Why the UK's hidden cash mountain needs to go green

Billions of pounds are looking for work. Next week's news on the green investment bank will show how serious the government is in putting them to use
Damian blog : Twenty pounds banknotes in pile
The private sector financial balance in the UK in 2010 was a surplus of £110bn. Photograph: Getty Images

In these austere times, here's a startling fact: there's an enormous mountain of available cash in the UK, currently gathering dust but precious little interest. It amounted to £110bn in 2010, an all-time record (Fig 1 here). In the US, the same applies, but there the mountain is £2,650bn.

Perhaps even more startling is who owns this glittering pile: you and me. Since the financial crash, households have been hoarding money, worried about spending in a recession. Nervous banks and businesses have done the same, seeing nothing worth the gamble of investing in. With little to invest in, our pension funds have sat on our money.

But there is a market that would put all that money back to work, earning good returns for hard-pressed savers, creating jobs and boosting tax returns. Even better, it could be created at the stroke of a pen by a government with the political courage to fulfil its promises. It is the market for renewable energy and all the low-carbon goods and services that are needed for a successful and sustainable economy.

The case is put with telling clarity in a recent paper by LSE and Cisco economist Dimitri Zenghelis, who spent a decade amongst the trolls of the Treasury who are currently busy blocking the road to green growth.

Governments should not, of course, create new markets simply to stimulate growth. Mandating new kitchens for all, for example, interferes with our freedom and the efficiency of a free market. The exception is when there is a market failure: when the free actions of individuals do not collectively deliver a beneficial outcome for the group as a whole.

The Stern review on the economics of climate change, of which Zenghelis was an author, called global warming "the greatest market failure the world has seen". And that is why correcting the failure is the greatest opportunity for putting that cash mountain to work.

Fund managers and business owners repeatedly tell me the same. There is no shortage of money, only a dearth of projects to shovel the cash into. Why? Because, if the government doesn't appear to believe in its own commitment to a low-carbon future, why should the C-suite executives charged with investing the money?

The green investment bank (GIB), a manifesto promise from both coalition partners, has a significance far beyond the few billions it will distribute.

We will see the details of the GIB next week. Establishing it as a genuine borrowing bank, with seed capital from taxpayers and the implicit government guarantee that brings, would be the clearest signal possible that the government believes enough in its own green policies to put a little of its money where its mouth is. Do that and the private sector will do the rest, delivering steady revenues back to the government, savers and pension funds. The key things to watch out for are the GIB's legal status, borrowing powers, whether it is operationally independent and what it can invest in.

However, putting its money where its mouth is is hard for a government that has pledged to cut the deficit as fast as possible. Any sliver of public debt added to the national accounts makes the political pledge to destroy the deficit in a single parliament look harder. Yet all that is needed to solve that problem is smarter accounting rules, as the debt is balanced by real-world assets.

This is a once-in-a-generation opportunity. If the economy recovers, the current cash piles will find investments and future capital will be more expensive as interest rates climb off the floor.

So, the UK is sitting on record levels of private cash which, given near zero interest rates and rising inflation, is withering away. The government, at near zero cost, can correct a huge market failure with no risk of crowding out private investment (there isn't any). That market will create jobs for those currently losing them and income for savers currently losing money. And, along the way, we'll move towards living on this crowded planet without costing the Earth.

Zenghelis told me it is "positively criminal" for the government not to unlock the cash mountain by giving clear, long-term signals of its belief in the low-carbon future. I agree. So keep your eyes open next week, when the structure and remit of the Green Investment Bank are unveiled. We'll then have a much better idea of how much the government believes in its own slogan: "the greenest government ever".