Poor economics in the FT

The FT gets Baumol’s disease wrong: Productivity growth raises the relative cost of labour-intensive services. It also raises the income available to pay for them.

Chrystia Freeland’s recent Financial Times column uses Baumol’s cost disease to explain a familiar complaint: voters feel that they are paying more tax while receiving worse public services. Her description of Baumol’s mechanism is broadly correct. The fiscal conclusion she draws from it is not.

Freeland argues that labour-intensive services such as teaching, healthcare and social care cannot match productivity growth in sectors producing manufactured goods. A string quartet still requires four musicians for the duration of the performance; caring for a child or an elderly person still requires human time. Yet wages in these activities must broadly keep pace with wages elsewhere, or their workers will leave. Their cost therefore rises relative to the cost of goods produced in sectors with faster productivity growth. This is the basic mechanism described in Baumol’s 1967 paper.

So far, so good. Freeland then suggests that one response is to “levy higher taxes on the sectors that can become more productive”. That leap does not follow. Productivity growth elsewhere raises the cost of maintaining public services, but it also raises the national income from which those services are funded. If we want the same quantity of public services and they continue to employ the same share of the workforce, the public-service bill and the tax base rise together. The tax share need not rise at all.

The arithmetic

Take a deliberately simple economy with GDP of £100. The private sector produces £50 of goods and the public sector provides services costing £50. Public spending and tax revenue are therefore both 50 per cent of GDP.

Now suppose private-sector productivity rises by 10 per cent while public-sector productivity is unchanged. The population and workforce are fixed, and people want the same quantity of public services as before. Providing it therefore requires the same number of public-sector workers.

To retain those workers, public-sector wages must rise in line with private-sector wages. Let's keep the price per unit produced by the private sector constant, then wage rates in both sectors must rise by 10 per cent (to match the 10% rise in private sector output quantity). The result is:

	Before	After
Private-sector output, at current prices	£50	£55
Public services, valued at current cost	£50	£55
Nominal GDP	£100	£110
Tax revenue required	£50	£55
Tax revenue as a share of GDP	50%	50%

The same public services now cost £55 rather than £50. But nominal GDP has risen from £100 to £110, so an unchanged tax-to-GDP ratio raises exactly the additional £5 required. Freeland counts the rising public-sector wage bill but neglects the simultaneous growth of the income used to pay it.

Valuing public services at their current cost is not an accounting trick invented for this example: in the absence of a market price, national accountants generally value current-price non-market output using its costs of production.

The distinction between nominal and real GDP also makes clear what Baumol’s disease actually does here. At the original prices, private output has risen from £50 to £55 while real public-service output remains £50. Real GDP is therefore £105: a rise of 5 per cent. Nominal GDP is £110, implying GDP-deflator inflation of about 4.8 per cent. The implicit price of public services has risen relative to the price of private goods. That is Baumol’s cost disease. The share of society’s labour and income devoted to public services has not risen.

If “higher taxes” merely means that the government must collect £55 rather than £50 after nominal income has grown by 10 per cent, the statement is true but empty. Governments normally collect more pounds when the economy’s cash income grows. If it means a higher tax rate or a larger tax share of GDP, it is false - as this example shows.

The article’s language about “makers” and “takers” is also misleading. Public-sector workers are producing education, healthcare and care services; taxation finances their collective purchase. The economic issue is how labour is allocated between different forms of production, not how much the supposedly productive must surrender to the supposedly unproductive.

What could make the tax share rise?

There are several reasons why an economy might genuinely need to devote a growing share of its income to public spending. An ageing population may require more healthcare and social care. People may demand more or better public services as they become richer. New medical treatments may expand what health systems can do, while increasing their total cost. Public-sector productivity might fall rather than merely remain stagnant. Debt interest, pensions or other spending may displace money previously available for frontline services.

The distribution of private-sector gains also matters. If productivity growth appears mainly as lightly taxed or internationally mobile profits, rather than broadly shared wages and incomes, the effective tax base may fail to keep pace. Freeland’s concern about international tax co-operation may be relevant to that problem. But it is a separate argument about distribution and tax design, not a consequence of Baumol’s disease.

Nor can Baumol’s mechanism by itself explain why services should become worse. With the same public-sector workforce and unchanged productivity, the model delivers the same services at an unchanged tax share. If taxes are taking a larger share of GDP while the quantity or quality of services is deteriorating, something else must have changed.

Baumol’s insight explains why a teacher’s, nurse’s or musician’s time becomes more expensive relative to manufactured goods. It does not show that a richer society must surrender an ever-growing share of its income to provide the same amount of that time. A productive economy can afford unchanged labour-intensive public services perfectly well. What it cannot do is make them progressively cheaper relative to everything else.

Should Andy Burnham allow more North Sea drilling?

One of the first significant choices facing Andy Burnham's government concerns the future of North Sea oil and gas. Initial reports suggested a broad change of direction, which now seems to have been softened to a promised “pragmatic” approach.

Decisions remain outstanding on particular developments and on the treatment of fields connected to existing infrastructure: approval for the nearly completed Jackdaw gas field, whose developer says it could begin producing this autumn, is a different decision from approval for the predominantly oil-producing Rosebank field; and both differ again from issuing licences for fresh exploration that may produce nothing for years.

In this blog I will leave employment, tax revenue, and the distribution of the gains to one side, and consider the case for and against drilling purely through the lens of climate. There are five climate and transition arguments worth taking seriously: one is plainly bad; two provide a genuine case for limited additional production; and two strengthen the case against it.

The stupid case: improving the carbon accounts

The bad argument begins with a correct observation. Producing and transporting a unit of gas from different sources creates different quantities of greenhouse gases. The North Sea Transition Authority estimates that, in 2024, producing and delivering UK gas emitted 28 kgCO₂e per barrel of oil equivalent. The corresponding figure was 85 kg for imported liquefied natural gas (LNG). Liquefaction, shipping and regasification are energy intensive, and methane can leak along the supply chain.

Therefore, using domestically produced gas is “cleaner” and will reduce emissions?

Domestic gas production relative to imports may reduce UK emissions, but the atmosphere is indifferent to the national column of a global emissions spreadsheet in which an emission appears. The relevant question is how a production decision changes total world emissions.

Additional UK supply lowers the market price of gas or oil. Consumers then use more, while some higher-cost production elsewhere is displaced. The split depends on demand and supply elasticities. And while it is perhaps too strong to claim that every additional North Sea barrel becomes an additional barrel of world consumption, it is equally wrong to assume that it displaces an imported barrel one for one. Unless producers elsewhere withdraw their output fully, world fossil-fuel consumption rises.

This is the central insight of the economics of supply-side climate policy. Harstad’s Buy Coal! showed why a climate coalition is likely to need to constrain fossil-fuel supply as well as demand. Fæhn and co-authors found, in a quantitative application to Norway, that supply-side restrictions could form most of a cost-effective unilateral climate policy. More recent empirical work reaches a similar qualitative conclusion while allowing for leakage. Prest and co-authors estimate that permanently curtailing an oil barrel reduces global lifecycle emissions by roughly 40–50% of that barrel’s gross emissions; other producers replace part of the lost supply, but far from all of it. Ahlvik’s estimates likewise show substantial leakage from an OECD-only oil-production tax, alongside a remaining reduction in global emissions.

These estimates dispose of the idea that supply is environmentally irrelevant because demand is fixed. From a climate-only perspective, this creates a strong presumption against expanding production.

The first serious case: the transition itself uses resources

Net zero is an enormous investment programme. It requires renewable generation, networks, storage, new industrial equipment, building renovation, heat pumps and changes to the transport fleet. Producing all that equipment requires labour, materials, capital and energy. During the build-out, resources devoted to investment are unavailable for current consumption.

This trade-off is familiar in growth economics, although it sometimes disappears from political accounts of the transition. In a recent macroeconomic model of net zero, Neil Mehrotra shows how the replacement of fossil capital with clean capital can reduce consumption along the transition path even where the eventual cost of clean energy is small. Premature retirement of usable fossil capital adds another temporary loss. The International Energy Agency’s net-zero scenarios similarly require a rapid increase in energy investment. Comerford and Spiganti show how a negative energy or economic shock can intensify this problem: consumption smoothing reduces aggregate investment and shifts the composition of the remaining investment towards shorter-duration, lower-upfront-cost fossil projects, delaying the clean-energy transition.

Energy itself can therefore be a binding transitional input. If Britain tries simultaneously to construct a new energy system and to contract its available dispatchable supply too quickly, the result may be lower consumption, higher prices or slower construction. Additional gas could ease that constraint and make a rapid transition more tolerable.

This is a genuine argument for production, although it is much narrower than a general case for reopening the North Sea. Three conditions must hold. The energy must arrive while the constraint is binding; it must improve the availability or resilience of energy used in Britain; and the clean investment programme must proceed faster as a result. A generic exploration licence satisfies none of these conditions automatically. The UK is a small participant in integrated European and world markets, so extra North Sea output will have little effect on the market price.

Jackdaw is the strongest possible example for this argument because the project is unusually advanced. Its developer says it could begin production on 1 October and supply around 6% of UK gas at peak. Those are company claims and the appropriate counterfactual still needs independent assessment. Even so, a field capable of producing within months deserves a different analysis from a new licence with a multi-year lead time. Rosebank, which is principally an oil project, cannot borrow an argument about a gas shortage this winter.

There is also an implementation problem. Unconditional additional supply may support extra ordinary consumption rather than construction of the clean system. A government relying on the transition-resource argument should be able to identify the bottleneck being relieved and the extra clean investment thereby enabled. Linking any temporary production rents to grids, storage, efficiency and renewable capacity would make the claim more credible.

The second serious case: net zero has a political constraint

Climate policy must survive elections, price shocks and cold winters. Its costs can be immediate and highly visible, while much of its benefit is global and arrives over decades. That asymmetry creates an obvious political vulnerability.

The evidence from carbon taxation is sobering. Douenne and Fabre find that, after the French Yellow Vests protests, voters greatly overestimated their losses from a carbon-tax-and-dividend proposal, perceived it as regressive and doubted its environmental effectiveness. Providing correct information improved support only partially. More broadly, the literature on climate-policy sequencing argues that early clean investment can lower later abatement costs and create constituencies with an economic interest in stronger policy.

Imagine, then, a serious gas shortage this winter after the government has rejected Jackdaw. Opponents of net zero would have an easy story: climate policy left Britain short of energy. The story might be economically false—the shortage could have arisen from international disruption, storage failure or weather—but political attribution rarely waits for a clean counterfactual.

The reverse mechanism is also possible: if Jackdaw is approved and a shortage occurs anyway, the limits of drilling become visible; continued exposure to gas could then be blamed, creating impetus for faster electrification, efficiency and renewable deployment. Europe’s response to the 2022 gas shock illustrates the possibility: governments secured emergency fossil supplies while also cutting gas demand and accelerating parts of the clean-energy programme.

Unfortunately, a crisis arrives without an agreed interpretation. The fossil-fuel industry can use the same shortage to demand another field after the first. Climate advocates can use it to demand release from gas dependence. Political outcomes depend on framing, and the economic interests that policy has already created. Approving drilling may insure the government against one line of attack, while strengthening a constituency that will resist the eventual phase-out.

The political-economy case is therefore real but indeterminate. It supports a transparent energy-security plan, explicit contingency analysis and protection for vulnerable households. It does not, by itself, select a drilling decision.

A weaker case against drilling: crowding out finance

Another concern is that money invested in North Sea projects becomes unavailable for the net-zero build-out. At the level of an individual project, this sounds unconvincing. The investors financing an offshore gas field are unlikely to be choosing between that field and a Scottish heat-pump programme. Britain is also open to international capital, so national saving is not a fixed pot that must be divided mechanically between brown and green investment.

The aggregate cost-of-capital version of the argument is possible, but it needs evidence. Renewable energy is capital intensive and unusually sensitive to financing costs. Work by Calcaterra and co-authors shows that high and unequal costs of capital can materially impede renewable deployment. Yet it does not follow that one additional UK fossil project appreciably raises the financing cost of clean projects. Indeed, Mehrotra’s transition model finds that expected lower consumption growth can lower the equilibrium real interest rate even as clean investment rises.

More specific bottlenecks offer a stronger version of the argument. Banks and developers can have limited risk-bearing capacity. Public guarantees, tax allowances and fiscal headroom are scarce. Offshore engineers, installation vessels, ports, planning expertise and management attention cannot move instantly between sectors. Fossil investment can bid up the price of these inputs and delay clean projects even if the global supply of financial capital is elastic.

So this argument should be quantified rather than asserted. For each proposed field, the government should ask which financing capacity, public support and specialist resources it will use, and what those resources would otherwise have done. Purely private finance with genuinely additional labour and equipment creates little direct crowding out. Subsidised finance or competition for an already constrained offshore supply chain creates much more.

The stronger case against drilling: capital creates its own future

Capital is durable, and investments are often complementary. A gas field raises the value of pipelines and processing hubs. Reliable gas supply raises the prospective value of gas-fired generation and other gas-using equipment. Once those assets exist, their owners have an incentive to resist policies that would strand them. Today’s investment therefore changes tomorrow’s technology, prices, and politics.

This is the economic core of carbon lock-in. Acemoglu and co-authors show how innovation can become path dependent: a larger market for dirty technologies attracts further research towards them, while clean innovation needs policy support to escape the inherited advantage. Rozenberg, Vogt-Schilb and Hallegatte show how irreversible investment in polluting capital creates stranded assets during a later transition and alters the costs and politics of climate instruments.

Harstad and Holtsmark’s new Journal of Political Economy paper, The Gas Trap, applies the point directly to natural gas. Extra gas can displace coal in the short run because existing renewable capacity cannot respond immediately. Once future gas supply is anticipated, however, investors build less renewable capacity. Over the longer run gas then displaces renewables, and emissions can rise. A policy that appears helpful in the immediate energy market changes the capital stock that will govern the next one.

For a single UK field, the effect on the European gas price may be small. The local infrastructure and political effects can still be important. Adura explicitly argues that Jackdaw would keep the Shearwater gas hub operating into the 2030s. That is an economic benefit to the project, and it is also the lock-in mechanism: extending the hub makes nearby tiebacks more valuable and gives workers, firms and asset owners a stake in further production.

Some complementarities could run in the other direction. Offshore skills, ports and pipelines may support wind, carbon storage or hydrogen. Existing infrastructure could be repurposed. These possibilities reduce lock-in only where conversion is technically realistic and backed by enforceable plans. The mere possibility of later repurposing cannot be counted as a delivered climate benefit.

So what should Burnham do?

The five arguments do not carry equal weight.

The higher imported emissions case fails by ignoring the effect of supply on the world market. The transitional-resource and political-economy cases are serious, particularly for gas that can arrive quickly during a genuine security constraint. Financial crowding out is plausible through specific bottlenecks, although the broad claim about a fixed pool of capital is weak. Path dependence is the strongest additional reason for caution because it affects future investment and future political choices.

The conclusion must be against a general return to North Sea exploration or an open-ended programme of new drilling. But the possible case for Jackdaw is much closer and should be judged separately: its near-completion gives it a credible short-run security value that Rosebank and new exploration do not share. Approval would nevertheless carry a global emissions cost and extend the life of gas infrastructure.

If Burnham approves a narrowly transitional gas project, the word “transitional” needs policy follow-through: a binding production horizon or cumulative cap; no expectation of repeated follow-on approvals; a climate royalty reflecting the carbon released when the gas is eventually burned; no public subsidy; and a specified clean-investment programme large enough to relax the constraint used to justify the gas. Prest and Stock show how such a royalty can incorporate downstream climate damages into a supply-side fiscal instrument. Without those commitments, the bridge has no defined destination and every temporary exception becomes the argument for the next one.

References and further reading

• Acemoglu, D., Aghion, P., Bursztyn, L. and Hémous, D. (2012), “The Environment and Directed Technical Change”, American Economic Review, 102(1), 131–166.
• Ahlvik, L. (2026), “Quantifying Supply-Side Climate Policies”, Review of Economic Studies.
• Calcaterra, M. et al. (2024), “Reducing the cost of capital to finance the energy transition in developing countries”, Nature Energy, 9, 1241–1251.
• Comerford, D. and Spiganti, A. (2025), “Energy Shocks and the Climate Transition”, Strathclyde Discussion Papers in Economics, No. 25–4.
• Douenne, T. and Fabre, A. (2022), “Yellow Vests, Pessimistic Beliefs, and Carbon Tax Aversion”, American Economic Journal: Economic Policy, 14(1), 81–110.
• Fæhn, T., Hagem, C., Lindholt, L., Mæland, S. and Rosendahl, K. E. (2017), “Climate Policies in a Fossil Fuel Producing Country: Demand versus Supply Side Policies”, The Energy Journal, 38(1), 77–102.
• Harstad, B. (2012), “Buy Coal! A Case for Supply-Side Environmental Policy”, Journal of Political Economy, 120(1), 77–115.
• Harstad, B. and Holtsmark, K. (2026), “The Gas Trap: Outcompeting Coal versus Renewables”, Journal of Political Economy, 134(7), 2166–2214.
• Meckling, J., Sterner, T. and Wagner, G. (2017), “Policy sequencing towards decarbonization”, Nature Energy, 2, 918–922.
• Mehrotra, N. R. (2025), “The Macroeconomics of Net Zero”, working paper.
• Prest, B. C., Fell, H., Gordon, D. and Conway, T. J. (2024), “Estimating the emissions reductions from supply-side fossil fuel interventions”, Energy Economics, 136, 107720.
• Prest, B. C. and Stock, J. H. (2023), “Climate royalty surcharges”, Journal of Environmental Economics and Management, 120, 102844.
• Rozenberg, J., Vogt-Schilb, A. and Hallegatte, S. (2020), “Instrument choice and stranded assets in the transition to clean capital”, Journal of Environmental Economics and Management, 100, 102183.

Data and context: BBC reporting on Burnham’s proposed North Sea plans; Office for National Statistics guide to UK emissions measures; North Sea Transition Authority gas-emissions factsheet; Carbon Brief’s lifecycle comparison of North Sea gas and LNG; the International Energy Agency’s net-zero pathway; and Adura’s description of the Jackdaw project.

Glasgow Transport Emergency

As oil prices rise to more than $100/barrel, with consequences for the cost of moving around by car, Glasgow's lack of resilience in its public transport system is laid bare by the devastating fire at Glasgow Central Station. Since everything to the south of the Clyde comes in to Glasgow Central, the whole network is essentially shut down by the loss of this single node.

This wake up call should lead to change. Even the short term response here can be positive. Glasgow has a rail network, not simply a single station, it's time to use it. Temporary platforms and stations have to be built on this network, with trains continuing in to Glasgow Central without passengers in order to turn etc so that logistics can be managed. Further, rail tickets need to be made valid on the Subway - integrated ticketing now!

Inverclyde & Ayr via Paisley

Currently trains from the south west coming in through Paisley have a final stop prior to Glasgow Central at Cardonald. This needs to go further so that trains can still usefully come in from the south west. Temporary platforms need to be built either at Shields Road or at West Street so that the south side of the city centre can still be accessed, with passengers easily changing on to the Subway. It may be that despite the apparent convenience of access to the Subway from West Street, Shields Road is a better bet with space provided at the Shields Depot - this may be a necessary terminus for trains coming from the east from Newton and Motherwell via Rutherglen.

Southside

The Carthcart Circle trains (and trains joining it from Kings Park and Muirend) currently don't stop north of Pollokshields (East or West) until they get to Glasgow Central. Ideally there should be 3 temporary stops built for this line: Eglington Toll for an interchange with trains running east-west between Cardonald and Rutherglen (and beyond to Newton and Motherwell); Lauriston for an interchange with trains coming south over the Clyde via the Union Bridge from Bellgrove (and heading west either to Paisley Canal or Paisley Gilmore Street); and Bridge Street for access to the city centre and to the Subway.

Kilmarnock & East Kilbride

Trains come in from Kilmarnock and East Kilbride via Pollokshaws West and Crossmyloof. Perhaps a temporary Platform can be built for this line at Pollokshields East to allow for changes on to the other Southside lines, but otherwise these trains should continue to Dalmarnock and on to Glasgow Central low level.

ClydeMetro

These temporary stations and interchanges should be aimed to be made permanent under the ClydeMetro project, which should prioritise the resilience characteristics of a city-wide network, rather than a system of spokes which all lead in to one or two vulnerable nodes (despite the demands that people will likely make for a direct link to either Glasgow Central or Queen Street). The major development beyond making these temporary stations permanent, should be a new city centre station at Glasgow Cross, providing an interchange with the line running through Glasgow Central low level, and providing city centre access to the line running south over the Union Bridge (since otherwise this line would only be accessible from Bellgrove).

London

Trains to England are the big intercity loss with Glasgow Central, and there are two ways to deal with this:

1) Use Motherwell as the main station for journeys to England, with frequent local services from Motherwell to Glasgow: south of the river via Newton and Rutherglen, to the temporary terminus at Shields Depot; and north of the river via Coatbridge Central, Gartcosh, Robroyston, and Queen Street.
2) Run direct trains south from Glasgow Queen St, either via the line through Coatbridge Central and Motherwell (not necessarily stopping at Motherwell), or via Edinburgh.

In any case, there are options: Glasgow has a network, it's time to use it!