Boosting growth and productivity in the United Kingdom through investments in the sustainable economy

The UK faces large-scale investment needs across both the public and private sector. There is mounting evidence that targeted and temporary borrowing to invest in sustainable technologies and infrastructure would prove cost-effective and beneficial to living standards and economic competitiveness by increasing productivity and economic growth.

This report sets out the need for long-lasting institutional and policy frameworks that can induce investment in a broad range of assets in the UK. These assets drive technological, institutional and behavioural innovation. The authors show that the transition to a sustainable, inclusive and resilient economy is a genuine opportunity for the UK to drive innovation and competitiveness and rekindle productivity growth. This requires a coherent, credible and targeted set of policies to raise living standards, manage disruption and unlock new, intelligent and sustainable forms of growth.  

The report is intended to guide policymakers to manage a structural transition, by taking advantage of the opportunity associated with the sustainable, intelligent and resilient economy while minimising the disruption and the risks associated with assets being left redundant and devalued in the economy of the 21st century. It makes the case for a strategic approach, noting that inaction is a choice that raises the cost of capital, reduces competitiveness and favours inefficient and unproductive economic activity.

Main messages

• It is now widely accepted that the UK has a major productivity growth problem, with chronic underinvestment across both the public and private sectors being a key cause.
• Investing in the opportunities afforded by the global transition to an efficient, resilient and inclusive economy needs to be a bigger part of restoring productivity and output growth for the UK to gain a competitive lead in the innovative markets of the 21st century.
• 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 raises costly risks.
• The competitive economy of the 21st century will be based on resource-efficient innovation. As a centre of innovation, the UK is well placed to lead the competitive race to build knowledge networks and supply chains for the goods and services of the 21st century.
• Investment needs to cover all key sectors: energy, transport, housing and industry, plus agriculture and waste. Much will come from the private sector, but government has a basic role to play in helping to guide investors while enabling workers to participate in the 21st century economy.
• The authors 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.
• Together with a 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.

Overarching recommendations for the UK Government

• Drive a sustained increase in UK public and private investment and support innovation to boost productivity, increasing annual public investment by the equivalent of at least 1% of GDP.
• Promote new methodologies to better reflect the nature of structural change – e.g. utilise economic approaches that inform on risk and opportunity rather than attempt to forecast structural change.
• Promote fiscal sustainability through temporary and targeted borrowing to invest, adjusting fiscal rules to recognise that borrowing for good public net investment reduces the debt-to-GDP ratio over time, and ensure scarce public resources are carefully targeted.
• Leverage private sector investment through a clear and predictable policy framework based on a national growth, innovation and skills strategy; create a dedicated, independent policy institution, focused on finding solutions to the country’s productivity problem.
• Manage change and disruption, providing institutional capacity to increase understanding of the nature of structural change, and responding to distributional impacts of policies as a part of a coherent skills and growth strategy to ensure that the risks and opportunities of the new economy are shared.