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Summary
- Chancellor of the Exchequer Rishi Sunak may launch the country’s first green government bonds to finance environment-centric investments.
- He might also encourage the Bank of England to focus on climate change in its policies.
- At the same time, any progress on carbon taxes might be slow for the UK.
The budget this year is expected to contain environment friendly measures. News reports have highlighted that Chancellor of the Exchequer Rishi Sunak, who will present this year’s budget on 3 March, will launch green gilts, but their scale and bond maturity levels are yet to be known. The gilts will form a part of the government borrowing plan for the next financial year.
In fact, other European nations have already taken a lead in issuing similar debt where the government has to offer higher interest rates than normal bonds.
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Besides, Sunak might use his annual review of the Bank of England to take its business towards a carbon-neutral direction. Moreover, the UK government might sell its holdings of bonds issued by oil and gas companies. This year, the BoE has asked banks and insurance firms to look at the risks they would face from climate change. They are mandated to publish these risks by early next year.
Another issue is of the carbon taxes that is expected to be slower as Sunak is trying to manage the herculean task of lowering down the £400-billion budget deficit. Last October, the International Monetary Fund had endorsed imposition of the carbon taxes on fossil fuel corporations. The global temperatures are expected to go up by 4 degree Celsius by 2100. At the 2015 Paris climate meeting, it was decided that the aim is to limit the temperatures to 2 degree Celsius. But most countries have not taken this target seriously and are not on track to achieve it.
Last week, Sunak told his team that he wanted climate change to be a major part of UK’s chairmanship of the G7 this year as the UK will be hosting the COP 26 in November.
Philip Dunne, Conservative chair, Environmental Audit Committee, UK Parliament, said Sunak should use the UN platform to fulfil the government promise to lower its net carbon emissions to zero by 2050. The government should initiate work on taxing carbon emissions and prepare its proposal by 2021 end, said Dunne.
All these taxes will help Sunak to generate the much-needed government revenue. In fact, market analysts have already warned the UK government that taxes might be hiked by £60 billion every year from this year to lower the budget deficit.
Despite all this, the long-term pandemic damage to the economy would leave ongoing unsustainable deficits in the UK government finances. The British economic output this year is likely to be 3 per cent lower than its pre-Corona levels.
A joint analysis by Citi Research the Institute for Fiscal Studies said that borrowings in FY21 will reach their highest share of GDP (gross domestic product) in any non-war period. The study has suggested that with interest rates being extremely low, the government should shift its borrowings towards long-dated bonds. But it also said that the furlough scheme needed to be extended as long as the coronavirus restrictions last as it will safeguard jobs. At the same time, deeply impacted sectors such as aviation might need a long-term support.
