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How a sustainable recovery can help boost productivity and level up the UK

Written by: Anna Valero, ESRC Innovation Fellow at the Centre for Economic Performance

Economic policy in the immediate response to the COVID-19 crisis has rightly been focused on protecting jobs and livelihoods. While government has announced the first elements of its recovery package - expected in full in the Autumn - it must now seize this opportunity to develop and implement an economy-wide strategy that will enable the UK to ‘build back better’, delivering a country that is more productive, inclusive and environmentally sustainable.

A continued commitment to net-zero emissions is central to this. In a series of reports with colleagues at LSE, we have highlighted the economy-wide opportunities in the zero-carbon transition, and these are illustrated in more depth in the case of zero-emission passenger vehicles. Our most recent report builds on discussions in the Royal Economic Society webinar series on a strong and sustainable recovery. In it, we set out areas where policy and institutional reform can boost investments in productivity-enhancing assets. Such investments will stimulate demand in the short run while building capacity to deliver on key government objectives including levelling up and increasing productivity – together with achieving net-zero greenhouse gas emissions by 2050. Crucially, investments in productive and sustainable assets will enable the UK to service its increased debts via the tax revenues resulting from economic growth.

Much needed investments can be categorised in the following areas:

  • Physical capital, including infrastructure.  Strategic investments in sustainable projects, including energy efficiency improvements and electric vehicle charging infrastructure, are labour intensive and can be implemented quickly. Investment in broadband infrastructure will enable the adoption of digital technologies for a smart future. Such investments can be boosted by leveraging private finance through creating new markets and establishing a new National Investment Bank.
  • Human capital. Those displaced by the current crisis, broader technological change and the zero-carbon transition will need to be reskilled or upskilled in order to thrive in the labour markets of the future. New approaches for lifelong learning are needed – further increasing incentives for firms to train their workers. Job guarantees – including in sustainable projects – can also help to reduce damaging and costly labour market scarring for those who could face long-term unemployment. A strong focus on disadvantaged students, who risk falling further behind due to disruptions to schooling, is required.
  • Knowledge capital and innovation. At a time of great financial risk to the UK’s research universities, accelerating the drive to reach a target for R&D investment of 2.4% of GDP can be achieved through a mixture of increased funding and incentives for innovation, including enhanced measures to direct innovation towards clean technologies. In order to strengthen or build regional innovation hubs, further collaboration between universities, industry and local policymakers is needed. In addition, support for diffusion of existing technologies is key for improving productivity and resilience in the UK’s lagging firms.
  • Natural capital. Ecosystems creation, preservation and restoration projects require direct investment. This must be supported indirectly through projects such as active and accessible travel infrastructure and smart city design, which result in cleaner air, improved health and wellbeing.
  • Social capital. Public trust and buy-in for a sustainable recovery can be built both locally and nationally - by developing and communicating a strategy that will lead to improved opportunities and living standards. To achieve this, it will be important to involve local policymakers and stakeholders in the design of the recovery package, building on positive behavioural changes in response to Covid-19 (e.g. reduced business travel and more family-friendly working practices) and utilising the latest innovations in public participation, such as Citizens’ Assemblies.

There are strong local and regional elements across the investment areas set out above and, as such, resources should be channelled to where the evidence suggests they are most needed and where impacts are considered to be greatest. To date, both the health and economic impacts of Covid-19 have been unequal across individuals and places, and this is likely to exacerbate large pre-existing disparities in economic performance. Into recovery, local policymakers should be empowered and adequately resourced to deliver local responses where appropriate.

The various components of an effective recovery package are complementary, and must therefore be part of an overarching strategy which can be more than the sum of its parts. To this end, the UK’s industrial strategy should be re-emphasised, updated and relaunched – at the national and local levels - with clean growth at its core. Given the response to Covid-19 and the extent of government support to industry, a long-term industrial strategy can help build a strong partnership between the private and public sector accelerating investments towards a sustainable and inclusive future.

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