Traditional economic models often overlook the importance of the natural resources and ecosystems that provide essential services to the economy. Green budgeting is an innovative approach that integrates environmental considerations into public spending. 

“It is a powerful tool for driving sustainable economic resilience and growth while meeting the UK's climate, nature, and other environmental commitments,” says Dimitri Zenghelis, Partner at Independent Economics and a Special Adviser to Cambridge University’s Wealth Economy Project. “By integrating environmental considerations into fiscal policy and public spending, governments can ensure that their budgets support long-term sustainability and well-being.”

Ensuring sustainable economic resilience and growth

According to Zenghelis, who was previously Head of Economic Forecasting at HM Treasury, green budgeting is rooted in the idea of the ‘wealth economy’, which emphasises the importance of investing in various forms of capital, including natural and social capital, on which economic output and human well-being depend.

Zenghelis argues that green budgeting can help shift public spending towards investments that protect or enhance these assets, thereby supporting economic resilience and growth. For example, investing in renewable energy and nature restoration projects can create jobs and reduce environmental risks.

Green budgeting can also help address the synergies and trade-offs between spending decisions. “By incorporating environmental considerations into budgeting decisions, governments can prioritise investments that deliver economic and environmental benefits, ensuring a more balanced and sustainable growth trajectory,” he says.

However, Zhengelis believes that green budgeting is a means to an end, not an end in itself. “We need to move away from just looking at Gross Domestic Product (GDP) and instead focus on national net wealth (or worth), which should encompass all the assets that really matter in generating well-being and GDP.”

He argues that such an approach isn’t about abandoning GDP, but rather “aligning GDP to reflect what we care about. This means changing behaviour and relating measures of production to the delivery of true social value – which in turn means carefully, through policies to create new markets, induce innovation and generate behavioural change.” 

The right overall policy framework is the key in ensuring government spend is allocated to the areas that matter most. Zhengelis says: “As new markets are created in protecting natural capital, the income, wages and profits will be picked up in GDP, which will better measure what matters.”

He argues: “With the right policy landscape, green budgeting will become unnecessary, as no environmentally damaging options will be available in the marketplace.”

However, as Richard Spencer, Director of Sustainability at ICAEW, points out, this ideal situation is some way off. “We need to remain realistic about what is and is not achievable and we recognise that not all government policies will benefit climate or nature,” he says. “However, we should try to get it right when looking at the overall mix of policies and this is where green budgeting can play a role in starting to collect data on green spend and to start shifting mindsets.” 

Progress in the UK

The UK has started introducing green budgeting, but much work is still needed. The government has committed to reaching net zero greenhouse-gas emissions by 2050 and has implemented policies to support this goal, such as the Net Zero Strategy and the Powering Up Britain plan.

While there have been efforts to incorporate sustainability considerations into fiscal policy, the focus has primarily been on carbon and energy-related issues. There is a need to broaden the scope of policies (and green budgeting) to include other aspects of natural capital, such as biodiversity and ecosystem services.

One of the key challenges in advancing green budgeting is the lack of comprehensive data and measurement tools. Zenghelis emphasises the importance of developing robust wealth accounts that capture the value of natural and social capital. He explains: “You want more comprehensive measures of wealth broadly defined, but the data simply isn’t good enough.” 

Such accounts could help to provide a clearer picture of the overall health of capital stocks to support assessment of the impacts of public spending decisions, enabling more informed and effective policymaking.

Zenghelis also highlights the need for increased spending to boost growth and productivity. He argues that the UK government should increase annual public investment by at least 1% of GDP, or £26bn, to tackle climate change, biodiversity loss, and environmental degradation, and to encourage more private investment. 

Next steps 

To make further progress on green budgeting in the UK, the measurement and valuation of natural capital must be improved. This involves developing comprehensive wealth accounts that capture the full range of assets that contribute to economic well-being. This should allow the UK government to understand the trade-offs and synergies between different types of capital and make more informed budgeting decisions.

There is also a need to integrate green budgeting into the broader fiscal policy framework. This means aligning public spending decisions with long-term environmental goals and ensuring that all government departments consider the environmental impacts of their budgets. Zenghelis suggests that green budgeting should be seen as an integral part of the overall budgeting process.

Furthermore, there is a need to build capacity and expertise in green budgeting within government institutions. This includes training policymakers and budget officials on the principles and practices of green budgeting, as well as developing the necessary tools and methodologies to support its implementation. 

Green budgeting can drive innovation and technological advancements by creating markets for sustainable products and services. Zenghelis says: “Government can create the standards, the regulations, the pricing, the norms and the procurement that create the markets it wants. And when those markets are created, whether it’s reforestation or preserving wetlands or building renewable generation, that will feed into GDP via the economic activities they generate.”

Finally, Zenghelis argues there is a need for greater transparency and accountability. This involves regularly reporting on the environmental impacts of public spending decisions and ensuring that these reports are accessible to the public. By doing so, governments can build trust and support for green budgeting initiatives and demonstrate their commitment to sustainable development.