It’s not easy being Chancellor when the economic mood is so glum. Rachel Reeves faces low growth and stagnating productivity. Meanwhile, the cost of servicing the national debt is rising.
All this suggests that the Chancellor’s second Budget won’t bring sunshine in the autumn. Rachel Reeves’ attempts to cut spending, such as through cutting the winter fuel allowance, have been politically toxic. Reversing these decisions could mean tax rises, and journalists are already speculating over who will pay.
The government’s Carbon Budget and Growth Delivery plan is also expected in October. The Budget will get more attention that month, but this plan for climate action is significant because it might have some answers on where the Chancellor can grow the economy.
Moving away from fossil fuels is one of the most profound changes to the global economy since the industrial revolution. It presents enormous opportunities for countries prepared to grasp them. McKinsey estimates UK firms supplying goods and services to enable the green transition could make £1tr by 2030.
UK companies see this opportunity and are in the race already. Analysis from the Confederation of British Industry (CBI) shows that the net zero economy grew by 10 per cent in 2024, compared with 1.1 per cent for the economy as a whole.
But Rachel Reeves needs growth soon, and this will come from sending clear signals to investors. Clean energy is one of the sectors of the UK economy most likely to increase growth, according to the government’s industrial strategy. An analysis by the Competition and Markets Authority found that like the other seven sectors selected for government support, it is “more productive, competitive and dynamic than the whole-economy average”.
We can do some green things, like clean energy, better than other countries. Our comparative advantage in clean technologies, compared with some other economic sectors, shows up in the concentration of patents, a decent measure of our ability to innovate.
But the return on innovation in clean energy also exceeds that of any other technology. Commercial returns from research and development in offshore wind, tidal and carbon, capture and storage technologies together exceed those in biotechnology and artificial intelligence. This is particularly true when the investment happens outside Southeast England. So making the most of our existing strengths is one part of the argument for prioritising the green economy over other opportunities, like AI.
Some recent signs show that a Chancellor in search of growth is looking in the right places. The energy security and net zero department won one of the best settlements in the spending review. But we are also successfully growing markets for other clean technologies, like electric vehicles.
The UK emerged as the leading EV market in Europe last year, according to Bloomberg NEF. This already accelerating the decarbonisation of the UK. It is particularly likely to support high-wage jobs and boost the economy.
The UK car industry employs around half a million workers, earning 13 per cent more than the average UK wage, according to CBI analysis. Supporting domestic EV manufacturers to invest in the skills and technologies for the next wave of innovation could pay huge dividends.
The UK has existing strengths here. Carmakers contributed £47bn to the economy in gross value added (GVA) in 2023. But the total economic contribution of this sector is considerably higher, because for every £1 of initial GVA an additional £2.26 is generated in the wider economy.
The government is moving in the right direction to make the most of this economic contribution. Measures like the recently announced Electric Car Grant will support domestic manufacturers move to cleaner production. The CBI estimates that a rapid transition to manufacturing EVs instead of polluting cars could add £16.1bn to the gross value added (GVA) of the UK’s automotive sector.
Green investment could also reverse problems that hold the UK economy back, like creaking transport infrastructure, and homes that leak energy.
The UK is one of the most traffic congested countries in Europe, costing us an estimated £7.7bn a year. The economy would benefit from better public transport because we’d see higher productivity, according to a recent government review of the economic evidence.
The connection between better transport and higher productivity seems instinctive. People spend less time in traffic and more time doing productive things. But better connected towns and cities host more productive businesses, which can then pay higher wages. But the economic boost from building London’s Elizabeth Line is roughly equivalent to investing in warmer homes, according to E3G.
The UK has an established reputation for having some of Europe’s oldest and worst insulated homes. But 85 per cent of them also rely on gas for heating. British families were therefore uniquely exposed to the fossil fuel price shock caused by Russia’s invasion of Ukraine.
Full delivery of the government’s £13.2bn Warm Homes Plan announced in the June Spending Review could mean lower energy bills for millions by insulating homes and heating them with electricity. But families will also be able to stop spending so much money on expensive gas, and spend it elsewhere on local goods and services. This investment would support a lot of other economy activity: the installation of 1.2 million heat pumps, the rollout of one million solar arrays, and insulation upgrades for 2.7 million roofs and walls. E3G estimates it could also create 9,000 additional skilled jobs across the UK each year, particularly in regions with higher levels of deprivation.
There’s not much the Chancellor can do to change the mood music for her next Budget. But if she uses the Carbon Budget and Growth Delivery Plan, also expected in October, to take a big bet on the green economy, it’s likely to pay off. That’s because the green economy includes many sectors where the UK has comparative advantage, others where markets are rapidly growing, and some where our weaknesses can be turned into strengths. It’s the right place to look for growth.
This piece originally featured in BusinessGreen.
