UK climate change targets could add £469 billion to national debt
- UK Prime Minister Boris Johnson’s target for net-zero carbon emissions could add GBP 469 billion to UK national debt.
- The Office for Budget Responsibility (OBR) says the coronavirus pandemic is the most significant financial shock for the UK since the 1930s.
- UK state pensions are forecast to rise to 8% next year, which would cost the UK government an additional GBP 3 billion.
- UK Chancellor of the Exchequer Rishi Sunak must find GBP 10 billion a year to cover the continued financial impacts of the coronavirus pandemic.
UK Prime Minister Boris Johnson’s target for the country to reach net-zero carbon emissions by 2050 could add GBP 469 billion to UK national debt, says the Office for Budget Responsibility (OBR).
The UK government pledged to reach a net-zero carbon economy under former UK Prime Minister Theresa May and will look to gradually reduce fossil fuels, with a focus on electric heating and renewable energy sources.
Steps are already being taken towards a green economy in the UK, with automobile company Stellantis announcing that they will invest GBP 100 million to produce electric cars in Ellesmere Port, Cheshire.
The OBR highlighted the astounding national debt figure in a report outlining the UK’s financial risks as the nation emerges from the fiscal impact of the coronavirus pandemic, which has been the most significant UK economic shock since the 1930s.
The twelve-figure projected cost of the UK’s climate change targets is slightly smaller than the addition to net debt resulting from the coronavirus pandemic. Nevertheless, the UK’s early action against climate change would add 21% of GDP to public sector net debt in 2050-51.
The report highlighted that the UK would take a catastrophic financial hit if it took no action on climate change, stating that climate change, the coronavirus pandemic and cyberattacks were the three most significant threats to the UK economy.
There are elements of a green economy that ‘pays for itself’, with battery technology and electric vehicles combating the costs of petrol cars. However, the phasing out of gas boilers in homes and road fuel taxes could be a challenge.
It’s been highlighted that the UK economy has been significantly impacted by a combination of the coronavirus pandemic and the UK’s 2008 financial crisis. The report also voices concerns that UK financial stresses appear to become more frequent, with two recessions experienced in just over a decade.
However, the OBR still forecast that the UK economy will recover to pre-pandemic levels by mid-2022 but warned that there could be a 3% permanent hit to gross domestic product (GDP) if climate change action were delayed.
Richard Hughes, OBR chairman, stated that the UK is under increasing pressure now from rising interest rates and inflation than ever before, with governments no longer able to ‘inflate their debt away’. However, the report outlined that interest rates would be less risky if the UK demonstrated a more robust economy and increased productivity levels.
That being said, the OBR report highlighted that the UK economy has proved to be surprisingly resilient given the 10% plunge experienced during 2020. Last year’s UK economic hit was one of the worst experienced across major economies. However, the UK soon bounced back due to GBP 400 billion worth of support from the UK government.
The UK economy will also experience a hit from the anticipated 8% rise in state pensions next year, placing further pressure on the taxpayer.
UK state pensions forecast to rise 8% in 2022
UK pensioners could see a substantial rise in payments from April 2022, with earnings growth set to reach 8%. Whilst this is excellent news for pensions, the rise in pension payments could lead to an additional GBP 3 billion costs for the UK government.
The significant rise in UK state pensions results from the pensions triple lock policy, adopted by the Conservative government in the 2019 general election. There was speculation that the UK government could scrap the pension triple lock policy. Still, UK Prime Minister Boris Johnson stated he would honour the Tory Manifesto and stand by the policy.
The pensions triple lock policy means the state pension rises in line with the highest out inflation measured by the Consumer Prices Index (CPI), growth in average wages, or 2.5%.
Wages will likely be the highest out of the three, with the Bank of England (BoE) forecasting that UK earnings will rise by 8%, which would lead to a high extra cost for the UK taxpayer. UK earnings have seen an unusually substantial rise this year.
However, the news does not benefit all pensioners, with many UK citizens losing their jobs during the coronavirus pandemic. As a result, those individuals will struggle to build up savings in private and workplace pensions.
The OBR report outlined how the triple lock policy increases government spending by GBP 0.9 billion for every 1% wage growth.
In October 2020, UK Chancellor Rishi Sunak stated that the pensions triple lock policy would be safe and highlighted the UK government’s commitment to providing security for UK pensioners. His comments were contrary to reports from the Treasury who indicated that the policy could be paused for one year.
Mr Sunak recently stated, however, that whilst the pensions triple lock was a UK government policy, but would still go ahead with a review this Autumn. The Chancellor also described the 8% wages growth as speculation.
Rishi Sunak must find GBP 10 billion a year to protect the UK economy
Today’s reports reveal that UK Chancellor Rishi Sunak will need to find GBP 10 billion a year over three years to deal with the continued financial impacts of COVID-19. The news comes as UK Prime Minister Boris Johnson stated the UK must now learn to live with COVID-19, warning that COVID cases will rise further in the UK.
The OBR report highlighted that this anticipated extra spending is not currently accounted for and would be needed to help fund the UK’s three key public service sectors; health, education and transport.
Coronavirus has added pressure on health budgets, with an additional GBP 7 billion reportedly required above current spending plans due to the NHS test and trace service in what the OBR calls a spending black hole. Increased budgets will also be required to cover re-vaccination programmes and anticipated consequences for other physical and mental health issues.
The OBR says further funds will also be required due to surging coronavirus cases forecast for later this year and the further potential pressures placed on the NHS. The estimations follow comments from UK Health Secretary Sajid Javid, who said that UK coronavirus cases could rise to 100,000 per day once the UK fully lifts COVID restrictions on 19th July 2021.
Other UK government priorities that will also require further funding include GBP 1.25 billion for catch-up education for learning lost during COVID lockdowns on top of the GBP 1.4 billion already set aside.
GBP 2 billion will also be needed to cover lost revenue for railway services from reduced passenger levels, which saw a drop in fare revenue between 10 to 25%. The UK government has already set aside GBP 12.8 billion of financial support to UK railways and Transport for London (TfL) across 2020 and 2021. However, June 2021 saw passenger levels on national rail and the London Underground services were below half of the pre-pandemic levels.
Mr Hughes highlighted that the list is not exhaustive, with other areas to consider, including UK courts and social care.
The OBR’s report provides an additional warning to the UK Chancellor before his spending review in the Autumn. Mr Sunak would need to increase taxes, raise public borrowing or enforce spending cuts to raise sufficient funds.
Some have argued that the UK needs to change its fiscal framework to sufficiently cover the UK’s key sectors during the ongoing effects of the coronavirus pandemic. In addition, many have called for UK fiscal policy to be more transparent, highlighting potential alternatives to funding and the lasting impact this could have on the UK economy.