Pandemic, climate change and rising debt pose fiscal risks in UK, watchdog warns – business live | Business

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The fiscal cost of achieving net zero by 2050 will be double if the UK government delays taking action until 2030, rather than acting quickly now, according to UK budget watchdog .

The Office for Budget Responsibility’s Fiscal Risk Report shows that taking early action to decarbonize the economy has a lower net impact on UK finances than Covid-19 or the 2008 financial crisis.

But delaying until the start of the next decade will end up adding twice as much to the national debt as acting fast.

And failing to act has a catastrophic impact on public finances (and, more importantly, the planet), with debt reaching 289% of GDP by the end of the century, up from around 100% today.

The UK Climate Change Committee (CCC) puts the cumulative investment cost for the entire economy by 2050, plus the operating costs of the emissions cuts, at £ 1.4bn at 2019 prices, the report says.

The government has not said how much of that cost it expects to bear – but the OBR assumes it covers a quarter of it. Combined with the savings from more energy efficient buildings and vehicles, the net cost to the government is £ 344 billion in real terms. Spread over three decades, this represents on average only 0.4% of GDP in additional public spending each year.

Speaking at today’s press conference, OBR chief Richard Hughes explains that the watchdog has crafted an “early action” scenario, in which the UK is stepping up carbon taxes and also stimulates investment in green technologies from mid-2020.

In this scenario, in which all carbon emissions are taxed, the transition to net zero by 2050 adds approximately 20% of GDP to public debt over the next 30 years, slightly less than what the pandemic is expected to add in just two years, says Hughes.

Office of Budget Responsibility
(@OBR_UK)

The total cost to society of achieving net zero could be significant, with £ 42bn per year of investment required to decarbonize power generation, home and commercial heating and manufacturing. #OBTax risks pic.twitter.com/UmmJzr5QJj


July 6, 2021

Office of Budget Responsibility
(@OBR_UK)

the #OBTax risks the report is based on @theCCCuk and @bank of England scenarios to estimate the net fiscal impact of reaching net zero by 2050. An early action scenario adds 21% to the debt-to-GDP ratio – a lot, but less than the 2020 pandemic or the 2008 financial crisis . pic.twitter.com/hND7n2thLc


July 6, 2021

Most of the cost comes from the loss of the fuel tax, followed by government support for investments in zero-carbon technology – which are only partially offset by heavier carbon taxes.




The OBR report shows how broadening the tax base to cover all other emissions would increase revenue from a carbon tax. Photograph: OBR

But, this is only a scenario for reaching net zero, and arguably “fairly optimistic,” admits Hughes, in which governments around the world are taking decisive action this decade to put their emissions on a sharply declining trajectory. .

OBR therefore modeled alternative scenarios – varying the timing of the transition, the impact on productivity and fiscal policy choices.

Scenario saves government money – if the investment costs are financed within the framework of the existing expenditure plans (which means a very tight cut on other public services), and the loss of the fuel tax is replaced by another tax on the automobile, such as a road user charge.

But in the ‘late action’ scenario in which decisive action to reduce emissions globally and in the UK is delayed until 2030.

Then the UK has to deal with a more rushed and costly transition to net-zero – and misses five years of carbon tax revenue.

In this scenario, the debt in 2050-2051 is 23% of GDP higher than in the early action scenario, with a lower GDP of around 3% and direct public expenditure increases by about half.

Hugues says:


The price of this delay is a doubling of the total fiscal cost of the transition.

Office of Budget Responsibility
(@OBR_UK)

The economic and fiscal consequences of achieving net zero are uncertain, and there are choices as to the share of the cost borne by the state versus households and businesses. We therefore consider alternative scenarios and sensitivities and their effect on debt. #OBTax risks pic.twitter.com/TL7AeECufL


July 6, 2021

Office of Budget Responsibility
(@OBR_UK)

Policy parameters are critical to the long-term fiscal impact of achieving net zero. Debt falls below our baseline if zero net transition costs are funded from existing public investment plans and the fuel tax is replaced by another auto tax. pic.twitter.com/yAx2S52tbT


July 6, 2021

Hughes also points out that in certain sectors of the economy, such as transportation, decarbonization pays off, as improvements in battery technology reduce the lifetime cost of electric cars below the cost of gasoline cars, says Hughes.

But other areas have large net costs, such as replacing household gas boilers, there are large net costs that society would have to bear.

The net cost to government depends on how incomes evolve – net zero offers threats and opportunities. Revenue collected from gasoline taxes is threatened – which will almost certainly disappear once fossil-fueled cars are banned by 2030.

But, this can be partially offset by a carbon tax (although revenues here would decline as the economy goes to net zero).

Office of Budget Responsibility
(@OBR_UK)

The shift from fossil-fueled vehicles to electric vehicles, on the other hand, offers the prospect of both emissions reductions and financial savings through lower operating costs. This may be one of the reasons why electric car adoption has consistently exceeded our expectations. pic.twitter.com/t571WiQJpT


July 6, 2021

Office of Budget Responsibility
(@OBR_UK)

Fewer fossil-fueled cars, which will be banned for sale in 2030, will reduce £ 35bn per year (1.5% of GDP) in fuel taxes and VED revenue. This could be, temporarily, offset by higher carbon taxes, which could also help pay some of the transition costs. pic.twitter.com/ZNUpmtd7ml


July 6, 2021

Here are other key graphics from the report:

Office of Budget Responsibility
(@OBR_UK)

The government has pledged to achieve net zero by 2050. Since 1990, the UK has reduced its CO2 emissions by 243 million tonnes, more than any other G7 economy and faster than the average. the EU. #OBTax risks pic.twitter.com/urzK7VtSTz


July 6, 2021

Office of Budget Responsibility
(@OBR_UK)

But the UK will need to cut emissions by an additional 365 million tonnes over the next 30 years to achieve net zero emissions by 2050. Reductions will need to come mainly from decarbonising energy, industry, buildings and transport.#OBTax risks pic.twitter.com/5La0QXZRya


July 6, 2021

Office of Budget Responsibility
(@OBR_UK)

The shift from fossil-fueled vehicles to electric vehicles, on the other hand, offers the prospect of both emissions reductions and financial savings through lower operating costs. This may be one of the reasons why electric car adoption has consistently exceeded our expectations. pic.twitter.com/t571WiQJpT


July 6, 2021

And here’s a reaction:

Joss garman
(@jossgarman)

The central OBR scenario indicates that net zero costs are negative until the early 2030s.

The overall cost of transitioning to Net Zero could double if action is delayed by a decade.


July 6, 2021

Jason groves
(@ JasonGroves1)

The new OBR forecast suggests a total cost of moving to Net Zero by 2050 of £ 1.4 trillion – although the savings may offset that by nearly £ 1.1 trillion. pic.twitter.com/F4TdSKtEw7


July 6, 2021

Tom peters
(@tbtpeters)

This is helpful in the OBR report released today. Significant costs for early action on climate change (which can be mitigated by green fiscal measures – although more debate is needed on fairness), but the cost of late action is enormous. pic.twitter.com/gv2AlFS635


July 6, 2021

emilymckenzie
(@ ejmckenzie1)

@OBR_FR The FRR includes the climate as 1 of the 3 major risks for public finances. Recognizes the need to include nature in the balance sheets of government assets and liabilities when thinking about fiscal risks and long-term fiscal sustainability. Briefing at 11h https://t.co/ZHb4GPEJx5


July 6, 2021



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