HM Treasury spending review

On 20 October 2010, Chancellor George Osborne delivered the Coalition Government’s Spending Review. We consider its implications, focusing particularly on environmental sustainability.

Looking at last month’s HM Treasury Spending Review, you have to ask yourself, “What would Conservative or Labour have done if they were the government of today?” We are not a political magazine, but we believe it’s highly likely that the Coalition has produced a better review than any of the parties would have done were they acting alone.

So, just how good is it? Our interest is in the planet generally and the small part we live on specifically. As Britons, we can affect the first by inventing stuff, exporting it and providing supporting services. The second, the domestic bit, is the primary subject of the Spending Review. In terms of the bottom line for environmental and sustainable issues, our verdict is: “Not bad, but sneaky in parts”.

Green-leaning activists are outraged that the Department for Environment, Food and Rural Affairs (DEFRA) is taking such a big hit, but they seem not to notice that the Department of Energy and Climate Change (DECC) is being treated altogether more kindly, especially where expenditure limits are concerned. DEFRA’s will shrink 34% cumulatively over four years, while DECC’s will grow 41%.

These two numbers alone give a sense of the Spending Review’s intent in environmental terms. While DEFRA has to encourage the building of flood defences and environmental stewardship schemes, DECC’s role is to encourage low carbon energy and heat generation. Crudely stated, one has to protect and adapt; the other has to attack. The review is somewhat mute on other environmental essentials, such as water and waste, apart from ditching seven waste processing initiatives.

It has to be said that, politically, Chancellor Osborne played his hand well. In his earlier budget, he warned of cuts up to 25% and sought consultation. After thanking the Labour Party for its suggestions that the average cut should be 20% across unprotected departments, he brought his recommendations in at 19% and then sought the approval of the House. Olé.

Dirty Tricks

Regarding the environment, the dirtiest trick Osborne played was with the Carbon Reduction Commitment (now renamed the CRC Energy Efficiency Scheme) in which heavy users of energy are expected to buy allowances to cover their tonnage of carbon dioxide emissions. In the original scheme, those who most improved their performance were rewarded with a share of this revenue. Now the revenue goes straight to the Exchequer. With the “reward” side of the equation removed, the carrot has become the stick. It’s nothing short of £1 billion stealth tax, which could become a gold mine if (or should we say when?) the rate per tonne is increased or the catchment for the scheme is widened. At the moment, it applies only to the top 5,000 companies in terms of energy consumption. You can say two good things about this: 1) the start date has been deferred by a year to 2012; and 2) it will push companies to reduce their carbon emissions where to do so would cost less than the levy.

At a personal level, you’ll likely have very mixed feelings about the Spending Review. On the one hand, you see slivers of money taken away here and there that, which, when added together, could equate to an exotic holiday or something similar. On the other hand, you may be thinking, “Well, something had to be done”. Some of you will consider the measures unfair; others will be happy to “do their bit”.

Let’s take a closer look at the sustainability-related measures. Take transport, for example. It’s true that the new infrastructure has to be built and existing systems have to be maintained. But why encourage train fare increases when the aim is to get people out of the air and off the roads? Why cut bus subsidies to operators by 20%? These plans do not send the right message. No doubt with an eye on the grey vote, pensioners will still get their travel passes. And presumably the many road building plans will reduce emissions. If not, what are they for, exactly?

Perhaps the Government expects no change in our behaviour and is building in the hope of a flood of electric and hydrogen fuel-cell vehicles. If that’s the case, we’re going to need to upgrade our energy and service station infrastructures way beyond anything we can imagine at the moment. Starting in January 2011, the Government is going to start dishing out up to £5,000 towards the cost of ultra-low emissions vehicles. Rather like the scrappage scheme that preceded it, little thought seems to have been given to the lifecycle environmental costs of such measures. Cars have to be made (raw materials, carbon emissions, water, waste), run (electricity is only as clean as the power station that creates it), and disposed of eventually (its parts reused or upcycled, ideally).

Green Innovation

As a nation, we need new relevant inventions that can improve our quality of life and bring us foreign revenues. With developing countries churning out science graduates by the million, it’s vital that we sustain some kind of advantage. The relatively good news is that the Science Budget is being retained in cash terms, although this means that this year’s £4.6 billion will be worth less. As in so many aspects of this Spending Review, we really are expected to get more and more out of less and less. Those of us in business will be very familiar with the concept. It can always be done, but it requires change–something that strikes fear into many hearts.

The Government is to invest £1 billion into an independent “UK-wide” Green Investment Bank. Many economists consider this amount laughably inadequate and have been pitching £2 billion to £6 billion as an absolute minimum. However, the proposed figure has its advantages. It sends a signal that this is not a “free for all”; nor is it open to every wacky idea. It is intended to lend to projects with a reasonable chance of success; projects that will contribute to the UK’s green infrastructure. “Offshore wind farms” is an example given in the Spending Review. The clear aim is to get things moving or at least started. The bank’s capital reserves will be boosted by sales of government-owned assets. There is an intention to attract private capital as well, but the details of the structure of the bank still need to be hammered out. But if the bank truly is “UK-wide” in a traditional sense, the billion pounds is going to burn off like morning mist on a summer’s day. The bank has to be slim, central but accessible to all.

The Feed-in Tariff for microgeneration of electricity, which seems very generous at the moment, will be reviewed in four years’ time. You can bet it won’t be good news, though. The present tariff will hopefully have done its job in introducing people to the realities of home-grown electricity generation. The focus will probably turn towards giving good tariffs to people installing the most effective technologies. However, industry insiders are certain that existing recipients will not see their tariff reduced. Well, that’s good news. Along with this comes the promise of a Renewable Heat Incentive in 2011-12, which will reward green heating installation – typically ground source or solar thermal.

On a grander scale, the Government has earmarked £200 million to help ports accommodate offshore wind farm equipment and set up local manufacturing facilities.

The Review contains a lot of sustainability-related initiatives, but they are primarily aimed at increasing our clean energy capacity and reducing our carbon emissions. Two things scarcely mentioned are water and waste. Actually, water isn’t mentioned at all, except to say that the Water Services Regulatory Authority (or Ofwat) was not part of the Spending Review Process. Perhaps this is because water is largely privatised and, apart from Ofwat and the Consumer Council for Water, the Government doesn’t have much to do with what’s going on. These organisations are currently being reviewed with an eye to their fitness for purpose. Water, it seems, is on the political radar; just not to the extent that it impacts this Spending Review.

However, on waste recycling the Government has decided that it can withdraw from seven proposed PFI-funded projects but stick with a further eleven. According to DEFRA, “This will reduce estimated central government PFI expenditure by £3 million per annum in 2014-15 rising to £26 million per annum from 2017/18 onwards”. With further justification that “these projects will no longer be needed in order to meet the 2020 landfill diversion targets set by the European Union”. The targets come with heavy fines attached to failure, meaning that the motivation for treating our waste seems more about avoiding fines than ensuring any environment benefits.

In an ideal world, we’d reuse most of what we currently send to landfill, we’d make things easier to recycle in the first place and we’d minimise unnecessary packaging. We wouldn’t just accept landfill as a necessity. Increasing numbers of companies are seeing the opportunities in waste, the so-called “trash to cash” organisations. They separate and make use of what they can, even if it sometimes means burning it for energy.

And, finally…

Hopefully it’s clear why we rate the review, “Not bad, but sneaky in parts”. And, of course, we’re restricting ourselves to sustainability aspects. For a broader look, let’s take some clippings from better qualified commentators.

In late September, the IMF visited the UK and was broadly positive about the Chancellor’s intentions. It hasn’t commented since the Review Announcement, but after the visit it said: “The UK economy is on the mend. Economic recovery is underway, unemployment has stabilized, and financial sector health has improved. The government’s strong and credible multi-year fiscal deficit reduction plan is essential to ensure debt sustainability. The plan greatly reduces the risk of a costly loss of confidence in public finances and supports a balanced recovery”.

Angel Gurría, Secretary General of the OECD (Organisation for Economic Co-operations and Development), says: “The measures are tough, necessary and courageous. Acting decisively now is the best way to secure better public finances and bolster future growth”. In a separate statement, the OECD confirms that “Mr Gurría supports the UK’s continuing willingness to back its commitment to a greener economy with further budgetary resources”.

The Economist’s report (headlined “Ouch!”) states, “the government’s bet that the private sector will generate growth as the public sector retrenches remains just that: a gamble”. It also says that “Mr Osborne was also right to protect capital spending as far as possible; despite its economic value, such investment is often the first thing that myopic cost-cutting governments sacrifice”.

The course has been set for the good ship UK. Some passengers won’t be looking forward to the voyage, and big question marks hang over the ability of the captain and crew to navigate the stormy seas ahead. A select few even doubt the seaworthiness of the vessel itself. But if intentions equate to actions, the UK should emerge into calmer waters in time for the next election.