Growth, net zero and levelling up: three mutually-reinforcing objectives to encourage investment in the UK
With a new Prime Minister in Number 10, Nick Stern argues that public policy must be based on the recognition that private markets will be the primary drivers of investment and innovation to power change in the UK towards a clean, resilient and inclusive economy. Now the Government needs to create the right conditions for private finance as it works towards its complementary objectives of growth, net zero and levelling up.
Over the past few years Rishi Sunak, the UK’s new Prime Minister, has strongly emphasised the three objectives of growth, net zero, and levelling up in his public statements and plans. These policies were in the 2019 Conservative Party Manifesto and are now reflected in his Cabinet appointments. Together they provide a new dynamic, able to foster higher productivity increases and create a strong, clean and inclusive approach to growth for the UK in the coming years. Acting on these three objectives can reduce both costs and price volatility across much of the economy. It can save lives, offer opportunities for talent and enterprise, and provide the foundation for achievement, respect and leadership for Global Britain. Combining these policy strands creates a powerful programme for growth driven by investment and innovation – mostly, but not only, driven by private sector action.
Strengthening conditions for private investment to encourage growth
Growth in productivity fuels better living standards. As has been widely and rightly emphasised, the UK’s growth performance, particularly on productivity, has been disappointingly weak over the last 10 to 15 years: associated with a fall in the investment rate and, partly as a result, weakness in innovation, notwithstanding our strength in research and development, universities and entrepreneurship. In the UK, as in most countries, more than 80% of investment is from the private sector. The UK has been investing far less as a fraction of GDP than its competitors over the last decade, a critical reason for its comparatively weak growth performance. The first challenge, therefore, is to create stronger conditions for private investment. Work by the World Bank when I was Chief Economist and subsequently has shown there are six key factors for fostering private investment (both domestic and foreign):
1. Clarity, credibility and predictability of strategy and policy for medium-term decision-making
2. Quality of the workforce
3. Functioning and supportive infrastructure
4. Ability to get things done without heavy bureaucracy or interference
5. A pleasant place to live and educate children to encourage worker mobility and choice of where to locate activity and thus investment
6. Various aspects of tax structures, including corporate, business and personal, and their complexity and administrative burdens.
In particular, clarity and credibility on strategies and consistency of government policy are critical to providing investors and companies with confidence. This has special importance in relation to the transition to net zero, which inevitably involves structural transformation. Increasingly, firms are recognising that a low-carbon future will be a profitable one, but investment is about expectations: confidence and risk management are key. Government-induced policy risk is a central problem for investment in all countries. Consistency is crucial. Further, for some key areas, including cities and aspects of transport, it is necessary for governments to ‘enable’ investments. In this context, long-term borrowing for long-term public investments is sound fiscal policy. Clear, strong, and credible commitment to the net-zero strategy will be a key driver of investment and growth.
The returns to an investment strategy focused on the transition to net zero will be strong and lasting. They include: greater resource efficiency across the board; a much healthier environment (air pollution kills more than 30,000 a year in the UK and harms many more); and greater comparative advantage and productivity in the most dynamic areas of the economy. The major financial funds are already seeking the investment opportunities of the coming decades. Nigel Wilson of Legal & General and Larry Fink of Blackrock, for example, have made very clear that they see the new low-carbon technologies as the big investment opportunity of this century and where the next unicorns will emerge.
Investment for net zero by 2050
This is shorthand for the emissions reductions and structural transformations we as a world have to make – starting now – to avoid the most severe risks of climate change, and for the challenge of managing that transition cost-effectively and inclusively. At COP26 the UK pledged to cut its emissions by 68% by 2030 relative to 1990. That is what is necessary for us to fulfil our role in keeping warming of 1.5oC within reach. The science is very clear on how much more dangerous warming of 2oC is compared with 1.5oC yet we are now heading for warming in the region of 3oC, to temperatures not seen for around 3 million years. This level of warming would be devastating to lives and livelihoods across the world, including in the UK, and would cause massive population displacement, migration and conflict. For meeting the Paris temperature targets this decade will be decisive and to delay action is deeply dangerous.
The good news is that we can recognise most of the investments that can put us on this new path, such as renewable energy and electric transportation, and we can see that they are very productive, cheap and secure. And we can also see the R&D and innovation emerging in the new areas that we have to develop – such as green hydrogen and new aircraft fuels. But we will not be able to achieve this transformation without strong investment and associated innovation. This is an area of strong potential UK leadership, both economically and politically.
In our paper for the UK (Carbis Bay) G7 Presidency, prepared at the request of Prime Minister Boris Johnson, we showed that extra annual investment of around 2 percentage points of GDP in G7 countries would be needed to drive forward investment, growth and productivity on the one hand and put us on the new path of strong and sustainable economic development on the other. This is a path far more attractive than the dirty and destructive models of the past, leading to, for instance, cities where you can move and breathe, and ecosystems which are robust and fruitful.
Not only is this increase in investment necessary and does it offer attractive results, but it is also clearly feasible. In the UK it would involve restoring investment as a fraction of output to the levels of around 20 years ago. The large majority of that investment would be private and it would arise from improving the investment climate. Any public investment can be supported by long-term financing, including from the National Infrastructure Bank. This is also a core competitiveness imperative. A global race has begun to build the supply lines, knowledge clusters and manufacturing hubs that will power the growing low-carbon markets of the 21st century.
Levelling up and investment for net zero: intersecting goals
The investment story has a remarkable fit and overlap with the challenges of levelling up. Here are examples:
County Durham and Sunderland have a high concentration of CCUS patents; the concentration of carbon-intensive industries, the North Sea, and existing mines makes this area of the Northeast well-suited to industrial CCUS sites. South Wales has received funding for a net-zero industrial cluster (stretching from Pembrokeshire to the border with England).
Blyth, Northumberland,has several energy innovation assets, a deep seaport, and one of the UK’s largest coastal development sites. Hull is the site of plans at Siemens Gamesa for an expansion of their offshore wind turbine blade factory.The east coast of England (near Hull) and Scotland (near Aberdeen) have seen a significant number of offshore wind projects developed more recently.
Waters near Shetland are the location of Cerulean Winds’ bids for floating wind projects to decarbonise oil platforms. Cromarty and Moray Firth (Inverness region) are where the Department for International Trade is seeking to establish a portside manufacturing facility for the serial production of floating substructures and associated components.
A tidal energy scheme off the coast of Anglesey and a tidal lagoon in Swansea are among recently approved projects; the west coast of Britain has one of the highest tidal ranges in the world. The North Wales Tidal Lagoon from Llandudno to Prestatyn, with a sea wall more than 19 miles long, is one of the most ambitious proposals. Its backers say the £7bn project could power more than a million homes and create over 20,000 jobs.
Sunderland has the single biggest European EV production site with Nissan, which announced plans to create a North East EV manufacturing hub, including the UK’s first large-scale gigafactory (although its future was uncertain at the time of writing). China’s Envision plans to expand its adjacent factory. Coventry is likewise receiving investment for a gigafactory producing lithium-ion batteries, which is a public–private joint venture between Coventry City Council and Coventry Airport Ltd.
Tees Valley currently produces half of the commercially available hydrogen in the UK and BP has announced the UK’s largest hydrogen project on Teesside, with the intention to develop an industrial hydrogen cluster. Orkney is the site of a funded project for hydrogen in an ‘integrated maritime energy transition’.
Public policy: incentivising change and protecting living standards
Strong and clear public policy will be necessary to foster the investment and structural change we need. This includes clarity on medium-term strategies, clear standards and regulations (e.g. on the phase-out of selling new internal combustion engine vehicles and on waste and the circular economy), support for energy efficiency in homes and businesses and help with both practicalities and finance, support for R&D and innovation, some public investment in infrastructure, some appropriate taxes (e.g. on carbon) and subsidies (e.g. for new heat pumps) and supporting people, particularly those on low incomes, who may face higher costs for some goods and services at some parts of the transition, including in their cost of capital.
We must recognise, however, that for many goods and services the new ways are already cheaper, including for electricity and alternative vehicles.
Design will be important, too, around pedestrian and cycling facilities in towns, and for the circular economy, for example. And we must also invest in the natural capital of our land and forests and in the skills of our people.
The growth story of the 21st century
This is a moment where we must change, investing and innovating for a new growth model. We now have in our hands much more attractive paths than those we have been following, for growth, for the climate and for levelling up. We must invest to get there and there will be difficulties and risks along the way. But the risks are lower and opportunities greater than any alternative. This is the growth story of the 21st century. The potential prize from UK leadership and strategic action to shape the 21st century economy is immense.