Budget Resolutions and Economic Situation

Barry Gardiner Excerpts

Wednesday 18th March 2015 Commons Chamber

[Barry Gardiner (Brent North) (Lab)]

A Budget is not an exercise in economic theory; it is a practical attempt to manipulate the levers of the financial system, both fiscal and monetary, to maximise public goods and public benefit. It used to be assumed in British politics that uncertain inviolable public goods would always be defended by Government, but that assumption has fallen apart over the past five years. From the quality of our air and water to the threat of catastrophic flooding and climate change, many now see that the role of Government has been hopelessly diminished. Over the past five years, the Government have stepped back from so many of the key risks facing our country that in the eyes of many people they are no longer fit to govern.

I want to focus on climate change and resource insecurity—two issues on which the Government promised significant progress and on which the Chancellor himself once made significant promises, but which show the true face of this Government and their significant failure.

In 2013 the chief economists of the Department for Environment, Food and Rural Affairs, the Department of Energy and Climate Change, the Department for International Development and the Foreign and Commonwealth Office proposed a cross-departmental review of resource security, climate change and growth. They had been planning it for more than a year. The Chancellor, however, cancelled the review on the grounds that neither resource security nor climate change posed a threat to growth. One has to wonder whether he ever read those letters that the Governor of the Bank of England is obliged to send to him every time inflation misses its target, because all 14 of them specifically cited resource price spikes and resource insecurity as key factors in missing those economic targets.

One has to wonder whether the Chancellor ever listens to the speeches of the Governor of the Bank of England, because Mark Carney has spoken powerfully about a “tragedy of horizons”, whereby new challenges to our long-term prosperity and economic resilience, such as climate change, manifest themselves beyond the standard regulatory and market outlook, which is two to three years. Speaking only last year at the World Bank-International Monetary Fund meeting, Mr Carney highlighted the fact that the vast majority of fossil fuel reserves could become unburnable in the transition to a low-carbon economy, resulting in a problem of “stranded assets”.

Investment horizons, whether in terms of the maturity of debt, the scope of risk analysis or the focus of equity markets, are often much shorter than the lifetime of the underlying assets and the impacts they create. An extended time horizon, such as that advocated by the Governor of the Bank of England, is a critical yet poorly understood dimension of a sustainable financial system. What Carney is pointing out, and, sadly, what this Government and this Chancellor have ignored, is that standard investment practice underestimates the value of future threats, particularly for those that are poorly priced and build slowly over time.

Out of 2,868 companies surveyed about their approach to risk management, 72% identified a current or future risk related to climate. It is clear that businesses and investors agree with the Governor of the Bank of England and disagree with the Chancellor, but the situation is worse than that: businesses and investors are delaying investment because of the regulatory risks this Chancellor has created. Of those 72% of companies identifying climate-related risks, 90% cite regulatory risk as a key factor affecting their business. It is no wonder that Bloomberg screens now include a carbon risk valuation tool. The Chancellor should take a look at it.

One of the desperately short-sighted measures the Government took was to scrap the adaptation reporting power. That means that the companies that own and run our critical infrastructure no longer have an obligation to monitor and report but are free to ignore the risks of climate change, leaving us more exposed to the impacts of extreme weather events and flooding. Ironically, the Chancellor claims that that was done as part of reducing the burden on business of unnecessary regulation.

Another short-sighted but devastating decision that undermined the investment capacity and future productivity of UK business was the Government's decision to downgrade the UK climate change risk assessment. I say downgrade, but that is really a euphemism: the Government slashed the number of staff working on climate change impacts from 38 to six in 2012. I do not know how much those 32 officials were being paid, but I am absolutely confident that the cost to British business from the lack of capacity to make a proper future assessment of climate risks and how to adapt to them will be infinitely more.

The impact of climate risk on our economy has been made only too apparent by the devastation left by the floods in 2007 and in 2013-14. This is not an imagined threat of future danger but a proven disaster, so one might expect the Chancellor to abandon cynicism and make the necessary investment to protect the public good. In his autumn statement, the Chancellor announced funding for 1,400 flood defences. It has now been revealed that the lack of partnership funding means that only 93 are fully funded.

A proper Chancellor would understand that the value of the financial system lies in the power it has to catalyse and facilitate a dynamic and efficient real economy. The real economy is that part of the economy that is concerned with producing goods and services as opposed to the part that is concerned with buying and selling on the financial markets. The goal of the financial system should be only to deliver inclusive and sustainable development by facilitating transactions, intermediating capital, transferring risk, transforming maturity, providing liquidity and governing assets. In short, it should serve and support the real economy by enabling capital to be allocated efficiently where it can best be used.

This Chancellor has failed to understand that distinction. Under him, we have seen increasing financialisation of the economy and the increasing importance of financial markets. My point is that the local economy has abundant stocks of financial assets but insufficient flows of investment into the areas where they are required for long-term sustainable development. The World Economic Forum estimates that there is a $1 trillion gap in investment infrastructure each year, but why is that gap important and why is it so important this year? In September, Ban Ki-moon will convene the leaders of the world to agree the sustainable development goals and in December the world will look to Paris and the UN framework convention on climate change to deal definitively with the risks to all our economies posed by climate change.

We must ensure that the misalignment between the financial system and the real economy is addressed and ensure that the financial economy is properly aligned to deliver the investment flows into the productive economy that will supply the need for new energy infrastructure and new adaptive capacity; that will deliver the transforming power of education and public health objectives set out in the sustainable development goals; and that will make for a more, rather than less, inclusive society and end poverty.

We know that a Budget is not an exercise in economic theory but a practical attempt to manipulate the levers of the financial system, both fiscal and monetary, to maximise public goods and the public benefit. If we want peace in the world, we must create economic justice, and if we want justice we must live sustainably.