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A taxing way to a greener future

The strictures prompted by Covid hit public finances hard, but recovery presents opportunities for environmental reform, says Mike Reid.

The Covid-19 pandemic led governments to implement unprecedented fiscal policy action as an immediate emergency response to the developing crisis.

According to the Office for National Statistics, public sector net borrowing (excluding public sector banks etc) is estimated to have been £8.8 billion in January 2021, £18.4 billion more than in January 2020, which is both the highest January borrowing since monthly records began in 1993 and the first January deficit for 10 years.

Estimated public sector net borrowing in December was £34.1 billion – £28.2 billion more than in December 2019 – both the highest December borrowing and the third highest in any month since monthly records began.

The table below shows the overall level of public sector net borrowing from April 1993 to January 2021. The UK national debt is now more than 100% of GDP which is at a level that hasn’t been seen since the early 1960s.

To compound the situation UK tax revenues are also falling due to policies put in place to combat the effect of Covid on the economy. We are far from seeing the full economic impact of Covid but significant measures will need to be taken to put the UK finances back on an even keel.

It is sobering to think that dealing with the pandemic will be a relatively shortterm problem whereas combating climate change will be the much greater challenge for the 21st century.

Many people have inadvertently reduced their environmental impact by measures taken to restrict the spread of Covid and hopefully this impetus will be maintained in any recovery. Governments have the opportunity to implement green recovery packages with decarbonisation objectives which should assist a strong recovery while also building a more sustainable green future.

One of the challenges with climate change is that the way we live our modern life has impacts on the climate which aren’t immediately apparent. Most people don’t pay anything for the damage they do to the environment by pollution from the petrol in their cars, the use of fossil fuels to create electricity to run their homes and the heat that escapes from inefficient properties. By the time the impact is visible it is likely to be too late to take any action to reverse climate change.

Some people have already recognised the potential impact and are taking measures to make the necessary changes and others will certainly follow, but in order to implement the wholesale change needed Governments have to take the central role.

Generally, for Governments to induce a desired behaviour they need to introduce either a carrot or a stick, or both. This is generally a mixture of taxation and subsidies. When devising a tax system to stimulate a green recovery, taxing the environmental polluter and providing incentives for environmental benefits should form part of any recovery package. However, it is a delicate balancing act, as any tax policy choices need to include provisions to protect the more vulnerable in society, promote people’s wellbeing and include overall environmental protection.

We are living in exceptional times and the challenge ahead shouldn’t be underestimated but when this pandemic is under control there will be an exceptional opportunity for broader tax reforms to stimulate the economy and provide a greener, sustainable future.

UK public sector net borrowing excluding public sector banks April 1993 to December 2020 Source:

 

 

 

 

 

 

 

 

 

 

 

Office for National Satistics - Public sector finances,