Transitioning to An Economy That Works

Transitioning to An Economy That Works: Defining and Measuring Success

It is widely recognized that transitioning to a sustainable economy is necessary. Mounting evidence also shows that it will also strengthen UK Plc – promoting competitiveness and stimulating new investment, innovation, and job creation. For example, a recent report by Cambridge Econometrics (commissioned by WWF-UK) showed that meeting decarbonization targets would boost GDP and generate significant employment[i].

This is why WWF-UK supports An Economy That Works (AETW) – a timely and much-needed case for change – and a clear vision for what this transition should deliver.

As AETW emphasizes, one of the key things the UK can do to help drive the transition is to move beyond GDP growth as the dominant measure of economic success. Yet in the UK we still lack a coherent national framework of indicators to help track (and benchmark) progress and inform policy-making.

This blog (a personal perspective) explores why this matters – particularly to Treasury, and why the UK’s annual budget process needs reform.

WWF-UK will launch a report in February 2015 (ahead of the Budget on 18th March) setting out a suite of policy measures that the Chancellor could implement via the budget to help drive innovation and investment.

Beyond GDP: delivering environmental and social outcomes

As vital as GDP is, it is widely accepted that excessive focus on it is a poor way to set policy. As a measure of the flow of national economic output (or income), GDP says little about how individuals are doing or about our true ‘wealth’ (and future prospects), including the stocks of assets that actually underpin economic activity and human well-being.

Countries can, therefore, achieve GDP growth in the short to medium term, whilst at the same time running down their assets – such as the stock of natural capital (soils, oceans, rivers, forests, etc).

Because a declining asset base cannot sustain the same level of output, this is clearly not a sustainable model in the long-term by any measure (economically, socially, or environmentally).

The UK’s Natural Capital Committee (NCC) has warned that we’re doing just this in the UK – and flagged that this will be bad news for the economy, businesses, and citizens.

We’re not alone of course. Most (if not all) economies are struggling to escape from this ‘trap’ to varying degrees. In China, air pollution was linked to 1.23 million premature deaths in 2010, which in monetary terms is equivalent to up to 13% of GDP[ii].

Encouragingly, more and more countries are realizing that focusing on short-term GDP growth at whatever environmental and social cost is inappropriate – and are moving towards a model based on a longer-term, system-wide approach that also delivers environmental and social outcomes.

Whatever we call it – AETW or a Green Economy – the overwhelming consensus is clear: new measures of success are needed based on a wider understanding of what constitutes and influences national economic and individual ‘well-being’ (e.g. stocks of natural capital assets, but also social fairness, quality of life, etc).

Relevance to Treasury and the budget

The Treasury is at the heart of this agenda, given that this required transition will have implications for its dual responsibilities – securing economic prosperity and managing public finances.

To fulfill these roles effectively, and measure economic success in a way that fits with what society really wants, Treasury needs to be making decisions based on the right information. As the NCC put it, “what is not measured is usually ignored”[iii]. This can only be addressed via good indicators, monitoring, and reporting.

For example, Treasury needs to identify how long-term trends in wealth and assets affect UK economic prospects, to set targets and achieve policy goals in the most cost-effective way, and to monitor and report on progress. Treasury also needs to benchmark UK progress against other economies.

In our forthcoming report, we argue that the annual Budget also needs a substantial information overhaul – such as the addition of a full asset report (including information on natural capital stocks, risks, liabilities, and future outlook).

There is also a need to mainstream this kind of information into the Treasury’s decision-making rules, methodologies, and tools (budgetary or otherwise).

For example, introducing a requirement for a natural asset check in the Green Book rules on policy appraisal is a priority, as is improving the way environmental (and social) dimensions are considered in its economic models.

Catalyzing effect of information

In theory, the catalyzing effects of better indicators and information could be substantial – driving a number of necessary enhancements in the way that the Treasury delivers economic and fiscal policy.

For example, by highlighting the links between a healthy economy and a healthy environment, the need to take better account of nature’s value in policy decisions becomes clearer.

Knowing more about our natural assets (and the risks/costs of their degradation) would also help to drive investment where it provides the greatest returns. It would also help to identify policies to reward departments, companies, and consumers for making more sustainable choices and to help stimulate innovation/investment.

Better information would also help to incentivize cross-government working, which is critical to delivering against these new indicators for least cost (e.g. improving air quality and public access to green spaces are increasingly acknowledged as being key elements of any long-term national health policy).

Information could also help to drive a longer-term budget agenda, which is critical for tackling ‘big’ systemic issues such as environmental degradation and climate change (where the benefits will take decades to realize). Long-term planning is also more conducive to investing in preventative and restorative action (“spend to save”) which has the potential to result in better outcomes and achieve greater value for money.

So how are we doing in the UK?

We’re making progress – but not fast enough. The Government’s 2011 Enabling the Transition to a Green Economy report didn’t mention indicators – and the UK still has no clear strategy in place for the development and policy application of such a comprehensive indicator framework.

The Office for National Statistics (ONS) has broken new ground via its National Wellbeing Programme and (from December 2014) will report against a number of new economic well-being indicators alongside GDP[iv]. However, these only cover physical and financial assets.

The NCC has already highlighted the almost complete lack of accounting for natural assets in government policy. The ONS has set out its plans for incorporating natural capital into UK Environmental Accounts by 2020[v] and the NCC has made good progress in a number of areas (e.g. its natural asset register, which should inform indicator development).

However, the political appetite to act upon its findings is highly uncertain (the government response to the NCC’s 2nd report skipped over its key recommendations[vi]).

Substantial gaps also remain in the policy landscape – notably measures to drive the investment required to meet decarbonization targets and new statutory targets for protecting and improving natural capital.

Clearly not all of this is the Treasury’s responsibility, and experience tells us that achieving systemic change will not be delivered without addressing wider political and institutional barriers. This could be achieved in a number of ways.

For example, WWF-UK would like to see the establishment of a new independent statutory Office for Environmental Responsibility to advise the government (alongside the Office for Budgetary Responsibility and other agencies) on the economic/fiscal implications of natural capital stocks (including risks, liabilities and investment requirements) and appropriate policy targets and response, to scrutinize compliance of wider government policy with these targets, and to monitor and report publically on government performance.

Of course, indicators are of no use without targets. Once the right indicators are in place, robust targets should be established to help drive government action and boost investor confidence in emerging markets.

A recent report by a team of leading UK economists highlighted the choice: kick-start green innovation by sending clearer policy signals to investors – or dither and lock ourselves further into unsustainable development pathways which will incur spiraling costs down the line[vii]. The clear message is: economies that actively drive the transition through decisive policy action will gain substantially.

Future budgets will be different

WWF-UK will launch a report in February 2015 (ahead of the Budget on 18th March) setting out a suite of policy measures that the Chancellor could implement to help drive the transition. The report will focus on policies that recognize and maximize the potential economic contribution of our natural capital to the nation’s prosperity, and which position us to perform better in carbon and resource-constrained global economy.

If you would like to know any more about this or any other WWF-UK work, please do get in touch.

Toby Roxburgh is Economics Adviser, WWF-UK

Author: Amreza Bagas
An Extraordinary businessman who loves to share business experience in some words.