Economic prospects in 2023: the New Weather Institute in the Financial Times survey
Each year the Financial Times polls a group of economic analysts on what they think the next year holds in store for the UK. The New Weather Institute is part of that survey published today, and here are our responses collected together. They argue that rather than trying to get the economy back to where it was before the pandemic, marked by inequality and living beyond its environmental limits, we should be applying lessons learned during the pandemic about how to change behaviour, policy and infrastructure overnight, and use them to power a rapid transition.
- Will the UK economy outpace or lag behind other developed economies in 2023 and how will it feel for households?
The UK has voluntarily placed itself at a disadvantage in relation to other developed economies in two key ways: firstly by not revisiting the self-harm of Brexit, even though public opinion has now swung decisively to see leaving the EU as a mistake, and secondly by leaving firms and households exposed to high energy costs through a succession of policy failures.
In considering whether or not the UK economy will ‘outpace or lag behind’ others the vital caveat is to ask ‘with regard to what?’ The international scientific community has determined this to be the last decade available for meaningful action to preserve a habitable climate, so the only meaningful measure of success is the UK’s relative performance at meeting economic need, and ensuring quality of life whilst hitting climate targets.
The question is not whether we can return to some prior, sick economic state, but whether we can see the green shoots of genuine transition to a more equal, well-being oriented and ecologically viable economy
No developed economy is doing enough – current plans see the world overshooting both the 1.5°C and 2°C climate targets. But for comparison, the US has the tellingly titled Inflation Reduction Act that includes a massive $369 billion package of investments into climate related measures, while the EU has the Green Deal investment plan with €503 billion allocated to climate and environment from the EU 2021-2027 budget, 25% of the total budget, and including €100 over the same period for a Just Transition Mechanism to ease the process of change. South Korea meanwhile has a Korean New Deal, or “K-New Deal” backed by a US$135 billion investment programme that includes measures to create 659,000 new green jobs by 2025.
At the same time the UK is missing key opportunities to ease economic pressures and spur positive, ecologically viable activity. Policy has been actively spurned to shift demand away from high-energy, polluting goods, increase energy efficiency and realise the potential of cost, carbon and pollution saving behaviour change. Lifting the fracking ban and clinging on to North Sea oil and gas contradicts climate goals and slows transition to cleaner, cheaper and more employment intensive renewable alternatives. While gifting energy companies excess profits via household energy subsides, instead of investing in massive housing retrofit and the heat pump revolution, is another missed opportunity. To properly answer this question would need an international index measuring transition to zero carbon, high well-being economies.
- On monetary policy, how tough will the Bank of England need to be in 2023 to curb inflation?
Simply turning an interest rate screw will only increase the UK’s economic pain without tackling the underlying inflationary pressures, over a problem that will most likely, short of another war or pandemic, sort itself out in the coming year.
The Bank of England has already conceded that inflation is set to fall in 2023, so for that reason alone, further rising interest rates would make no sense. But there are many other reasons for them not to increase the cost of money in a way which will increase unemployment, homelessness and bankruptcies. Chief among these, again acknowledged by the Bank, is that most of the key inflationary drivers are things beyond their control. Fall-out from Putin’s war against Ukraine looms large, and is also perversely a key reason why inflation will fall later in 2023, as current prices start to be compared to the prices already inflated by the war in 2022. International energy cost and supply chain causes of inflation from the war add to labour supply and product chain blockages resulting from Brexit and the aftermath of the pandemic.
The greenest of shoots from living through the pandemic is that we learned we are able to transform not just the economy but our day-to-day lives almost overnight – putting public health and well-being before short term economic interest
More important for the UK’s long-term recovery is that the Bank should ensure low cost money is available to fund rapid transition to create a zero carbon, high employment and well-being, energy efficient, low waste, circular economy. That implies boosting a greater re-domestication of how the UK meets its needs whether in terms of manufacturing, food or renewable energy production.
- On fiscal policy, will the government need to announce further tax raises in 2023 to maintain sound public finances?
It has already been argued compellingly that the so-called black hole in public finances currently being used to justify a second wave of austerity is a dangerous politically motivated fiction, and the result of a statistical artefact of accounting, rather than an economic reality. The gap emerges from the difference between unreliable forecasts and self-selected government targets of permissible debt-to-GDP. Yet, such targets often change. One piece of recent analysis demonstrates that simply reverting to the underlying measure of debt used to set the target to that used by government until January 2022, not only makes the black hole disappear, but credits an extra £14 billion to spend.
Further taxing the useful, productive economy would be counterproductive. Rather we should be seeing tax incentives to propel a more rapid transition to a dynamic green economy. This would not only encourage the kind of genuinely sustainable economic activity needed to shore up public finances, but insulate the economy better from being undermined by external energy price and supply shocks.
That said, for the UK to make the transition to a modern, zero carbon, high well-being economy, the old adage of ‘tax less what you want more of, and more what you want less of’ should be applied. Windfall taxes on the super profits of fossil fuel energy companies could go directly to make Britain’s leaky homes more comfortable and energy efficient. MPs on the All Party Parliamentary Group on the Green New Deal recently called for the level of taxation on oil and gas firms to be permanently raised to 70 per cent.
Whatever the downturn faced by the UK this year, a realistically funded, Green New Deal type programme is the best medicine for turning the economy around, levelling up and preparing the UK for the world it has to face
- Reasons to be cheerful, will we see green shoots of recovery starting by the end of 2023?
Recovery suggests returning to a prior state of health, but even before the war in Ukraine, before the pandemic, Brexit or even going back to before the 2007 financial crisis, the UK economy has seen its benefits distributed in a highly unequal way, consistently missed opportunities for win-win environmental upgrades, and been marked by wasteful, debt-fuelled over-consumption. So the question is not whether we can return to some prior, sick economic state, but whether we can see the green shoots of genuine transition to a more equal, well-being oriented and ecologically viable economy. Here, oddly, I do see some reasons to be cheerful if we can hold on to some of the lessons from the lockdown years, as traumatic and difficult as they were, about what individuals, firms, communities and governments are capable of when circumstances call on all groups to flex their agency and full capabilities.
The greenest of shoots from living through the pandemic is that we learned we are able to transform not just the economy but our day-to-day lives almost overnight – putting public health and well-being before short term economic interest. Companies converted production lines to serve a public purpose – brewers and cosmetics firms made hand gel, fashion companies made PPE and even Formula One engineers made low cost breathing aids. Local authorities redesigned town centres to favour walking and cycling over polluting private car access, and gave more space on streets to local businesses. Momentum is growing for vibrant, healthier car free cities. Flying for business, and the cost, carbon and time it consumed, was virtually ended as we connected online instead.
Most people radically altered how they lived to help others and put public safety first, with millions taking the opportunity to rethink what mattered in life and seek to escape the ‘work and spend’ consumer trap. A shorter working week was normalized for many and there was something of a reskilling with more people relearning how to cook, make and repair things, entertain themselves and help others through local mutual aid groups – many of which are still active. We were also reminded that, with public backing, science can move rapidly to find and implement solutions, and that the state has the capacity to enable and make things happen at scale and speed. It can, for example, end street homelessness, find resources and compel the banking system to support rather than drain the real economy – and it can even be the wage payer of last resort. The green shoots are there, but they need to be watered and not trodden on.
- What is the best historical comparison for the downturn the UK faces in the year ahead?
Because the UK faces action on a climate emergency that is unprecedented – civilisation has never before experienced the climate it has created by burning coal, oil and gas – there is no adequate historical comparison. That is has simultaneously dealt with serious inequality and the fall-out from leaving the EU and a global energy price shock further complicates any comparison. However at the time of the 2007-2008 banking crisis, there was also an oil price shock and huge disruption to the global food supply chain linked to extreme weather events. Then, further harking back to precedents of economic upheaval, I and colleagues proposed a Green New Deal, including financial market reforms and public investment in zero carbon transition, as a fairly comprehensive solution to the UK’s problems. The failure of government to act back then means vital elements of that important work remain undone.
Signals matter in politics, and for the UK to regain any credibility it will need to backtrack on fracking, and on issuing new North Sea oil and gas licences.
Worse still, the Bank of England warns that Government plans to weaken banking regulations again risk returning the UK to the reckless pre financial crash days Another, more hopeful comparison in terms of having high ambition to solve generation-defining challenges, is the UK’s post war period when, in debt and with a shattered economy and population beleaguered by years of trauma and hardship, the country nevertheless built the NHS, and managed a social housing programme under both Conservative and Labour governments that built over 200,000 homes per year. The lesson being, that whatever the downturn faced by the UK this year, a realistically funded, Green New Deal type programme is the best medicine for turning the economy around, levelling up and preparing the UK for the world it has to face.
- What else?
In spite of the clearest science and warnings, there is still scant evidence of governments fully understanding and acting on the imperative of the climate and ecological emergency, as if they have failed to understand that this is the frame for all economic policy and that adequate action is non-negotiable. At the launch of its latest report the IPCC commented that, “Any further delay in concerted global action will miss a brief and rapidly closing window to secure a liveable future.” On the same issues, António Guterres, Secretary General of the UN, using highly unusual, undiplomatic language said, “The abdication of leadership (on climate action) is criminal… delay means death… now is the time to turn rage into action.” In words that could have been pointed directly at the UK government he said, “climate activists are sometimes depicted as dangerous radicals. But the truly dangerous radicals are the countries that are increasing the production of fossil fuels. Investing in new fossil fuels infrastructure is moral and economic madness.” The latter sentiment has been echoed by Fatih Birol, Executive Director of the usually conservative International Energy Agency.
When the Prime Minister, Rishi Sunak, was embarrassed into attending the climate conference, COP27, he talked of the UK’s climate leadership and boasted of the UK’s climate finance going to Kenya. This overlooked the UK breaking its aid commitments, failing to meet its global contributions and the fact that Kenya already produces over 80% of its electricity from renewables, with the UK producing only 38%. Other countries ranging from Costa Rica, to Paraguay, Ethiopia, Uruguay, Iceland, Albania, Bhutan produce 100% renewable electricity. Signals matter in politics, and for the UK to regain any credibility it will need to backtrack on fracking, and on issuing new North Sea oil and gas licences.
A better signal would be the UK government to follow London’s leadership and back a Fossil Fuel Non Proliferation Treaty, endorsed by the EU Parliament, other major global cities from Sydney to Kolkata, thousands of scientists and over 100 Nobel Prize Winners. For the UK to have a future it needs to let go of its fossil fuel past. There are other ways too in which we could stop promoting our own self-destruction. We could follow the life-preserving precedent of the ban on tobacco advertising and stop advertising high carbon products and lifestyles, from the fossil fuel companies themselves to gas guzzling SUVs and flights. At the city level from Amsterdam and the Hague, to Stockholm and cities like Norwich and Liverpool in the UK, policies are being passed to end such ‘badverts’ in the public domain. Change is easier when you are not surrounded by adverts to stay the same.