What the environment needs from the Spring Statement  – Inside track

With a racy film version of Wuthering Heights going down a storm in cinemas right now, the chancellor will be hoping that all the drama takes place safely elsewhere and not in the House of Commons when she stands up to deliver her spring statement on 3 March. 

The spring statement is the government’s response to bi-annual economic forecasts from the Office for Budget Responsibility (OBR). An upbeat but otherwise uneventful statement from Rachel Reeves would be exactly what the country, and the environment, needs right now.   

The government has a good story to tell on many green issues. But its achievements are too often drowned out by political noises-off, and it needs the sluggish economy to revive so it can fund action to mitigate and adapt to climate change over the rest of this parliament and beyond. 

The need for green public investment
The Climate Change Committee argues that, while the total costs of getting to net zero are manageable, and will mostly be delivered by the private sector, an annual £6 to £23 billion of additional capital investment needs to be publicly funded through to 2035.  

While a large-sounding sum, this never exceeds two per cent of total public spending in any one year and the investment will more than pay for itself over the long run through less pollution, lower energy costs and higher productivity from developing the clean technologies of the future.  

Nevertheless, funding the upfront costs of green investment is easier in a growing economy. Without growth, and with public finances still constrained by high borrowing amid nervous financial markets, public spending can too easily become a zero sum game, whereby increased investment in one area comes at the cost of lower investment in others. For example, there are warnings that higher defence spending may be paid for by cuts to net zero and overseas aid. 

It hasn’t helped that the government’s handling of the economy has been patchy and marred by a lack of clarity around its growth strategy.  The economy was virtually stagnant at the end of last year and the consensus of forecasters surveyed by the Treasury is that it will grow by only one per cent in 2026, below what the OBR is expecting. 

So far, while the government has earned a reputation for performing u-turns in many areas of policy, it has largely stuck to its guns on providing the public investment needed to underwrite the green transition. 

For example, it managed to tweak the fiscal rules to allow for more investment spending while retaining the confidence of financial markets. Accordingly, last June’s multi-year spending review saw major increases in spending on capital investment and clean energy, along with a pledge to deliver the £15 billion Warm Homes Plan in full over the next five years. 

But, for this investment to continue over the rest of the parliament and beyond, some better news on the economy is needed. What can we expect?  

No drama for Reeves
Last year’s statement covered the state of the economy and its impact on the government’s fiscal position and so was, for all intents and purposes, a mini budget.  

This was not the intention, but a run of poor economic data following Rachel Reeves’s badly received first budget in autumn 2024 prompted an OBR warning that the government’s fiscal rules on borrowing and debt were in jeopardy. Ensuing market panic required evasive action in the form of further tax rises that created the conditions for further fiscal tightening in last November’s full budget.  

Rachel Reeves is desperate to break this doom cycle and aims to curb the excitement by confining her response to the economic situation alone.  

Helping her to dial down the drama is the welcome fact that, after 18 months of economic disappointment since the election, the auguries are good for the economy to improve over the remainder of the parliament. A global glut of oil and gas should lead to lower energy prices, easing cost of living pressures and giving the Bank of England cover for further interest rate cuts, with at least another quarter point reduction to 3.5 per cent expected by the summer.  

Lower inflation, along with bumper tax receipts, has also cut the government’s borrowing costs, easing pressure on its fiscal rules.   

The private sector is the least indebted it has been in over a decade, paving the way for a long overdue pick up in business investment in clean power, manufacturing and other sectors. The UK is well placed in what are expected to be the growth industries of the future, such as AI and renewable technologies.  

There are also signs that productivity growth (how effectively companies operate) may at last be picking up. Although this could be the harbinger of white collar job losses to come as firms adopt AI, higher productivity will boost the economy, raise incomes and ease pressure on the public finances that may help to offset the costs of higher unemployment.   

With the next spending review, covering the bulk of the rest of the parliament, due in less than 18 months’ time, it’s vital that the government creates the fiscal space to continue investing in the environment. Despite recent gloom, the economy could at last be picking up. If the government can avoid more u-turns, this should pave the way for the green investment that we need.  

Photo by Eilis Garvey on Unsplash