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Beyond 'aid'

The decision by the UK government at the end of 2020 to go back on its commitment to spend 0.7% of GDP on overseas development assistance – reducing it to 0.5% – has been widely criticised. First achieved in 2013, the UN target was embodied in UK law in 2015.

Of the 43 richer nations counted by the OECD as providing overseas development assistance (ODA) – defined as aid specifically aimed at reducing poverty in low-income countries – only five now provide 0.7% of GDP or more. The World Bank estimates that the Covid-19 crisis pushed around 120 million people around the world into extreme poverty, with almost all governments pushed into higher debt and their development plans severely retarded.

While many are calling for aid to low-income countries to be increased, others argue that the concept of aid from rich to poor nations is outdated, not least because the majority of the world’s poor no longer live in the lowest-income countries. Proponents of the concept of ‘Global Public Investment’ are attempting to forge a new multilateral approach to investing in the Sustainable Development Goals (SDGs) and ending poverty, opening up decision making to include the poor. Calls for a Global Green New Deal also embody this idea.

Special Drawing Rights

It is now widely expected that the International Monetary Fund (IMF) will create $650 billion in new international money to help low-income countries recover out of the pandemic. So-called ‘Special Drawing Rights’ or SDRs (which countries can draw on from the IMF) could help support both vaccination and health care programmes and infrastructure investment – particularly in green projects and ‘nature-based solutions’ – in the global South.

Under current IMF rules SDRs mainly go to richer countries (including China), so this programme will require them to ‘donate’ their allocations back to the IMF to reallocate to poorer ones, particularly in Africa. Many people are now arguing that this redistribution should be written into the IMF’s rules to ensure it is permanent. Others are calling for a larger SDR issuance as part of stronger support for a global green and resilient recovery.

Debt relief

For many low-income countries, the Covid-19 crisis has further damaged already struggling economies. 52 countries are currently experiencing a debt crisis, where the size of debt payments undermines the government’s ability to protect the basic economic and social rights of its citizens. A further 100 plus countries are considered at risk. 2020 saw a huge flight of overseas capital from developing economies.

Since May 2020 the Debt Service Suspension Initiative (DSSI), initiated by the rich G20 countries, with the World Bank and IMF, has postponed debt repayments for some of the poorest countries during the pandemic. Many indebted countries are however choosing not to take part, for fear of this impacting on their sovereign credit rating and therefore the costs of future debt.

There are now widespread calls for a more comprehensive package of debt relief for the poorest and most indebted countries. One possibility is that this could be funded by earmarking the rise in the value of gold reserves over recent years. Innovative proposals have also been put forward to combine debt relief with environmental action, where countries agree to ‘swap’ debt relief for quantifiable commitments to reduce deforestation or enhance conservation.

Trade, the environment and climate change

One of the most insistent criticisms of trade agreements has been in relation to their impacts on the environment. International trade is of its nature carbon-generating, as goods are transported around the world. But trade agreements can also open up new markets for commodities produced in unsustainable ways, from fish to palm oil, tropical timber to cement.  

Many people therefore argue that environmental protection should be a core principle of trade agreements. Indeed, trade deals could be a powerful mechanism to promote stronger commitments on climate change or biodiversity conservation, rather than weaker ones.

One proposal gaining increased attention is for ‘border carbon adjustment’. This would enable countries with strong climate policies to impose tariffs on imports of goods from countries with lower standards. This would ensure that trade did not become a ‘race to the bottom’ in which lower standards were effectively incentivised. But many developing countries are worried that any such border tax could simply turn into a form of trade protectionism which froze them out of developed country markets.

New kinds of trade agreements and governance

As the UK embarks on agreeing new trade agreements, there are increasing calls for such deals to be designed around clear principles of public interest, not simply on increasing the volume of trade as an end in itself. Many for example argue that trade deals should be used to protect and enhance labour and environmental standards, rather than to reduce them.

With the final Brexit deal rushed through Parliament at the last minute, there have been calls for MPs to have a much stronger scrutiny role in future, and for trade unions to be involved in agreement design where labour standards are at stake. More widely there are calls for the World Trade Organisation to be reformed to focus on major global challenges and greater accountability.  

Trade deal controversies

Leaving the EU means the UK needs to negotiate many new trade agreements – indeed the freedom to do so was one of the main arguments used in favour of Brexit.  

Trade deals are no longer only, or even mainly, about reducing tariffs. They primarily focus now on reducing other ‘barriers to trade’, for example by aligning national regulations in areas such as product standards, professional qualifications and environmental protections.  

Trade deal proposals are therefore often highly controversial, with many fearing they will lead to a lowering of existing standards and protections. The UK’s early discussions with the US around a post-Brexit deal were a case in point, with warnings that it would lead to the arrival of chlorinated chicken on UK shelves or the risk of further privatisation in the NHS.

One of the elements of trade agreements which has led to particular opposition is the widespread use of ‘Investor-State Dispute Settlement’ (ISDS). This is a mechanism under which a company from one signatory state investing in another can argue that new laws or regulations could negatively affect its expected profits or investment potential, and seek compensation in a binding (and often secret) arbitration tribunal. This effectively elevates the rights of corporations above a country’s democratic right to decide its own laws.

International tax cooperation

Over recent years many countries have reduced their tax rates on businesses, hoping to attract inward investment from multinational corporations. But this can easily lead to a ‘race to the bottom’, in which tax competition leaves all countries with lower revenues. Low-income countries are hurt the most, and corporations are the beneficiaries.

Multinationals anyway find it easy to avoid high tax rates by ‘profit shifting’ and ‘transfer pricing’, the creative accounting methods by which profits are allocated to the countries and states where taxes are lowest. It is estimated that this costs governments globally up to 10% (approximately $240bn) of corporate tax revenues every year, money that could have been spent on public services, or that must instead be found from smaller businesses and citizens. Some large multinationals pay almost no corporate taxes in the UK (and other countries) at all.

At the same time both corporations and wealthy individuals have been able to make extensive of tax havens, usually small nations which seek to attract foreign capital by exempting it from tax altogether.

Proposals for international tax cooperation coordinated by the OECD have been given a boost by President Biden’s commitment to internationally agreed minimum corporation tax rates. At the G7 Summit in 2021, finance ministers agreed in principle to a global minimum corporate tax rate of 15%, marking major progress in the taxation of multinational companies.

A number of proposals have also been made for national taxes on multinationals, and for closing tax havens.

Vaccines and global health cooperation

Covid-19 vaccination programmes in most low-income countries have been proceeding much more slowly than in richer countries. This is both because of lack of finance, and because most of the available supply has been bought by the global North. It is generally accepted that the pandemic will only end when almost everyone in the world is vaccinated, since without this there will be a high risk of new variants being transmitted across borders. Universal vaccination will also hasten global economic recovery. But in practice ‘vaccine nationalism’ has so far dominated.

A global scheme for vaccine distribution, Covax, has been established, and high income countries have pledged money and vaccines to it. But both finance and supply are running well behind demand.

Many proposals for reform focus on the dominant private sector-led model of vaccine development and supply, which it is argued puts profit and the retention of intellectual property rights ahead of meeting human need.

Before the G7 Summit in 2021, the US had signalled its support for patents on Covid vaccines to be temporarily waived in order to facilitate their production in the Global South. But Germany, the EU and the UK resisted this. Instead, vaccines will be bought from pharmaceutical firms using public money and then donated to lower income countries.

New international frameworks for financing and developing vaccines, medicines and health services in the global South have been proposed.

The need for international cooperation

The global spread of the Covid-19 pandemic has highlighted the interconnected nature of today’s world. But the international response has not been equal, with huge differences in the capacities of high income and low income countries to control the spread of the coronavirus and to pay for vaccination programmes. The disparities have highlighted the need for a stronger system of international cooperation and equity, not just in the health field but across a range of issues.

Many of the world’s most pressing problems cannot be solved by national action alone. They include global poverty and security; climate change; the protection of the oceans; and the regulation and taxation of transnational corporations operating across national boundaries. The 17 Sustainable Development Goals, adopted at the United Nations in 2015, embody the international community’s economic, social and environmental priorities.

Over recent years international cooperation has been in decline, particularly in multilateral fora such as the United Nations and the G20. The return of great power rivalries, particularly between the US and China, along with the impact of economic weakness and Brexit on the unity and reputation of the European Union, have led to a fracturing of international relations. The UK government, for its part, has declared a new post-Brexit vision of a ‘Global Britain’, but what this should mean is not always clear.

In this context a wide range of voices have been calling for a revival of international and multilateral cooperation and for a new, positive role for the UK.  

Public sector workforce: recruitment and pay

In the decade before the pandemic, public sector pay fell behind the rising cost of living, so that in real terms public sector workers earned £900 less per year in 2020 than they did in 2010. Some workers have seen particularly sharp falls in pay, including teachers (£1349), local government residential care workers (almost £1900), firefighters (£2508) and early career nurses (over £3000).

In this context, the Government’s recent restraint on public sector pay has attracted criticism. First, many claim it undervalues the work of millions of public sector key workers who have already seen a decade of pay cuts. Second, economists of all stripes have questioned the wisdom of cutting wages while simultaneously trying to stimulate economic recovery. Third, some fear public sector pay restraint will exacerbate inequalities, as women and those living in poorer regions of the UK are disproportionately likely to work in the public sector.

The longer-term issue is building public sector capacity. Before the pandemic, public sector wages had fallen to a 25 year low relative to the private sector. At the same time, funding cuts have led to increased pressures on workers, further exacerbating recruitment and retention difficulties. In the short-term, pain in the private sector labour market and heightened interest in public service are likely to ease recruitment problems. Without efforts to reverse longer-term trends, however, we risk further undermining public sector expertise - leading to increased reliance on outsourcing - and failing to rebuild resilient public services after Covid-19.

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Outsourcing, procurement and public sector capacity

A string of high-profile failures and corruption allegations (e.g, Test-and-Trace, Ayanda Capital) during the Covid-19 has increased scepticism surrounding the value of and processes surrounding the government’s use of outsourcing and procurement.

In the decades prior to the pandemic, the government had come to increasingly rely on private providers to deliver public services, leading to a fall in the public sector’s capacity to deliver services ‘in house’. In 2018, following the Carillion scandal, the auditor general claimed that “there are lots of areas where the government does not have the capacity to do anything else but outsource”.

The result is a “gravy train”, whereby an over-reliance on the private sector and flawed contracting models mean that consultants and private companies like Carillion can make huge sums of money from government contracts, even if they deliver poor quality services. This is especially true during a shock of the magnitude of Covid-19, when services need to be rolled out quickly. Many have called for wholesale reassessment of the Government’s handling of private services providers following the pandemic.

See also the section below on public sector pay and recruitment for relevant resources on rebuilding public capacity.

Local public services

The United Kingdom - especially England - has a highly centralised political system and economic geography. Decision-making power is far more concentrated in central government than in comparable Western countries, and regional inequalities in income, wealth and health are almost uniquely pronounced.

The centralised management of public services has been a contentious topic during the pandemic. Many have argued the Government’s “over-centralised” response impeded effective provision of services, particularly with respect to public health and test-and-trace.

Covid-19 has also drawn attention to the financial fragility of many local authorities, which impedes their ability to provide public services. In 2020/21, English local authorities’ spending power was 26% lower than a decade prior. This period also saw population growth of 7%, rising demand and cost pressures, and new statutory duties for councils relating to public health, social care and homelessness.

For more relevant resources, please see our sections on health and social care, stronger local economies and regional inequality.

Funding public services

In the decade before the pandemic, public services saw "the longest sustained squeeze in public spending on record”. Analysis from the Institute for Government found that underfunding left “public services entered the crisis with ailing performance levels, severe staffing pressures and having underinvested in buildings and equipment”, undermining resilience in these services by the time the pandemic hit.

Rebuilding resilience in public services will require increases in their funding. Our ageing population is also likely to require higher spend per capita on health, care and other services to maintain service quality. There is also popular demand for spending more on public services.

Supporting a higher level of spending on public services will require tax reform, both to raise sufficient revenue and to ensure it is raised fairly. Others, including the Financial Times editorial board, have argued policymakers “must see public services as investments, rather than liabilities”, with implications for how spending on public services is treated within fiscal frameworks.

Please see our section on taxation for more relevant resources.

Public services for the 2020s

Over the past year, there has been an outpouring of appreciation for NHS staff, carers and other workers delivering key public services under extraordinary strain. At the same time, the pandemic has exposed a certain lack of resilience within these services, compromising our ability to respond to Covid-19 in an effective and fair way, even despite the best efforts of public servants.

The task beyond Covid-19 is to rebuild public services so they are better equipped to handle future challenges - both acute shocks, such as another pandemic, and chronic pressures such as our ageing population. Public services will also play a crucial role in achieving long-term shared national goals, such as decarbonisation or tackling regional inequality, and should be managed with these in mind. Other insights from our experience of Covid-19, including the centrality of digital access and data governance, should shape future public service provision.

The resources in this section bring together evidence on pre-Covid trends in public service provision - spending cuts, outsourcing, centralisation - and suggestions for how to rebuild these services in the wake of crisis.

Many argue that public services and social security must complement each other and be seen as part of the same system - please see our “Improving work and welfare” pages for further relevant resources.

Cooperatives and social enterprise

The UK has a flourishing economy of cooperatives (companies owned by their workers or consumers) and other forms of social enterprise (non-profit-distributing businesses with social goals). Such businesses have a long history in the UK and around the world, their origins often in mutual self-help initiatives among working class and other marginalised communities. They are characterised by democratic ownership and governance, and often a social mission.

Mutual building societies – which borrowed money from members of a local community to lend to others for housebuilding and purchase – were once a pillar of the UK financial system, but most became commercial banks in the privatisations of the 1980s and 90s. Both in the UK and around the world credit unions have performed a similar role of mutual borrowing and lending within a local or occupational community. Today a new wave of mutual banks is emerging to fill a gap in finance for social good.

Worker-owned cooperatives continue to be the mainstay of the cooperative movement, with the Mondragon network in the Basque country of Spain the single largest group. In the UK John Lewis remains the most famous employee-owned business, though its governance structure is not fully democratic. The Cooperative Group and regional cooperative societies are consumer-owned mutuals. In recent decades  a vibrant movement of community enterprises has emerged: socially-owned businesses committed to advancing social and employment goals, often in low-income areas.

Widening business ownership

The ownership of UK firms is highly concentrated. Over the last fifty years there has been a dramatic decline in the proportion of shares held by ordinary individuals. Share ownership is dominated by institutional investors such as pension funds, asset managers (many now operating passive investment funds), and the wealthy, many based overseas. Since the 1980s successive governments have privatised previously public-owned industries such as rail, water and energy. Few workers hold shares in the firms in which they work and the UK cooperative sector is smaller than in many other countries.

In recent years there has been increasing interest in how ownership can be widened. One way is through public ownership, in which the state takes equity stakes in companies in major sectors, such as energy or rail. Another is by giving ownership stakes in companies to their workers. This can be done either through individual employee share ownership schemes, or through collective worker ownership funds which would both widen the distribution of profits and give workers a say in how businesses are run.  

Another route increasingly advocated would be through the creation of a national ‘citizen’s wealth fund’, which would build a portfolio of company shares and distribute a dividend to every citizen.

Executive pay and pay ratios

One of the most persistent criticisms of corporate behaviour has been of the high levels of pay and share options by which company executives are often remunerated. Since 2000 the average earnings of workers in the UK have increased by about 3% a year, but the pay of FTSE 100 executives has grown by around 10% a year. The average FTSE 100 CEO is now paid 126 times as much as the average UK worker, compared to 58 times in 1999.

In principle executive pay should be based on company performance, but the evidence is that there is little or no relationship between them. Indeed, the widespread use of share option incentive schemes, in which executives are rewarded for increases in the value of company shares, has been criticised as an incentive for directors to focus on short term returns rather than long term investment. Various reforms to pay structures to incentivise long-term performance, and benefits to employees and other stakeholders, have been proposed.

Listed companies in the UK with over 250 employees are now required to report on the ‘pay ratios’ between their highest pay rates and their lowest and median pay. There are now calls for this to be extended to privately-owned companies, for more information to be disclosed about higher earners, and for the information to be better disseminated to company employees. Some have proposed a ‘maximum wage’, an upper limit on allowable executive pay, with the money saved redistributed to lower income workers in the company.

Regulating corporate behaviour

As multinational corporations throughout the world have grown over recent decades, they have developed complex supply chains. Globally traded commodities and goods may go through many stages of production in different countries before being made into the final products we buy. In this process it is easy for companies to profit from exploitative wages and conditions, forced labour and environmental harm, particularly in the global South where workers and local communities may have little bargaining power and enforcement is difficult.

Most of the initiatives designed to prevent abuses of this kind have been voluntary, where companies commit to codes of ‘corporate social responsibility’. But there is strong evidence to suggest that these are often ineffective. Companies are insufficiently motivated or incentivised to audit their supply chains properly.

One response has been the development of ‘worker driven social responsibility’, where trade unions and workers’ organisations agree higher standards with companies, and are able to enforce them. Another has been the development of ‘due diligence’ laws, by which multinationals are obliged under the law of their home states to audit their supply chains and ensure high standards, in areas such as labour conditions, human rights, environmental impacts and anti-corruption. The evidence suggests that a requirement to report on their supply chains is not enough; companies need to be criminally liable to ensure compliance.

ESG: environmental, social and corporate governance principles

Over recent years there has been a huge increase in the number of companies and financial investors committing to ‘ESG’ principles, under which they aim to achieve not just profit and financial returns but better environmental and social impact and corporate governance. Globally, assets classed as ‘ESG’ were valued at over $30 trillion in 2018, an increase of a third on 2016.  ESG investment funds have consistently outperformed the average, and there is strong evidence that an attention to ESG can improve shareholder returns.

ESG principles commit companies and investors to assessing their performance through the ‘triple bottom line’ of ‘people, planet and profit’ (sometimes known as TBL or 3Ps). But there is no universal agreement on the specific standards of behaviour which define ESG, or the metrics which should be used to measure performance. With so many different criteria used by ESG investment funds, critics argue that too many allow for ‘greenwashing’ of companies with unsustainable and socially damaging impacts.

When the US Business Roundtable released a statement in 2019 arguing that US businesses should be committed to a broad range of stakeholders – including customers, employees, suppliers and communities as well as shareholders – this was widely interpreted as a significant shift in business philosophy. But others argued that ‘stakeholder capitalism’ in practice looked insufficiently different from shareholder capitalism. Activist investors, both corporate and individual, are increasingly seeking to hold businesses to account in order to raise ESG standards.

Reforming corporate governance

Corporate governance in the UK and US is based on the principle of shareholder primacy. This means that the interests of shareholders take priority over those of other stakeholders in a firm, such as workers, suppliers or consumers. There is good evidence that this can encourage an excessive focus on short-term profitability, at the expense of long-term investment.

It is widely argued therefore that the Anglo- American model of corporate governance should better reflect the interests of a company’s stakeholders, not just its shareholders. Proposed reforms include giving firms an explicit duty to pursue long-term purpose or value creation, and to tie executive pay to a range of performance metrics rather than just a firm's profitability or share price.

A particular focus for reform is the make-up of company boards. Advocates of worker representation on company boards – which is commonplace in many European countries – argue that it would tend to strengthen investment, because workers have a longer-term interest in their companies than short-term shareholders. By fostering a culture of cooperation between managers and workers, it is said, it would also boost productivity. There are also widespread calls for mandatory improvement in the gender and ethnic diversity of company boards.

Renewing the purpose of business

Businesses are fundamental to any economy. They come in all shapes and sizes, from sole traders to multinational giants. But in recent years there has been growing criticism, both of the way some businesses behave, and of how they are governed. Much of this has come from within the business community itself.

A key argument is that many large businesses have lost their sense of ‘purpose’. Increasingly focused on financial metrics of success, many are now seen as prioritising short-term returns above long-term investment, and the interests of their shareholders above those of their wider ‘stakeholders’, such as their workers and consumers.

Partly as a consequence, new models of business have become more prominent. These include companies committed to an explicit statement of purpose. New types of ‘stakeholder’ corporate governance and financial investing are on the agenda, along with new forms of ownership giving a greater stake to workers. In these and other ways, an increasing number of businesses are seeking to change their impact on society and the environment. But some critics have expressed doubt as to whether some of these initiatives are far-reaching enough.

Income and wealth inequality in the UK

The UK has one of the highest levels of income inequality in Europe. There was a sharp increase in all measures of economic inequality over the course of the 1980s. According to the Gini coefficient, income inequality has stayed relatively flat since 2000, but other measures tell a different story.

First, the income gap between richer and poorer households has been increasing in absolute terms, even if measures of relative inequality like the Gini coefficient have stayed stable. Second, you can measure relative inequality itself in different ways. If we focus on the poorest 20% of households, for example, we see that incomes for this group are now no higher than they were 15 years ago, while the average household has seen its income rise 9% over this period. Similarly, the Gini coefficient hides the accelerating rise of the richest 1%, who now take 8% of all national income (compared to 3% in 1970 and 6% in 1990). Third, changing the way we measure income - such as by factoring in housing costs, or income from capital gains or inheritance - can reveal a widening disparity even over the past decade.

Wealth is far more unevenly distributed than income. Between 2016 and 2018, the wealthiest 12% of households owned half of the UK�۪s wealth, while the least wealthy 30% of households held just 2%. In the past decade, the wealth gap has increased: the wealthiest 10% hold �2.5m more in wealth per household than the least wealthy, a significant increase from the �1.5m gap in 2006-08. For the most part, income and wealth are tightly linked, meaning that the households most exposed to income shocks often do not have savings to fall back on. This goes some way to explain the increase in low income households turning to debt to cover essential needs - rent, food, utility bills - over the past decade.

Preventing financial crisis

Covid-19 lockdowns have caused incomes to evaporate for many sectors and households, as businesses are closed and economic activity falls. Many people are reliant on government grants and loans to avoid insolvency and defaulting on debts. The challenge is to prevent these debt burdens from leading to a financial crisis.

There are also concerns about equity; one analysis toward the beginning of the pandemic estimated that nearly half of the government�۪s furlough scheme would be spent on rent and debt repayments, ���amounting to an implicit bail-out of landlords and banks".

Central banks can cut interest rates still further, and continue to use asset purchasing programmes to shore up the wider system - otherwise known as quantitative easing. Governments can guarantee or write off all or a portion of loans made to corporations and households, and can also help to increase the incomes of households or corporations to ensure they are able to service their debts in the short term.

The importance of financial taxation

Taxes on finance, currencies and banking can serve a number of important purposes. They can reduce volatility in markets and reduce excessive speculative activity.

They guide towards or against particular types of financial activity ��� for example discouraging high risk parts of the industry that serve little direct social purpose, like high-frequency trading. They can also raise revenues that can be spent by the state on delivering wider economic objectives, such as a more inclusive finance system and funding the net-zero transition.

This is particularly relevant in the aftermath of an economic crisis such as that triggered by Covid-19, where the state has needed to act to prevent or minimise financial collapses.

Regulating the financial system

Since the financial crash policymakers have adopted a macroprudential approach to financial regulation focused on combating systemic risk, rather than a microprudential approach focused on individual institutions.

These measures have helped to reduce the risk of failure in the banking system in wealthier nations but banks are increasingly struggling to meet their regulatory requirements during the pandemic. The economic shock triggered by Covid-19 has exposed some remaining problems across the system ��� for example, many large financial institutions outside the realm of traditional banking remain under-regulated, such as hedge funds.

Proposals for better regulation of the financial system can be crudely divided into two areas. First, those that might help the system keep working in the event of an economic crisis, including changing capital requirements and lowering dividend payouts in lean times. Second, longer-term reforms to build both resilience and ensure wider social and environmental purpose. Many of these are outlined below.

Banking ecosystems

The UK�۪s banking system is unusual in its dominance by commercial banks.  Many other countries have a more diverse range of banks ��� more publicly-owned banks at the national and local levels, and a more thriving cooperative and mutual banking sector.  

Such a network of ���stakeholder banks�۪ can help a country�۪s financial resilience, ensure that lending reaches the parts of the economy left behind by mainstream finance, and deliver targeted investment to meet national or local strategic economic goals such as the green economy.

Restructuring local economies

The UK is one of the most geographically unequal countries in the industrialised world. Large disparities in wealth, opportunities and health exist within and between regions. Longstanding areas of urban deprivation have the highest levels of unemployment.

Compared to many other countries, local areas lack wide-ranging powers and resources. National decisions from the recent past, most notably austerity, have further undermined the ability of people and places to shape their own resilient economic future. Between 2010 and 2018, local authorities have seen 24% cuts to their funding with cuts falling disproportionately on councils in more deprived areas. Many of the bodies that do exist, such as Local Enterprise Partnerships, are criticised as undemocratic, under resourced and lacking the appropriate powers to make effective change.

Giving greater power to local authorities and communities is not just about reversing past cuts. Two leading ideas are to reform and reinvigorate local and regional governance, including through greater devolution within England; and for local leaders to pioneer Community Wealth Building, economic strategies that seek to keep as much wealth as possible circulating around the local economy.

Pharmaceutical development

There are major challenges for the development of new medicines in the coming years. Foremost among them is the need to ensure that treatments and vaccines are widely available and fairly priced.

The threat of antibiotic resistance is a major looming health crisis. It has been driven by the overuse of existing antibiotics and the lack of innovation in new ones. The drive for profits in the global pharmaceutical industry remains at the heart of the problem. The challenge is how to align this with the public interest.  

The Covid-19 crisis has revealed the difficulties of global cooperation on pharmaceutical development. The UN�۪s attempt to set up an information pooling scheme to share intellectual property around vaccines has been strongly resisted by the industry. Rich countries are prioritising vaccine development for their own populations first.

Proposals for reform fall into three main categories. First, more publicly-directed pharmaceutical development models. Second, greater global cooperation on vaccines development and distribution. Third, limiting the risks of antibiotic resistance by reducing their overuse in human and animal medicine.

Closing the funding gap

Far more money needs to be mobilised to avoid the worst impacts of the environmental emergency. Not only must investment in green activity increase, funding for environmentally destructive activity must decrease.

Governments are committing to a green recovery from the pandemic and interest rates are at a record low - so a range of voices argue that there is a case for greater public and private spending on sustainable investments.

Evidence shows that sustainable investments deliver high financial returns and can create lots of quality jobs, offering an opportunity to improve social and economic outcomes as well as restoring the environment.

Achieving net zero

The UK has committed to reducing emissions to net zero by 2050. This means having a balance between the emissions produced and those taken from the atmosphere. Many consider 2050 too late given the urgency of climate emergency.

Economic decisions taken in response to the pandemic may help accelerate, or further slow, the transition to an environmentally sustainable economy. Demands for a green recovery are adding new urgency to existing calls for industrial strategy and economic policy to prioritise sustainability.

Before the pandemic environmental groups said 2% of GDP needed to be spent in the UK to adequately tackle the climate and environmental emergency. Without similar action around the world there will be little hope of avoiding the most destructive consequences of the emergency.

Policy for the environmental crisis

The world faces many serious, interconnected environmental crises, such as the degradation of soil health, pollution and the mass extinction of species. These combine with climate breakdown to present an unprecedented set of economic and social risks to all countries. This is a profound challenge for governance and business and has been described as the ���defining challenge of our time�۝.  

Taking this risk seriously will require far more than just treating these crises as isolated policy issues. Historically, responsibility for the environment has tended to be the focus of specific government departments. Business-friendly approaches, such as voluntary agreements and promoting deregulation, have often been prioritised over deeper change.

Many organisations have proposed economy-wide measures or approaches that would seek to hardwire environmental limits into the daily activity of governments and business. These include the UN�۪s 17 Sustainable Development Goals (SDGs), which are a potentially transformative global agenda for 2030 on poverty, development and the environment, but have not yet been adequately implemented by countries including the UK. 

Other policy approaches include the concept of a circular economy, under which linear, throwaway business models are replaced with ones that regenerate nature and re-circulate materials. Other ideas include the better economic valuation of nature, incorporating this value into economic decision making, although this is practically and ethically complex.

The recent history of inequality

The UK has one of the highest levels of income inequality in Europe, with a sharp and sustained increase in all measures of economic inequality over the course of the 1980s. According to the Gini Coefficient, income inequality has stayed relatively flat since 2000, but other measures tell a different story. 

The income gaps between richer and poorer households have been increasing in absolute terms, even if measures of relative inequality have remained stable. You can measure relative inequality itself in different ways. If we focus on the poorest 20% of households, for example, we see that incomes for this group are now no higher than they were 15 years ago, while the average household has seen its income rise 9% over this period.

The Gini coefficient hides the "runaway rise" of the richest 1%, who now take 8% of all national income (compared to 3% in 1970 and 6% in 1990). Changing the way we measure income, by factoring in housing costs or income from capital gains or inheritance, can reveal a widening disparity even over the past decade.

Wealth is far more unevenly distributed than income. From 2016 to 2018, the wealthiest 12% of households owned half of the UK�۪s wealth, while the least wealthy 30% of households held 2%. In the past decade, the wealth gap has increased. The wealthiest 10% hold �2.5m more in wealth per household than the least wealthy, a significant increase from the �1.5m gap in 2006 to 2008.

For the most part, income and wealth are tightly linked, meaning that the households most exposed to income shocks often do not have savings to fall back on. This goes some way to explain the increase in low income households turning to debt to cover essential needs - rent, food, utility bills - over the past decade.

The uneven impact of Covid-19

The pandemic has sharpened the pre-existing economic disparity between men and women. Women are more likely to have lost work and income. They are more likely to work in low-paid, insecure frontline roles; out of over 1 million “high risk, poverty pay” workers, 98% are women. In many of the sectors that face longer-term instability due to Covid-19 - retail, hospitality, tourism - women are overrepresented.

Meanwhile, as our public services are placed under unprecedented strain, women are picking up the slack with even more unpaid domestic and care work. During school closures, for instance, 70% of mothers reported being completely or mostly responsible for homeschooling, and mothers were 50% more likely to be interrupted during paid work hours. This has exacerbated the uneven burden of care, which exerts a toll on women’s mental health and threatens to undermine their economic prospects over the long-term, compounding the lack of recent progress in closing the gender pay gap before the pandemic.

At the most extreme, more women are now suffering from domestic violence - visits to Refuge’s National Domestic Abuse Helpline website have increased by 950% since the onset of the pandemic. Low income and migrant status both significantly increase women’s vulnerability to domestic abuse, underlining the need for policymakers to understand how gender intersects with other axes of inequality.

The housing crisis

In the quarter of a century since 1996, UK house prices have risen 161%: from around 4.5 times average household income then to around 8 times now. In 2018 renters spent 33% of their household income on rent, rising to 40% in London.

Affordability is a nationwide problem, with rural areas having a higher ‘affordability gap’ than urban areas. It is particularly acute in England, where in 2017 new build homes were unaffordable to 84% of renting families.

Unaffordable housing is linked to a sharp fall in home ownership, especially among young people and families with children, and to an increase in homelessness. Prior to the pandemic, the number of rough sleepers had more than doubled since 2010.

It is now estimated that more than 8m people in England – around 1 in 7 – are living in an unaffordable, insecure or unsuitable home. A range of different types and tenure of housing are needed – not just homes to buy, but better and more affordable social and privately-rented accommodation.



Automation and artificial intelligence both promise to raise living standards, both through improved goods and services (e.g. more accurate medical diagnoses, for a non-consumerist example) and through improving the productivity and reducing the toil of workers.

Some fear, however, that technological advancement in these areas will have negative ramifications for the labour market. At the extreme end of these concerns is that much of human labour will be rendered obsolete, leading to technological “mass” unemployment. Sceptics highlight that similar arguments have been made in the past and that new technologies could create as many jobs as they destroy, but that nonetheless these developments threaten to exacerbate inequality and alienation in the labour market.

Proposals for how we should respond to these threats vary according to the analysis. Most speak to the need to manage automation to mitigate its impact on inequality, both between workers and between workers and capital owners. Those who believe that the majority of labour could be fully automated further propose the development of institutions that either better share available work (through shorter working time, for instance) or support humans in its absence (e.g. UBI).

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Reducing working time

There is nothing inherently fixed about working Mondays to Fridays – indeed ‘normal’ work hours have changed considerably over time, with the ‘weekend’ as we know it one of many successful union- and worker-led demands for less time at work. The shorter working week has been a longstanding proposal for helping reduce work-associated pollution, increase the wellbeing of workers and reclaiming time for leisure and important unpaid activity such as care.

It is increasingly central to proposals for economic rebuilding after Covid, with its advocates – including a growing number of governments and companies – seeing it as a way to ‘build back better’ after the virus by better sharing available work and improving work-life balance. Its supporters also claim it would address the UK’s poor labour productivity relative to international peers.

Advocates of the shorter working week emphasise that a reduction in working time is not a silver bullet, and that supporting reforms are needed to ensure it doesn’t exacerbate wider injustices. For instance, a key feature of most proposals is that a reduction in working time should not be accompanied by a reduction in pay, especially for low earners.

Trade unions and collective bargaining

Since the 1970s, in common with many other countries, the UK has seen a declining share of national income go into wages and salaries and a rising proportion returned to the owners of capital and assets. This period has coincided with a dramatic fall in trade union membership.

Many economists argue that the two are closely connected. Through collective bargaining, trade unions are able to raise workers’ wages and to improve their working conditions. Where unions are absent, employers have greater relative power.

This recognition has led to calls for a revival of trade unionism and of collective bargaining. In a more fragmented workforce where many workers are now self-employed or on precarious contracts this is difficult, but many trade unions have been finding ways to organise insecure workers.

Universal Basic Services

Proposals for Universal Basic Services take the principles underlying the NHS - the universal provision of healthcare, free at the point of need - and argue these should be applied to a wider range of public services, such as transport, shelter, food and information (e.g. Internet access).

UBS is often contrasted to UBI (above). While the two proposals are not diametrically opposed, the difference in focus leaves room for disagreement. Some UBS supporters argue, for instance, that the best way to spend our resources and political capital in ensuring people’s core needs are met is in the radical expansion of public services, and that unconditional cash transfers would not achieve the same uplift in living standards.

Conversely, while many progressive proponents of UBI support wider and improved provision of public services - e.g. health, social care, education, information - they take issue with some proposed universal basic services (e.g. food provision) and argue that cash transfers are a more efficient, less paternalistic route to ensuring some basic needs are met.

Universal Basic Income

Universal Basic Income (UBI) is a regular cash payment made to all (universal) without means-testing or work-requirements (unconditional). UBI has received increased attention during the pandemic as a means of supporting incomes through the economic crisis - avoiding the problems of gaps in coverage highlighted by ExcludedUK and others - but some propose that UBI could form a central part of our social security system in the long-run.

Supporters of UBI argue it would make our social security system easier to understand and reduce the bureaucracy, intrusiveness and stigma associated with claiming conditional benefits. They also claim the security it offers would support workers in making better long-term choices, recognise valuable unpaid work (e.g. care work) and be robust to the threat of ‘technological unemployment’. Critics of UBI question its cost and benefits relative to more targeted social security. Progressive criticism points to potential negative implications for the wider social security system and provision of public services, while conservative criticism tends to emphasise the danger of reducing incentives to work.

There are significant differences between various UBI proposals, concerning e.g. the size of the payment (would it be below or above subsistence level?) and to what extent it would either replace existing social security. There are no examples of UBI being implemented at a state-level, though there have been a number of trials and experiments, especially in recent years.

Social security for children

The two main provisions for children in the social security system are Child Benefit and the child element of Universal Credit (or child tax credits in the legacy benefits system). Child Benefit is issued for all children, although there is a reduced effective rate for all children after the eldest and families with one or more higher income earners (over £50,000 p.a.).

Means-tested support for families through Universal Credit or child tax credits is largely limited to two children. As of July, this “two child limit” affected 911,000 children. This aspect of government child support has faced particular scrutiny for increasing financial pressures on larger families, in which the rise in child poverty over the last decade has been concentrated. It has also been criticised for the pressure it places on survivors of abuse under the “non-consensual sex exemption”.

The backdrop to this is a sharp uptick in the cost of childcare and the financial fragility of the childcare sector. Before the pandemic, childcare costs had increased 3x as quickly as wages since 2008 and a number of providers faced closure. This has been exacerbated by Covid-19; now 25% of providers fear closure in the next year.

The future of Universal Credit

There was originally a degree of cross-party support around the introduction of Universal Credit in 2013 because it replaced a number of separate working-age benefit schemes. The stated aim was to simplify the system and to avoid a “cliff edge” whereby recipients would lose money if they found work - “making work pay” and smoothing moves in and out of the labour market.

Since then, Universal Credit has come under fire, both before and during the pandemic. Targets of criticism include its lack of generosity, the delay in receiving the first payment, its bureaucracy (including sanctions), and the distribution of benefits at a household, not individual, level - which increases the risk of financial abuse, especially for women.

While some argue for reforms to Universal Credit that address these issues within the present system, others call for Universal Credit to be scrapped altogether - either because of the system’s chequered history, or because of objection to its core principles (e.g. conditionality and means-testing). One far reaching reform within would be the establishment of a Minimum Income Guarantee - which would set a ‘living income’ floor below which no household would fall and could be implemented within the Universal Credit system.

NB Some households are still on the ‘legacy’ system of benefits. The Government expects all households to have ‘migrated’ to Universal Credit by September 2024.

What has Covid-19 revealed about our labour market and social security?

The disruption caused by the pandemic has both shone a light on undesirable aspects of our labour market and welfare arrangements and opened up space for thinking about how we might change these in future.

First, as more people have had to rely on the social safety net, Covid-19 has brought more attention to its shortfalls - particularly with relation to Universal Credit and sick pay. Second, the unequal impact of the pandemic has alerted us to sharp inequalities within the labour market, not just in terms of income, but in terms of precarity, flexibility, and exposure to risk too. Third, the necessarily radical nature of the pandemic response - unprecedented income support measures, large-scale restriction of economic activity for public health, a sea change in ways of working - has made other ‘radical’ economic policy measures seem more feasible,

The content below focusses on how the quality of work and social security can be improved as we recover from Covid-19. For information on job/income protection and job creation during and after the pandemic, see our “Stimulating economic recovery” page. For more on inequality, see our “Reducing inequalities'' page.

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Organising gig workers

One of the reasons that gig workers have few rights is that it is very difficult to organise and bargain collectively when workers are dispersed and have a fragile relationship with their contracting company. However a number of trade unions have been organising gig economy workers and in some cases winning significant improvements in working conditions and workers’ rights.

The fundamental imbalance between the power of digital work platforms and the workers who use them has led some to call for ‘platform cooperatives’ , in which the platforms would be owned by ther workers themselves.

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Regulating the gig economy

A key route to improving the conditions of gig economy and other insecure workers is to extend to them some or all of the labour rights and protections covering employees and other workers. This was the broad approach taken by the Taylor Review of Modern Working Practices, which has been partially acted upon by the government. But it was widely criticised for not going far enough.

One idea gaining traction is that of ‘portable benefits’. Attached to the employee and not the employer, a portable benefits account would allow workers and employers – and potentially the government – to pay into services such as sick leave, pension contributions, maternity leave and health insurance.

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Insecure work

The Covid-19 pandemic has exposed the large number of jobs in the UK economy which are highly insecure. 5 million people are self-employed, a status which includes many who work almost exclusively for one company. Over a million people now work on ‘zero hours contracts’ under which they have no fixed working hours.

Altogether it is estimated that 3.6 million people are in various forms of insecure work, including including agency, casual and seasonal workers and the self-employed earning less than the minimum wage. Research suggests that nearly 1 in 10 workers in the UK do ‘platform work’ via an app at least once a week, with nearly two-thirds of those under the age of 35. Many such ‘gig workers’ were among the first to lose their jobs as the economy closed down. Yet it is estimated that over 1.5 million self-employed people have been unable to get government support.

‘Gig economy’ jobs can provide welcome flexibility. But many come with very low pay, and by definition a high degree of insecurity which makes normal household budget planning very difficult. They tend to have few employment rights, such as paid holidays, sickness pay, and protection against unfair dismissal. And it is difficult for them to organise collectively, for example through trade unions.

GDP and alternative indicators of economic progress

One of the most common arguments in the growth debate is about the value of Gross Domestic Product (GDP) as a measure of economic progress. This was not what GDP, which measures national income and output, was originally designed for. But economic policy and analysis has generally used it as such: GDP growth is the primary (though not only) economic goal of most governments.

The argument against GDP is that it does not measure environmental degradation or the depletion of ‘natural capital’; it ignores productive activity (such as childcare and housework) that occurs outside market transactions; it cannot take into account intangible but important public goods such as social cohesion and trust; it does not reflect subjective happiness or life satisfaction; and does not measure the distribution of income or wealth.

Many attempts have therefore been made to construct alternative metrics of economic and social progress, with the aim of ‘dethroning’ GDP from its paramount position. Some seek to adjust GDP in various ways. Others have compiled an index of various measures.

The most common approach is to use a ‘dashboard’ of multiple economic, environmental and social indicators. These more complex datasets have the ability to track a breadth of concerns, but make it harder to track overall progress and tell a clear narrative story.


The idea of ‘wellbeing’ is now widely used to characterise the goal of a flourishing economy.

Wellbeing includes income but is not limited to it: it also includes other factors, including the quality of work, physical and mental health and public goods (such as the natural environment and social cohesion) that make up people’s overall quality of life. The general concept of wellbeing includes both individual life satisfaction and the flourishing of society as a whole.

A common focus of those arguing for a ‘wellbeing economy’ is that we need new indicators to measure economic and social progress, in place of growth of GDP (see below). Economic and social policy needs to be designed to achieve wellbeing directly, rather than relying on economic growth.

A number of countries, including Iceland and New Zealand, are using ‘wellbeing budgets’ and new indicators to try and ensure that this is achieved.


Rather than either ‘green growth’ or ‘degrowth’, some economists have begun to use the term ‘post-growth’ to characterise an economic policy stance focused directly on achieving environmental sustainability and individual and social wellbeing.

A ‘post-growth’ society and economy would be one where economic growth – and its attendant consumption patterns – is not regarded as a good in itself. While some of those using the term believe degrowth is necessary, others are (in Kate Raworth’s phrase) ‘growth agnostic’.

Some analysts have pointed out that western economies have for some time been experiencing much lower growth rates than in the past, with the idea of ‘secular stagnation’ suggesting that this may be a long-term condition. So adjusting to a post-growth economy may be necessary, whether designed or not.

The dependence of current economies on growth to sustain employment and raise tax revenues has led some researchers to model a ‘post-growth’ economy which lives within planetary boundaries and focuses on redistributing wealth and improving wellbeing rather than growing output.

Degrowth and a steady-state economy

For some environmentalists and economists ‘green growth’ and ‘inclusive growth’ are mirages. The root problem in our economy and society, they argue, is the obsession with economic growth. Exponential growth cannot be achieved within the earth’s planetary boundaries, and cannot satisfy human needs.

‘Degrowth’ is the term increasingly used for strategies which seek a deliberate and planned contraction in the economies of high-income countries. Proponents argue that reducing the throughput of materials and energy can be achieved at the same time as maintaining and even improving people’s standards of living. As unplanned recessions exacerbate inequality, a central tenet of degrowth proposals is to ensure social justice by equitably sharing out resources, and reducing consumption and income by reducing working time.

Proponents of the idea of a ‘steady-state economy’ or ‘prosperity without growth’ argue for an economy in which environmental resources and absorptive capacities are sustained at an ecologically healthy level. This will require a contraction in the current size of high-income economies.

Inclusive growth

With the focus of green growth on environmental sustainability, the concept of ‘inclusive growth’ has been developed to emphasise how growth strategies can be redesigned to achieve reductions in poverty and inequality. The OECD defines inclusive growth as ‘economic growth that is distributed fairly across society and creates opportunities for all’.

Advocates of inclusive growth argue that redistribution through the tax and welfare systems is not sufficient to achieve genuine inclusion. They typically emphasise instead the importance of education and skills, labour market reform, asset ownership, the empowerment of local places and democratic participation.

Green growth

One response to concerns about environmental degradation has been to argue, not that economic growth per se is impossible, but only its current patterns and forms. If the world switches to renewable energy, becomes much more resource-efficient and institutes a ‘circular economy’ in which resources are reused and recycled, GDP growth can continue at the same time as environmental damage is reduced. Growth in global income remains morally necessary, it is argued, to end poverty and give everyone on the planet a decent living standard.

Advocates of ‘green growth’ include major economic institutions such as the World Bank, and many governments and companies. They acknowledge that the world is very far from achieving green growth now. But they maintain both that it is possible to ‘decouple’ GDP growth from environmental damage, and that it is politically and socially infeasible to call for growth to cease.

Green growth

Environmental limits to growth?

The modern debate about economic growth first kicked off in 1972, with the publication of the influential Limits to Growth report by the Club of Rome.

The argument of the report was that exponential growth of production and consumption could not be sustained over the long term due to the finite resources and absorptive capacities of the Earth’s environment.

In the half century since then global environmental degradation has greatly worsened, with climate change, soil depletion, deforestation, ocean pollution and the loss of biodiversity all at critical levels. This has led environmentalists and environmental economists to revisit the question of whether economic growth can be environmentally sustainable.

Changing the economics curriculum

At the same time as neoclassically-based economics has been criticised for its influence over orthodox economic policy, its central role in the teaching of economics has also come under scrutiny.

Complaining that traditional economics courses did not reflect the post-financial crash world they were experiencing, economics students have campaigned for reform of the curriculum. They and others have argued for economic ‘pluralism’, an acknowledgement that there are a variety of economic perspectives, not a single correct one.

New ways of teaching the subject have been developed which start with real world problems and data about them, not stylised theory.

New economics institutions

Many of the organisations whose work features on Beyond Covid would argue for a new economic paradigm. A number of academic institutes, think tanks, practitioners and media outlets exist specifically to generate and promote new economic thinking in the round. Each has its own perspective and focus, but they share a general aim of changing the way economics is thought about and economic policy is designed.

New economic thought

The economic crises of the last decade have generated significant reassessment in the discipline of economics. The failure of mainstream analysis to anticipate the financial crash of 2008, the growth of inequality, the unexpected stalling of productivity and wage growth, and the increasing evidence of environmental breakdown, have led to a questioning of the theoretical foundations upon which much economic policy has been based. Mainstream economics has increasingly taken new perspectives on board, while alternative or ‘heterodox’ schools have become increasingly prominent.  

In macroeconomics, ‘post-Keynesian’ analysis has emphasised the critical role of the financial sector and of uncertainty. Institutional and political economists have focused on the role of institutions and power relationships. Evolutionary and complexity economists have sought to understand the economy as a complex, adaptive system with a path-dependent history of technological and institutional development. Ecological economics has pointed out the environmental basis of all economic activity. Feminist economists have forced attention on its gendered nature. Behavioural economists have shown how people actually behave, contradicting the neoclassical model of ‘rational economic man’.

These developments have not yet led to any grand synthesis, but economics is in greater flux, and generating more interesting ideas, than it has for a generation.

The growth debate

A key component of new economic thinking has been around the issue of economic growth. Critics of orthodox economic theory and policy have argued that the overwhelming focus on achieving growth of GDP is at the root of our environmental and social crises. Current patterns of economic growth are environmentally unsustainable and do not generate individual or social wellbeing.

These critics seek to replace GDP as the principal measure of an economy’s success. Most seek to define a broader goal of ‘wellbeing’, and alternative indicators to measure it. A number of international institutions have adopted the goal of ‘green growth’ or ‘inclusive growth’, often within the overall framework of ‘sustainable development’.

A more radical critique argues for ‘degrowth’: that environmental sustainability demands an overall contraction of production and consumption in western economies. Others propose the ideas of ‘post-growth’ or ‘beyond growth’, arguing for a direct focus of policy on the achievement of environmental and social objectives.

A new economic paradigm

There is as yet no widely agreed name for a new, post-neoliberal economic paradigm. But those seeking to build one largely agree on its core goals. They seek an economic system which is

  • environmentally sustainable, living within the earth’s planetary boundaries in a just and fair way for all the world’s people and for future generations
  • focused on improving individual and social wellbeing rather than prioritising economic growth
  • structured to reduce inequalities of income, wealth and power, and to eliminate systematic gender and race inequality
  • designed so as to spread the ownership of capital and assets, with many commonly owned and democratically controlled
  • structurally resilient to shocks, whether from finance, environment or pandemics

In such an economy democratically elected governments would play a significant role, seeking to shape and regulate markets to serve the public interest, and limiting the power of major corporations and financial markets.

These goals cannot be achieved, it is argued, by minor reforms to present economic systems. Fundamental reform is required, a structural transformation which hard-wires these goals into the way the economy works.

The critique of neoliberalism

The free market economic ideas and policies which were first introduced in the 1980s under Margaret Thatcher in the UK and Ronald Reagan in the US came to be known as ‘neoliberalism’. Neoliberalism is the doctrine that economic growth and human freedom are best served by the expansion of deregulated markets and private enterprise, and a reduction in the activities and size of the state. It is often described as the dominant paradigm of the last four decades, effectively espoused not just by right-wing governments but by avowedly centre-left ones which (it is often claimed) failed to reverse or challenge its principal policies.

Neoliberalism has been widely criticised. Its economic policies have led to a significant growth in income and wealth inequality and pervasive environmental degradation. The globalisation of commerce and free trade promoted by neoliberalism has in many countries led to the destruction of traditional industries and the communities which have relied on them. Deregulation has led to a huge expansion of the financial sector, and of the influence of financial objectives in companies and society, a process often described as ‘financialisation’.

Though neoliberalism claims to promote market competition, in key sectors (such as digital platforms and public services outsourcing) it has enabled the development of extremely powerful companies operating as near-monopolies. The process by which wealth is extracted from the economy by a relatively small group of financial and monopoly asset owners has led some to describe the neoliberal economy as ‘rentier capitalism’.

The idea of paradigm change

Even before Covid-19, the multiple crises experienced by western economies over the last decade and more – the financial crash, the climate emergency and rising inequality – have led some commentators to ask whether a new ‘economic paradigm’ may be in the making.

An economic paradigm is the framework of economic theories, policies and narratives which come to define a particular era. In the 20th century two major periods of economic crisis led to changes in the dominant paradigm. Old economic orthodoxies proved unable to provide solutions, and new economic theories and policies took their place.

In the 1940s, following the Wall Street crash of 1929 and the Great Depression of the 1930s, Keynesian economics replaced the previous orthodoxy of ‘laissez faire’, leading to the ‘post-war consensus’ of full employment and the welfare state. In the 1980s, following the economic crises of the 1970s, free market economics became the new orthodoxy. But free market economics seems to have caused the crises we have recently experienced, and to offer little by way of solutions. Is another ‘paradigm shift’ due?

How has Covid-19 affected racial inequalities in the UK

Black and minority ethnic (BME) residents of the UK have been disproportionately affected by the pandemic in two distinct ways. First, they have suffered worse health outcomes. On the whole, people of colour have been more likely to contract the virus - and less likely to survive it - than white people. Public Health England has highlighted how a range of factors relating to racism can contribute to these unequal health outcomes. BME people are also more likely to work in frontline, “key worker” roles where they are more exposed to the virus. There could be evidence of discrimination here too. The British Medical Association, for instance, reports that ethnic minority doctors have been disproportionately affected by PPE shortages, speaking to the higher death rate of ethnic minority health and social care workers.

Second, long-standing economic inequalities between white and BME Britons - themselves a consequence of historical and present-day racism - have been exacerbated by the downturn. Αnalysis from IPPR has found that ethnic minority people were more likely to face problem debt and unemployment as a result of Covid-19. Worse still, ethnic minority households have far less wealth, on average, to weather economic hardship - Black and Bangladeshi households, for instance, have 10p for every £1 of White British wealth.

Green recovery at city and local level

Many cities around the world have used the Covid crisis to prioritise walking and cycling and the provision of green space.

There is a growing global movement of cities committed to improving the quality of urban life through environmental improvement and decarbonisation, particularly of buildings and transport.

Many local authorities in the UK are looking to pursue a more sustainable form of economic development.

Green recovery at city and local level

Green recovery in Scotland and Wales

Both the Scottish and Welsh governments have committed to green recoveries. In Northern Ireland a plan has been proposed by a group of environmental NGOs.

Green recovery in Scotland and Wales

Green recovery plans across the world

Although the focus of most governments in the crisis so far has been keeping businesses and jobs alive, many have included environmental components in their stimulus and recovery plans.

This includes the EU, which has made its ‘Green Deal’ investment programme a centrepiece of its economic ambition and climate goals.

However analysis of plans published so far shows that the overall environmental impact of government plans in most countries is likely to be negative.

Green recovery plans across the world

Green recovery proposals in the UK

The call for a green recovery has been widely supported in the UK, by businesses, environmental organisations, and think tanks on both left and right.

For some green recovery is a way of rebooting the existing economy. For others it offers a chance for more radical change in the objectives and outcomes of economic policy.

Green recovery proposals in the UK

The UK government's 'green industrial revolution' plan

Looking towards the critical UN climate conference COP26 in Glasgow in November, the UK government published its ‘10-point plan for a green industrial revolution’ at the end of 2020.

It pledges to mobilise £12 billion of government investment, and potentially three times as much from the private sector, to create and support up to 250,000 green jobs.

The ten areas of focus are offshore wind, low carbon hydrogen, nuclear power, zero emission vehicles, green public transport, ‘jet zero’ and green ships, greener buildings, carbon capture, usage and storage, protection of the natural environment and green finance and innovation.

While some aspects of the plan were welcomed by environmental groups, others criticised it for vagueness and for failing to clarify how the UK would achieve its statutory emissions reduction targets, including its commitment to ‘net zero’ emissions by 2050.

The UK government's 'green industrial revolution' plan

The case for a green stimulus

As governments around the world are urged to ‘build back better’, a major focus has been to ensure that their economic recovery packages support environmental objectives. The language varies slightly – green, sustainable, resilient, ‘green and fair’, ‘green and just’, decarbonisation – but the core idea is consistent.

Governments should invest and create jobs in sectors and activities which align with long-term greenhouse gas emission goals (notably ‘net zero’ by 2050 or before), improve resilience to climate impacts, slow biodiversity loss, reduce pollution and increase the circularity of supply chains.

Analysis of spending programmes of this sort – including those implemented after the financial crash in 2008 – show that green spending tends to have high job creation potential, which can often be geared towards economically disadvantaged people and areas. Many green projects can be delivered relatively quickly.

The case for a green stimulus

How do we pay for government spending?

The Covid pandemic has forced governments across the world to spend huge amounts of money supporting their health systems and emergency public services, and sustaining business and household incomes. In the UK, the government will have spent over £280bn in 2020-21 tackling the crisis.

This money has come from increased government borrowing. By the end of the fiscal year 2020-21, the budget deficit (the gap between revenue and expenditure) is projected to rise  to £394 billion (19% of GDP), its highest level since 1944-45, and total public debt to 105% of GDP, the highest since 1959-60.

Unsurprisingly, this has led to questions about how and when this money should be repaid. Some people have argued (or assumed) that there will need to be a return to austerity – public spending cuts and tax rises – to reduce the deficit and the debt.

But most macroeconomists, including international economic institutions such as the OECD and IMF, argue that at current very low interest rates, high levels of debt can be supported for a long period. This is what happened after the second world war, when UK debt reached nearly 250% of GDP.

The Bank of England can help absorb debt by effectively ‘printing money’, as it is already doing. Some argue for this to become permanent, a mechanism known as ‘monetary financing’.

Company bailouts

Governments have provided various forms of support to businesses, and in some cases whole sectors, to enable them to survive the pandemic. Many people have argued that, particularly for larger businesses, such ‘bailouts’ should not be unconditional.

In return for financial help, companies should be required to meet a set of minimum standards of good corporate behaviour, such as environmental commitments and payment of tax.

A range of commentators have further called for the government to take equity stakes in the businesses it bails out, as it did for example with the Royal Bank of Scotland after the 2008 financial crash.

This would give the government a long-term stake in the future direction of such companies, helping to focus them on long-term investment and environmental sustainability. Revenues returning to the government from equity stakes could support long-term economic recovery, or form the basis of a social wealth fund.

'Levelling up' and local economic recovery

The UK government’s commitment to what it calls ‘levelling up’, improving living standards and economic prospects in England’s disadvantaged regions, has led to widespread calls for the government to prioritise stimulus spending in those areas where unemployment is highest and incomes lowest. In England city region mayors and others have called for greater resources to be given to local authorities to boost local employment. There is increasing interest in the idea of ‘community wealth building’, generating local economic development by focusing public procurement and business support on local firms, including social enterprises

For more on local economic development, see our page Stronger local economies.

A care-led recovery

A key dimension of ‘building back better’, it is widely argued, is greater investment in the ‘caring economy’. A ‘care-led recovery’ would see priority given to increasing employment and wages in the health service, social care and childcare.

The Covid crisis has exposed serious under-funding in these sectors, and the need to pay many of those working in them more. Investment in care creates more jobs, especially jobs for women, than comparable spending in sectors such as construction.

The Women’s Budget Group calculates that investment of around 2.5% of GDP in child care and social care would create over 2 million jobs as well as helping reduce the gender employment gap.

Fiscal stimulus and job creation

As the scale of the economic downturn has become clear, and unemployment has continued to rise, many organisations have urged the government to introduce a fiscal stimulus package to revive the economy and create jobs.

There have been widespread calls to increase government spending on infrastructure, particularly on ‘green’ and low-carbon projects. Noting that physical infrastructure spending tends to focus on male employment, others have argued for an equal emphasis on ‘social infrastructure’: sectors such as health, education, social care and childcare which are also necessary for the economy to function and have high levels of female and black and minority ethnic employment.

Increasing the minimum wage, giving public sector workers (especially key workers) a pay rise, and raising benefit levels, would all mitigate the unequal impacts of the pandemic and give a boost to consumer demand.

The government’s youth employment scheme, Kickstart, supports 6-month job placements for those aged 16-24. With youth unemployment known to have a long-term scarring effect on life chances, some have argued that this should be much more ambitious, with a stronger emphasis on skills training.

The economic case for a fiscal stimulus

So far most governments have focused their economic policies during the pandemic on keeping businesses alive and workers in jobs, and supporting household incomes.

As social restrictions have been eased and economies open up again, there has been a sharp recovery in GDP. Consumer spending has risen, particularly in areas where there is pent-up demand such as hospitality and leisure activities. But the loss of many businesses during the crisis, and much higher levels of unemployment, mean that a full-scale recovery will not occur quickly.

There is therefore a strong case for further fiscal stimulus measures to boost economic output and bring unemployment down. Both the OECD and the IMF have urged governments to sustain their spending, and not to return to austerity. They note that with interest rates already near zero, there is little more that monetary policy can do.

An expansionary fiscal policy is needed to create demand and boost investment, and thereby to create new jobs. Where interest rates are very low, economists note that the ‘multipliers’ from government spending (the mechanism by which spending expands throughout the economy) are particularly strong.

Protecting jobs and incomes

To keep businesses running and people in jobs during the Covid-19 crisis, the UK government has established a number of emergency measures. These include the Job Retention Scheme, which supports companies to put workers on furlough rather than lose their jobs; a support scheme for the self-employed; and loan schemes for various sizes of business.

Specific measures and funding have been provided for badly affected sectors, such as hospitality and the performing arts. At the same time the government has temporarily increased the rate of Universal Credit and Working Tax Credits paid to those on low incomes.

These measures have supported many businesses and households. But there have been a number of criticisms. In January 2021 over 1.5 million self-employed people were estimated not to qualify for support because less than half their incomes came from self-employment or they had not been self-employed long enough.

The government’s business loan schemes have been criticised for favouring landlords, who in many cases continue to be paid rent in full while their tenants have had to take out emergency loans. Meanwhile the significant increase in poverty caused by the pandemic has led many to call for permanent increases in Universal Credit and child support levels.

The economic crisis

The Covid-19 pandemic has caused the deepest recession in modern economic history. As lockdowns and other measures to protect public health were introduced, consumption and production slumped and unemployment rose. In the UK the fall in economic output was among the largest in the world, with GDP (Gross Domestic Product) declining by 9.8% in 2020, estimated to be the steepest fall in three hundred years.

Government support measures have kept many businesses going and the job furlough scheme at its height was keeping nearly 9 million workers in employment. But many firms have already gone out business, and when the furlough scheme comes to an end unemployment is projected to rise to 2.25 million people, or 6.5% of the labour force.

The economic crisis has not affected everyone equally. Workers on insecure employment contracts have seen their jobs go first, while many others on low incomes who cannot work from home have been required to continue working in often risky workplaces. For those on decent incomes the pandemic has increased their savings, allowing debt to be repaid. But many of the least well off have seen their debts increase. Many people have been pushed into poverty. Women, young people and those from black and ethnic minority groups are disproportionately represented as those whose living standards have been hit.


The environmental emergency is already causing a range of major problems around the world. Even if rapid action is taken, environmental destabilisation will increase, and societies must be ready for the resultant impacts. The Covid-19 pandemic has given an insight into events that can happen quickly, impacting all areas of society and overwhelming the ability to respond.

Adapting to the growing impacts of climate breakdown has been recognised as a priority by people across society in the UK for years. The government’s official advisors, the Committee on Climate Change, have previously concluded that the UK is not prepared for even a 2 degrees Celsius, let alone the higher global temperature rises that are likely to happen. Preparation is also needed to ensure the UK is resilient to the social, political and economic impacts of an environmentally destabilising world. There are potentially huge benefits of doing so; more resilient societies can be healthier and happier.

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Wealth taxation

A key step towards a more equal economy would be to make the tax system fairer. There is an emerging consensus that we need to improve the way we tax wealth. Wealth has soared relative to incomes over the past four decades, with these gains concentrated very narrowly at the top, and yet the tax take from wealth has remained flat.

Property wealth provides an instructive example. House prices have tripled relative to incomes since the 1970s, a key driver of economic inequality. A number of homeowners have seen their accumulated wealth soar as house prices have shot up in certain areas, but have been taxed very little on these gains despite them being uncorrelated with any work, effort or skill on the homeowners’ part

Income from wealth is currently taxed far more weakly than income from work, which is one of the reasons that the very wealthy pay a much lower effective average rate of tax on their remuneration. Wealthier households are also more likely to benefit from a complicated system of reliefs and exemptions, meaning that the effective rate of inheritance tax paid on estates valued at over £10 million is half that paid on those with a value of £2 to £3 million. Tax avoidance schemes allow the very wealthiest to circumvent tax. Taking the wealthiest 0.01% of households as an example, who control a not insignificant 5% of national wealth, approximately 30-40% of this is held offshore.

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The impact of Covid-19

The pandemic has put poorer households under great financial strain. On average, low and high income households have seen similar proportionate falls in income - but this does not mean that the pain has been equally shared. While richer households can cut back on non-essential spending and fall back on their savings, poorer households are unable to do so. Over half of adults in the poorest 20% of families have had to borrow to fund basic costs such as food or housing.

Unless action is taken, the unequal economic impact of Covid-19 will be felt well into the future. Job losses have been concentrated in the poorest households, threatening a longer-term divergence in employment chances. Many of the richest households have been able to build up their savings over the course of the crisis, further widening the gap between them and the increasingly economically insecure poor. They will use these increased savings to buy assets. Even as the economy has tanked, asset markets have remained reasonably buoyant. This divergence can in part be explained by the wealth gap because the asset-owning class has been least affected by the crisis and in part because of policy decisions that protect financial markets, even at the expense of the real economy

Poorer households have also seen far worse health outcomes than the well-off. In part, this is because they are less likely to be able to work from home and are therefore more exposed to the virus. It is no small irony that the UK’s “key workers” earn, on average, 8% less than the median wage, reflecting in part the freeze on public sector pay under austerity and persistently low pay in sectors such as social care. At the same time, the UK’s high levels of economic inequality have given rise to wide health inequalities, which the Marmot Review found to have widened since 2010. One consequence of this is that the Covid-19 death rate in the most deprived parts of the country is double that of the most well-off.

Regional inequality

Analysis from IPPR North has highlighted how the UK is "more regionally divided than any comparable advanced economy". This regional inequality exists across disposable income, productivity, employment, and political power. 

The UK has long suffered from regional health inequalities. Even before Covid-19 people in the most deprived areas could expect to live nineteen fewer years in good health than those in the most well-off. The death rate from Covid-19 in the UK’s poorest regions was over double the rate in the wealthiest.

The economic fallout of Covid-19 threatens to increase regional inequalities. The fall in hours worked in London in the early months of the pandemic was significantly less pronounced than in other regions of the UK. The Government’s regionally tiered lockdown approach drew widespread criticism - ranging from progressive civil society leaders to Conservative MPs - for their impact on regional divisions. 

Regional Inequality, Reducing Inequalities

Inequality and Covid-19

Covid-19 is not a "great leveller" - the impacts of the pandemic and economic shutdown have not been evenly shared. Early evidence showed that the effects have largely played out along existing lines of inequality. This means that people living in the most deprived areas of the UK are more likely to face extreme financial pressure as a result of Covid-19, they are also twice as likely to die from the disease

Without an active plan to mitigate unequal health and economic impacts future waves of the virus could further deepen the “old and deep inequalities"  at the heart of the UK economy, with potentially lasting effects. Lower earners, women and black and minority ethnic (BME) are more likely to have lost their jobs as a result of the pandemic, adding to existing economic disadvantage.

High levels of inequality exacerbate the spread and fatality of the virus, exemplifying how inequality can leave our society more vulnerable to crises. A more equal recovery  would not only make our economy fairer, but more resilient too.

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Gender pay gap

According to ONS statistics women in full-time employment are paid 8.9% less on average per hour than their male counterparts. Looking at employees as a whole, women earned on average 17.3% less than men per hour. This is partly because women are over-represented in part-time employment - which is less well paid. 

One factor behind the gender pay gap is illegal pay discrimination - unequal pay for equal work. Another key cause is the uneven burden of unpaid care work. This can limit women’s career opportunities in a variety of ways. The "maternity penalty" is a key example. This is the economic cost to mothers of taking on more unpaid child-rearing work, which inhibits their career progression and pressures them to take on more flexible, less senior, and less well-paid roles.

A variety of solutions could redress the gender pay gap. Increased transparency of pay and paths to promotion are intended to reduce the potential for pay discrimination.

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Social infrastructure

Closing gender inequality requires investment in systems of social infrastructure. These include healthcare and social care services. Raising carers’ pay would both increase the resilience of the care system and benefit its predominantly female employees. Increased provision of care would relieve the burden of unpaid care that currently falls on women.

It is also important to invest in these systems when tackling other crises, such as the climate and environment emergency. Often, calls for investment to build back better focus on physical infrastructure - transport and energy systems, housing and so on. Spending on social systems is rarely classed as ‘investment’, despite the investment-like returns to spending in these areas - reflecting a possible gender-bias in economic policy making. Health and social care can provide low carbon jobs and are essential to providing high standards of living and undoing inequalities.

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Public services

Research from the Health Foundation finds that social care services in the UK have suffered from “decades of political neglect” and entered the Covid-19 pandemic in a fragmented, underfunded, and understaffed state. There is consensus on the need for “fundamental reform" to make the care system more resilient, expanding access to and increasing the quality of services.

Investing in public care services is also crucial for tackling gender inequality. Greater public care provision could relieve the burden on unpaid carers, the majority of whom are women - they make up 80% of the adult social care workforce. The action needed to tackle “stark recruitment and retention” challenges in care would improve pay and conditions for millions of women.

There is majority public support for extending the principles underlying the NHS to social care, making it free at the point of need and taxpayer-funded. Additionally, there is evidence that financialisation and marketisation have undermined care provision.

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Better policymaking

Badly designed policies worsen gender inequality. For example, pregnant women can be exposed to more risk or even excluded when their requirements are not considered.

Under the Public Sector Equality Duty, the Government is required to have due regard to equality. Some organisations have argued that the Government has fallen short of this obligation. The Women’s Budget Group, for instance, has argued that public bodies need to undertake meaningful Equality Impact Assessments (EIAs) to ensure that policy does not discriminate against women, ethnic minorities and other groups protected under the 2010 Equality Act.

Many economists have argued that assessments of policy from government, as well as the media, should be based on a broader account of economic and social progress. This means targeting the reduction of inequalities as well as focussing on GDP growth.

The hostile environment

Tackling racial inequality is inextricably linked to advancing the welfare of migrants to the UK. Just over half of BME residents of the UK were born overseas. Public attitudes to race and immigration are intimately connected. 

Covid-19 has highlighted both the positive contribution migrants make to society and the challenges that they face. Migrants are disproportionately likely to work in key worker roles. Around 20% of care workers are foreign nationals, the majority from outside the EU. Many of these roles are less well paid.

Often migrants have restricted access to public services and financial support. They pay twice for the NHS through their taxes and the NHS surcharge. They face significant barriers to care despite their outsized contribution to the UK's health and care systems.

Prioritising racial justice

In its submission to Parliament’s Human Rights Joint Committee Black People, Racism and Human Rights inquiry the Runnymede Trust criticised the lack of equality impact assessment in the response to Covid-19. They point out the failure to publish plans to protect BME lives given their disproportionate vulnerability.

Overlooking the distinct experiences of different minority groups can undermine the effective communication of policy. There is evidence, for instance, that minority communities are less aware of the Government’s Covid-19 public health messaging. The task of communicating this to minority communities has been left to voluntary organisations, undermining the overall pandemic response.

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Government response

Even before Covid-19 there were calls for governments to write off some or all of mounting personal debt, on grounds of social justice and the impacts of debt on the poorest in society.

Some governments have now taken measures to guarantee existing or new corporate and/or personal borrowing to prevent defaults. There are two main drawbacks: firstly, the guaranteeing of loans transfers risk from private banks to the state without imposing costs on the former. Secondly, it can create moral hazard by failing to differentiate between more and less creditworthy borrowers. Guaranteeing borrowing may be a less effective measure than other approaches, such as converting corporate loans to equity. 

The flip side of reducing debt is to increase incomes. Many governments have already introduced such measures temporarily – for example, the UK’s coronavirus furlough scheme. More broadly, campaigns and proposals for a universal basic income or similar argue for a permanent floor on incomes. One key issue with income support is that unless high outgoings are reduced, much of it will accrue in practice to banks, landlords and other rentiers.

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Central bank response

Central banks around the world have already reduced interest rates to zero or below to reduce borrowing costs and discourage saving. Some central banks have moved towards negative interest rates – charging certain depositors for keeping their cash in the bank. While some argue for going further, others worry that negative interest rates could reduce the stability of the system. 

Central banks have also restarted and expanded post-crash programmes of quantitative easing (QE) – colloquially known as printing money, but in practice taking the form of asset purchasing programmes.

These programmes attempt to place a floor beneath falling asset prices to prevent insolvencies and a destabilising cycle of debt deflation. One criticism of QE programmes has been that they exacerbate social inequality and disproportionately benefit high-carbon firms. Alternative green QE versions have been proposed but not adopted.

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Taxes on bank profits

Policymakers can also introduce less targeted financial taxes such as bank levies, which can help to curb systemic risk and ensure that the taxpayer benefits from the rewards of financial risk-taking rather than simply bearing the costs.

The UK introduced both a corporation tax surcharge for banks and a bank levy in the wake of the financial crisis of 2008. This was levied on the global balance sheets of large banks operating in the UK, but the revenue generated by the tax has fallen since the financial crisis in part due to changes to its structure introduced in 2016. 

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Currency transaction tax

The principle of financial transactions taxes can also be applied to currency trading. Currency transactions taxes (CTTs) act to slow down currency transactions by raising their cost, thus reducing volatility. This makes them effectively a form of capital control – tools that can be used to help regulate the flow of money into and out of economies.

As Covid-19 unfolded many countries faced significant capital outflows, strengthening arguments for using CTTs as a partial response, particularly for emerging markets.

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Financial transaction tax

Financial transactions taxes (FTT) can be used to shift the incentives investors face when deciding on their trading strategies. In particular, such taxes can disincentive high-frequency trading, which is associated with rising volatility in financial markets and has created opportunities for rent-seeking at the expense of longer-term institutional and/or productive investors.

They can also generate significant revenue. At least forty countries already have taxes on financial transactions of one kind or another, including the UK where stamp duty acts as a form of FTT on trading in equities.  It was estimated in 2017 that a modest extension of a FTT in the UK could raise an estimated £23.5 billion over the course of a Parliament. 

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Macroprudential reform

Over the long term, there are proposals for the better use of macroprudential tools, financial policies that aim to ensure the stability of the system as a whole, to strengthen the resilience of the finance sector and equip it to better deliver on wider social objectives, such as building a net zero economy.

This includes rehabilitating credit guidance – rules on how credit should flow to particular parts of the economy, such as green investments.

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Shadow banking

While the 2008 financial crisis centred on the banking sector, the Covid-19 crisis has shown that there are huge vulnerabilities in other parts of the financial system – often referred to as the shadow banking system. Shadow banking entities offer services that are similar to those provided by commercial banks but are not regulated in the same way. They include some investment banks, mortgage companies and firms that deal with securities.

This lack of regulation means that shadow banking contains the most immediate risks to financial stability as a result of the economic downturn, as a result of poor regulation for the last decade. Some argue that particularly systemically important non-bank financial institutions – such as insurance companies or other institutions that might be seen as too big to fail – must also be protected and regulated to protect the integrity of the financial system as a whole.

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Profit distribution

Excessive risk-taking in the financial industry could be disincentivised and how much people are paid and the way profits are distributed can play an important role.

Goldman Sachs made headlines by taking the decision to retain its dividends payout despite the Federal Reserve’s guidance against doing so. The UK’s Prudential Regulatory Authority has already requested that banks scrap dividends distributions throughout the Covid-19 pandemic, as have many other national regulators.

Some proposals go further, arguing that after anti-banker sentiment following the financial crash, the current crisis is the time for regulators to require that ethical banking become the norm.

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Capital requirements

Ensuring that banks hold enough capital to withstand a moderate crisis is a critical part of macroprudential policy and was a key response to the 2008 crash.

In 2010 the Basel III regulatory reforms allowed regulators to require banks to increase capital held during financial upswings and reduce it during downturns.

Some argue that the time is right for loosening capital requirements to encourage financial institutions to keep lending, although there are warnings that this will increase the risk of a future crisis.

Green finance

Creating a net zero economy by 2050 will cost between £39bn and £78bn (1-2% of GDP) a year. There is a crucial role for the government in establishing a credible commitment to decarbonisation, including ending carbon subsidies and increasing public investment, but the target will only be met if private financial institutions direct funds in ways that can reduce emissions.

Central banks have so far focused on the risks to financial stability from climate change instead of steering capital into green investment. They could take into account the carbon intensity of assets when conducting monetary policy by reducing the cost of capital for low-carbon sectors.

There are also calls to stress-test financial institutions for their resilience to climate risks and to impose higher leverage requirements on banks with exposure to assets – for example, fossil fuels investments – that could become worthless as a result of climate change.

Green finance

Ownership and control

The high level of financialisation and financial sector profitability in the UK is partly enabled by the state. This includes the implicit government guarantee it will not allow banks to go bust, as seen during the 2008 financial crisis.

There are growing concerns over the financial sector’s ability to supply the funding needed to meet the economic challenges we face. This has focused attention on the ownership and accountability of the UK’s unusually concentrated financial sector.   

According to the Bank of England, the proportion of UK bank credit flowing to non-financial firms has fallen to just 15%, with just a third going to SMEs. There are calls for credit guidance policies to steer this lending towards productive sectors and away from less desirable options, such as mortgage credit. This could be done, for example, by the Bank of England capping the amount banks can offer to various parts of the economy. Other proposals include changing ownership within the finance sector.

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Reforming finance

The growth of the financial sector and its profitability has far outpaced wider economic growth. This is partly because governments have deregulated financial systems and removed obstacles to cross-border movements of capital. In the UK this process has developed to such an extent that some argue finance is outsized and divorced from the needs of the non-financial, or real, economy. 

The pandemic has tested the weaknesses of the financial system. In the short term governments and central banks will attempt to prevent a wave of crippling defaults. This must be done without creating undue moral hazard, encouraging reckless or otherwise unwise lending or borrowing. The need remains to ensure the financial system is made more resilient to crises in the long term, and that it is a core part of a sustainable and more equal economy. 

Some proposed reforms focus on reducing financial activity that has little social or economic value. This could be through the imposition of transaction taxes on high frequency trading or foreign exchange dealing. There are calls for credit guidance policies to steer bank lending towards productive sectors of the economy.

Other proposals concentrate on challenging the dominance of the country’s big four clearing banks – Barclays, HSBC, Lloyds and NatWest – on lending to SMEs. There have been calls for a radical decentralisation of the banking sector through the establishment of regional stakeholder banks or for the creation of state investment banks and publicly banked venture capital funds to provide patient capital to firms. 

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Local and regional banking

Geographically-focused banks can play a major role in boosting investment, particularly in disadvantaged areas. They can help to retain wealth within local areas and support greater economic resilience. Distinct from merely the local branch of a high street bank, there are two types of such bank.  

The first are localised branches of publicly-owned national investment banks, with a specific remit to support the investment needs of local areas. In the UK it has been proposed that this could be done by creating publicly-owned Post Banks through the Post Office network, or by the government retaining its stake in the Royal Bank of Scotland (RBS) and repurposing it as a series of local banks.  

An alternative model would see the expansion of locally-focused cooperative, credit union and community finance organisations. Such institutions have a greater emphasis on high-street and branch banking and excel at lending to smaller businesses.

There is a growing movement to create a network of regionally owned and controlled mutual banks, where customers automatically become co-owners.

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Scottish National Investment Bank

There has been a Development Bank of Wales since 2017, and a Scottish National Investment Bank was launched in late 2020, supported by £2 billion of public funding over its first ten years.

The bank's mandate is to finance investment to realise Scottish economic priorities, including a greener economy. Some claim its mandate is not tight enough and it should be more deliberately focused on helping Scotland respond to environmental breakdown and supporting ethical investment.

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National investment banks

State-backed investment banks exist to provide finance where private banks may be reluctant to do so – in disadvantaged regions, new technologies or in sectors where returns are not considered high enough or too risky.

They are particularly valuable for providing 'patient' capital. This is long-term finance that is beyond the time horizon of most commercial banking but which is essential for innovation and strategic economic development. In very different circumstances, China and Germany both provide evidence. 

The UK is unique among major advanced economies in not having a national investment bank. Its advocates argue that such a bank would increase investment in innovation and meeting major mission-focused industrial transformations, such as building a green economy. The depth of the economic crisis caused by Covid-19, and its potential impacts on private finance, has added new urgency to these proposals.