Public finance as a steward of inclusive green growth

A mix of regulation, economic incentives and engagement with the investment community are needed to facilitate a fairer future green economy, writes Jeffrey Matsu

Dynamic economies are in perpetual flux from a vast range of influences. While predicting which of these are cyclical or structural is more art than science, the role of public policy is to ensure that outcomes are just and fair for as many people as possible. Markets determine the mechanisms by which scare resources are allocated and thereby utilised most efficiently, but it is government that serves as referee.

The shift to a net zero economy should be viewed as an opportunity to train and reskill workers as part of this evolution. Generous fiscal and monetary stimulus geared toward amplifying a post-Covid recovery provides an ideal platform for addressing the extensive array of inequalities that surfaced both before and during the pandemic. With jobs, businesses and even entire industry sectors experiencing severe dislocation, government can play a strong and decisive role in determining outcomes.

Just as the industrial revolution incorporated automation into labour-intensive production processes, and the tech boom accelerated the speed of communication and knowledge transfer, a green transition has the potential for advancing economic growth with the environment in mind. The growth strategy should be people-focused with technological adaptations in areas such as renewables and energy efficiency, complementing the human capacity for creativity and compassion. Indeed, education, research and innovation will need to be prioritised as enablers of carbon-lite solutions, and government policies should create platforms for more effective private-public collaboration and risk sharing. Meanwhile, a modernised system of taxation that is simpler, fairer and more transparent could help to generate the revenue necessary to enable positive change.

Regulation, while important, cannot be the sole means by which to change behaviours – incentives matter too. A mix of tax credits, deductions and subsidies can influence behaviours across households and businesses. Decision making that fully accounts for the input and output of carbon at the source of origin can further reduce the scope of offshoring emissions. Meanwhile, common languages such as the EU’s Sustainable Finance Taxonomy or ESG can minimise green-washing through agreed definitions and globally recognised standards.

Asset managers and the wider investment community can play a partnering role in developing a stronger, more coherent voice on how carbon prices are structured and advanced. Increasingly, a willingness to pay for emissions that affect a common public good, i.e., the environment, will need to be paired with intergenerational issues of fairness. The active role of government as convener and moderator of such discussions will be critical in achieving global ambitions relating to the sustainable development goals (SDGs) or net zero carbon. There will also need to be a deliberate change in how return on investments are calculated that includes analyses of costs and benefits across both geography and time. Insofar as investors are profit maximising, the cost of greenhouse emissions will need to be made explicit and reflected in today’s prices.

Governments can redistribute the gains and losses associated with addressing climate change by facilitating more rapid price discovery. Beyond a traditional regulatory role, policy makers can enable markets to deliver green solutions through a mix of policies that support the development of human capital alongside fixed asset investments such as buildings and machinery. Markets on their own may favour one over the other depending on the costs of capital and labour at any given point in time. Anticipatory frameworks will be needed to address the shocks of tomorrow with stronger, more resilient capacity today in areas such as training, skills and knowledge exchange.

The temptation to steer economic performance through rigid industrial policies should be avoided. Economic history has not been kind on government attempts to pick industry winners and losers – past performance is seldom indicative of the future. Governments can, however, enable productivity-enhancing business investments by providing clear and stable governance frameworks. Moreover, policies that are not overbearing in regulation or burdensome in reporting have the added benefit of creating a more level playing field for businesses of all sizes.

Structural economic changes are difficult enough without unnecessary changes to strategic frameworks. For example, the UK’s Industrial Strategy seemed to have just taken root when it was abruptly displaced by a new Plan for Growth. What had taken industry, businesses and local governments a few years to grasp, and then respond to, was replaced by a similar vision but with different terminology and milestones. At the very least, public consultation on future changes affecting the direction of policy will be needed to develop and maintain the trust of stakeholders. Advancing long-term growth agendas cannot be powered on pump priming and political savvy alone.

Transitioning to a greener way of living can make business sense if the rules are clear and the incentives compelling. The perceived urgency to act should be tempered with an honest, measured assessment of sequencing and prioritisation. Progress at a measured pace is likely to be more durable than a rapid succession of disparate, near-sighted policy schemes. Perhaps squaring ambition with the fragile fiscal forecasts for the years ahead will be the greatest challenge.

Above all, future growth – whatever its form – will stand a greater chance of success when it is inclusive by design.

The article was written by CIPFA’s Chief Economist, Jeffrey Matsu.

Further Information: 

www.cipfa.org

Event Diary

The Security Event is set to be the first major exhibition to take place in the sector when it opens its doors on 7-9 September 2021 at the NEC in Birmingham and for the first time it will also encompass the National Cyber Security Show.

digitech21 will seek to demystify the increasingly complex technology landscape and will showcase a host of public sector best practice case studies and the very best solution providers, each of whom are helping organisations to transform and improve the way in which the public sector delivers services to the citizen.