Economic growth is the government’s new mantra, but what exactly does it mean, and how exactly is it achieved? Who is going to pay for it? The government does not appear to have answers – at least, not ones that are credible and likely to create sustainable economic growth.

Growth involves a more than simply announcing big projects: three new runways and nine new reservoirs and the largest theme park in Europe – the government’s aspiration is to announce 150 projects by the end of this Parliament. Despite Tony Blair’s description of politics as being “and/and”, the reality is that it’s “either/or” – there are always trade-offs to be made.

This podcast explores what really lies being these announcements: the real choices and the trade-offs that need to be made, and what actually causes economic growth.

The government’s number one mission is to grow the economy, by building more houses and sprinting to net zero by 2030. On the energy side, we’re told that investment in renewables will lower our electricity bills – costs come down, investment goes up. But despite the UK’s claim to be world leader in tackling climate change, the reality is that it has amongst the highest energy costs in the developed world and global warming is still rising.

This podcast examines the challenges that the government is facing that run counter to its objective to reduce energy costs. These include the massive demands on the system that come from the new data centres that need to run 24/7, the back-up supplies required when the wind doesn’t blow and the sun doesn’t shine, and the materials needed to build the new green infrastructure, much of which needs to be imported and paid for by whatever it costs as a result of the sprint to achieve net zero in just 60 months. These high costs are making the UK a much less attractive place for investors, who are not flocking to its shores for its claimed low-cost electricity.

As the many tens of thousands fly back home from Baku after this year’s COP, where have the 29 attempts among the world’s nations to tackle climate change got us? The concentration of carbon in the atmosphere continues to rise; 80% of the world’s energy still comes from fossil fuels; and the 1.5 ⁰C target is being passed.

But why? What’s causing the relentless increases in emissions that are feeding through to the continual, year-on-year 2ppm+ increase in carbon the atmosphere?

COPs are based on the failed objective of achieving a legally binding set of emissions targets, measured in carbon production and not carbon consumption. They encourage net zero targeting, which is at best ineffectual. Why would anyone think that another 29 COPs are going to crack the climate problem? It’s time to re-set climate policies, build bottom-up coalitions of the willing, and face up to the full scale of our carbon consumption.

The British economy is going to see more regulators, more regulatory bodies, more intervention in the private sector – all requiring businesses, on the other side of the regulatory rules, to spend more time dealing with regulators and regulation. While all governments promise to “cut red tape” – and the new government is no different – sadly, the opposite appears to be happening. There are plans not only to beef up existing regulatory bodies (Ofcom, HMRC, Ofgem, Ofwat possibly, and the EA), but also to add new regulators, including NESO, the Regulatory Innovation Office, the Fair Work Agency. No doubt there are more to come.

Why does regulation grow and grow? Do we need yet more regulatory bodies, on top of the government departments, the various offices of regulation, the plethora of quasi-regulators that surround them, and the regulators that regulate them? Does it lead to better outcomes? Not only does the new government want to do more, so, too, will the regulators themselves, as they tend to seek to expand in order to increase their budgets and make their mark. Hence the growing regulation industry, despite the efficiencies that one might expect new digital technologies to bring. But as regulation in the UK mushrooms, with this additive (not substitution) approach, what does it mean for the UK economy ahead?

The government is planning radical transformation, to health, education, rail travel, and with a view to achieving net zero electricity by 2030. These bold plans raise questions about what is going to be achieved, by when, and how. The politics is key, as is the timing. Such transformation takes years (many more than Starmer is anticipating). Thinking through the politics of what happens between now and when the election takes place in 2028–29, the government needs to face the difficult reality that radical reform will, in essence, mean that things will get worse before they can start to get better. Thatcher’s reforms in the 1980s, for example, took a decade to begin to turn the economy around.

So, it’s worth looking at what is going to get worse through the period until 2030 before it gets better (as a result of transitioning to net zero, and turning around the NHS, education, housing and transport). To ensure that this transformation is embedded and to bring the public with it, the government needs to be honest with us and manage our expectations while we experience the pain and disruption of the transition in the interim.

The government’s overriding objective is economic growth, and it plans to get there by building lots more houses, and a dash for net zero electricity with the implausible target of 2030. There may be some merit in both, but economic growth is not caused by houses or wind turbines. What inhibits Britain’s economic growth is altogether more profound. The four fundamental problems are: not enough production, too much consumption, too little savings, and too much debt.

We import rather than produce, and have almost no supply chain domestically for the net zero target. We live beyond our means, with imports exceeding exports, and calling capital maintenance “investment” supported by debt rather than paying as we go. We have virtually no savings net of capital depreciation, and hence rely on foreign investors not domestic savings. The result is too much debt, exacerbated by failing to realise that the great financial crisis of 2007-08 and the Covid-19 pandemic left us poorer, but without the willingness to accept an adjustment to our consumption.

‘Easy money’ (quantitative easing and low nominal/negative real interest rates) has left a legacy of lots of zombie companies that should not still be in business, because they are not genuinely profitable. Cheap debt washed through the banking system keeps them afloat.

For the utilities, easy money has had a devastating impact, encouraging widespread financial engineering. Thames Water is the extreme example, but there are many others among the unlisted, privately owned, UK utilities. The result is a set of companies that are highly vulnerable to economic shocks being kept on life systems.

The impact is most obvious in the boardroom, where the focus is on servicing the debt, rather than on customers, future investment and R&D. As these are the elements that drive productivity growth, the long-term economic growth opportunities are seriously impaired.

Facing up to the consequences of zombie companies in the utilities sector means Special Administration, pulling the plug on the zombies, restructuring them, and selling them on to new owners. The debt holders will have to take a haircut. But what’s not to like about more productivity, more investment, better customer service, boards focused on their customers and the business? This has to be done now if we’re serious about turning around not only the utilities sector but the wider British economy. Instead of endlessly kicking the Thames Water can down the road, Ofwat should call in the Special Administrator now. The costs of not doing so are serious.

The Labour government is on a mission to grow the economy to pay for all the public expenditure needed. But where will this growth come from? Previous major economic growth (e.g. in Germany, Japan and China) has had two common factors: exports and high levels of domestic savings. Labour’s plans don’t include anything about exports or export growth, and savings net of capital depreciation are less than zero in the UK.

How does Labour’s strategy of building new houses and wind turbines, and fitting lots of solar panels, cause economic growth? The need for more houses comes from the sharp growth in the UK population, and with higher population, GDP growth itself doesn’t necessarily raise GPD per head. On the wind turbines and solar panels, we’re replacing one capital stock (gas and coal power stations) with another (off- and onshore wind and solar panels) that provides exactly the same services. As new technology replaces old assets, this is capital maintenance not investment.

The stuff to build the houses, turbines and panels comes from overseas supply chains – the opposite of export-led growth. The economic growth calculation is based on the assumption that the costs of renewables will fall. But with the net zero card being pushed elsewhere, the costs are higher for all those competing countries wanting to go faster.

The main source of finance is overseas debt markets. This dash for growth is in effect a dash for debt. The cost of capital is key to this, and it’s been rising in real terms. How will the government get to a position of no current deficit and debt falling as a percentage of GDP by the end of the Parliament? Calling anything investment, especially capital maintenance, is no real, long-term solution. If the government’s strategy goes wrong, the dash for debt will leave finances even worse than it inherited. Let’s be realistic about what we are truly facing.

The uninspiring ideas and promises from both main parties since the election was announced make for a depressing read. In trying to get our votes – promising not to put up taxes and to look after pensioners – they are seeking to deliver the cakeism we, the consumers and voters, want: more and better services, without paying for them. It is our votes they are bidding for, and the election campaigns reflect what they think we will vote for.

In the face of the massive capital maintenance and investment needs across many sectors (infrastructure, the NHS, education, water, energy), someone has to pay. Not only do we not want to pay higher bills, we want to borrow to finance the investment, rather than saving to pay for it. Net of capital depreciation, saving in the UK is negative.

It would take a brave political leader to spell out what would really be needed to re-industralise the UK (to manufacture all the wind turbines, nuclear reactors and solar panels), to transform our health and education services, to provide a proper defence system, and to restore our natural environment.

All of this costs, but we don’t want to pay. We want a free lunch. This is not sustainable for our citizens, societies and businesses. The opinion polls suggest that people don’t buy this empty promise, yet they seem set to vote for it. Because it is not sustainable, it will not be sustained. All the promises we like hearing will turn out to be empty – we will have to pay for our lunch.

The privatisation casualties are starting to stack up – earlier failures included Railtrack, and more recently there is Thames Water. Royal Mail is struggling to deliver the post; Bulb and over half the energy supply companies failed; and BT is struggling to find a way forward. Is there a trend behind this, and what does it mean for the UK’s core infrastructures?

As real interest rates rise, the financial engineering that regulators allowed to happen has started to unravel. Thames Water geared up to 80%, Heathrow even higher, and most of the energy distribution companies are carrying a lot of debt. Their priorities risk becoming the servicing of their debt over and above their capital maintenance and the performance.

Some think that it’s simply a question of reversing the privatisation, but it’s hard to see how nationalisation will resolve the issues. Abolishing dividends does not abolish the cost of capital. Finding the money for investment just gets a whole lot harder. The Treasury has other competing priorities in a highly constrained public finance context.

Proper regulation is what is needed now to deal with the casualties and to prevent a trickle becoming a flood. Failing companies need to be taken into special administration and restructured, with a proper balance sheet and with new owners brought in to run the company. This needs to happen to Thames Water – if it doesn’t, a terrible precedent will be set. Clear performance and environmental requirements need to be reimposed. A line needs to be drawn, with companies regulated to operate in the interests of their customers; nationalisation simply kicks the can down the road.