than the private sector, adding to the cost of energy generation. However, it is increasingly clear the market alone is failing to deliver, as some of the wealthiest energy firms in history funnel profits into investor payouts rather than renewables.
Over the last two years energy companies have benefited from a boom in prices since the Russian invasion of Ukraine, providing what ought to be a powerful war chest for the green transition. But analysis by the IPPR thinktank shows that BP and Shell alone handed £32.6bn back to their investors in 2022 through dividends and share buybacks – 11 times more than the £2.9bn they invested in renewables.
In a world of rising supply chain costs, geopolitical shocks and higher borrowing costs on financial markets, a state-backed firm could help de-risk the cost of renewables projects for private firms by co-investing alongside them. It makes even more sense when the approach is already the norm in Britain – only with companies owned by overseas governments rather than our own.
Figures from Common Wealth show 42.2% of the installed capacity from operational and under-construction windfarms in the UK is owned by foreign public entities, including state-owned enterprises and public pension funds. Such is the lack of our own involvement that the UK government owns less of that capacity (0.03%) than the city of Munich does (0.85%) through its stake in the Gwynt y Môr windfarm off the north Wales coast.
The next government will have choices to make. Powering up economic growth could be helped by a step-change in green investment. Rather than holding back amid fears over affordability, it’s the cost of inaction that would hurt more.
