National Debt: It’s Time for Tough Decisions (Economic Affairs Committee Report)
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Lord Bridges of Headley
That this House takes note of the Report from the Economic Affairs Committee National debt: it’s time for tough decisions (1st Report, HL Paper 5).
Lord Bridges of Headley (Con)
My Lords, it gives me great pleasure to open this debate. Let me start by thanking everyone who has come in on this lovely sunny day, and, in particular, the members of the committee for their hard work and commitment over the years in which I was chair. Sadly, I no longer chair the committee, but I have passed the baton to the very capable hands of the noble Lord, Lord Wood, who we look forward to hearing from later. Before I move on, I thank the committee’s clerks, both past and present, our policy adviser and our specialist adviser, Isabel Stockton, and all those who gave evidence to this report. This report showed this House, as I think of it, at its best. It was a great cross-party effort—a team effort—and I thank everyone for all that they did.
The sustainability of our national debt is, in my mind, a central issue of our time. How we manage it and ensure that it remains sustainable touches on almost every aspect of our economy and our way of life. Between the turn of the century and March last year, public sector net debt, excluding the Bank of England, trebled to just under 100% of GDP. This rise was turbocharged by successive Governments’ responses to the financial crisis, to Covid and then to the energy shock. In the past, such a sustained increase happened only during wartime. This time, as our debt grew, so did the conspiracy of silence about it. None of the major parties wanted to confront head-on the economic and social consequences of this rising tide of red ink. Therefore, at the start of last year, the Economic Affairs Committee decided to give this issue the attention it truly deserved by asking a very basic question: how sustainable is our national debt?
Before I go any further, let me define what the committee meant by sustainability. Debt sustainability depends on tax and spending policies which credibly align with expectations for economic growth and the cost of borrowing. It is the trajectory, rather than the level of debt, and our ability to service our debt which should be the principal considerations when assessing debt sustainability. A debt level risks becoming unsustainable if there is an insufficient buffer to absorb future economic shocks, or if a Government’s approach to fiscal policy creates a long-term trajectory of increasing debt service costs.
Looking at our nation’s debt through this prism, our findings paint a very dark picture of our nation’s finances. Our core conclusion was that, without an appropriate fiscal policy that addresses the challenges the UK faces, there is a risk of the debt becoming unsustainable. We stated that if we wish to maintain the level and quality of public services and benefits that we have come to expect, we face a choice: taxes will need to rise, or the state will need to do less. Addressing this will demand clarity as to the responsibilities and role of the individual versus that of the state. Muddling through is not an option. If this choice is ducked in this Parliament, the UK risks being on a path to unsustainable debt.
Why did we come to this conclusion? First, the trends that helped us manage and bring down our debts in the past have been thrown into reverse. We now face what I call the Ds: higher defence spending; the pressure of demographic change; decarbonisation and the green transition; dependency, especially around labour market inactivity and welfare costs; and, of course, the cost of servicing debt itself.
Another reason for our concern was growth. If real interest rates exceed the growth of national income, there must be a primary surplus. In other words, government expenditure, net of interest payments, must be less than government revenue to prevent the debt ratio rising. With growth anaemic, we heard evidence of how the UK risks being sucked into a debt trap. Furthermore, we pointed out that while high net migration has boosted GDP growth, it cannot be the solution to debt sustainability, for it has made little impression on GDP per head.
The third reason for our concern was the structure of our debt. Successive rounds of quantitative easing have seen long-term debt exchanged for short-term debt, and a greater proportion of debt is index-linked and held by overseas investors. This has made the cost of servicing the UK’s debt more sensitive to rises in interest rates and inflation, as well as to sudden changes in investor sentiment. Given today’s geopolitical risks, the Government need a larger fiscal buffer if they are to weather future economic shocks.
Finally, we were concerned about the fiscal rules. We said that rules should hold Ministers accountable for reducing debt steadily, as a proportion of GDP, over time. The concept of a rolling target for debt creates a misleading impression as to the true state of the public finances and hides the need to take difficult decisions to secure debt sustainability in the medium to long term.
Since the report’s publication, we have had a Budget, we have had a Spring Statement, we have seen the impact of other challenges created by another D—this time Donald Trump—and we have received the Government’s written response to our report.
In that response, for which I am most grateful, the following passage stuck out. Let me quote it:
“The government agrees with the … Report that difficult decisions are required to avoid the UK’s debt being on an unsustainable path. The Budget took the necessary difficult decisions to put the public finances on a sustainable path—setting realistic plans for public spending while raising revenue—to create the conditions for growth. This will be supported by the government’s new fiscal rules”.
Let us dissect this passage. First, on the difficult decisions, tax as a share of GDP is going to rise to an historic high in 2027 and remain at that level for the rest of this Parliament. I do not think any of us would dispute that raising taxes to an historic high counts as a difficult decision, but has it put our public finances on a sustainable path and is this course of action creating growth, as the Chancellor’s letter stated?
Let us start with debt sustainability. On Wednesday, the latest figures showed that net debt as a percentage of GDP remains at levels last seen in the 1960s. Looking ahead, the OBR shows that, from 2025-26 to the end of the decade, debt will rise by an average of almost £11 billion more every year. Although public sector net debt is forecast to fall a fraction next year, it will then rise back to 96.1% in 2029-30. Obviously, the Government have changed the definition of debt that they use for their fiscal rules, but, as the OBR states, whichever of the four definitions of debt one uses, all four show debt remaining at historically high levels within the forecast period and show debt to be higher in 2029-30 than in 2024-25.
Next, are the Government creating the conditions for growth, as the Chancellor states? Growth largely stagnated over the second half of 2024 and is now forecast to be 1% this year—half of the October forecast—and that forecast could itself easily be blown off course. I make one point: were bank rates and yields on gilts issued across the forecast both 0.6% higher—this is less than the 1% volatility in 10-year gilts since early October—that alone would be enough to eliminate the minuscule headroom that the Government have to meet their fiscal mandate.
On tax and spending, the OBR assumes that the fuel duty indexation and the reversal of the 5p cut will take place and that unprotected departments’ budgets will be cut. It flags that the proposed welfare reforms are “very uncertain” and that previous reforms have saved much less than previously expected. Given all these uncertainties, the probability of meeting the fiscal target is 54% and the probability of meeting the debt target is 51%.
That brings me to the fiscal rules. The debt target is pinned to the third year in the forecast—a year that continuously moves forward. The Chancellor’s letter states that this
“avoids the need to make sharp policy adjustments in response to small changes in the forecast or economic shocks”.
I do not buy this argument for rejecting our proposal, which was for debt to hit a fixed target in a given year
“unless there are exceptional reasons”.
In other words, economic shocks would be catered for. If small changes in the forecast mean that the Government cannot meet their rule, this suggests that their plan failed to build in a fiscal buffer.
I highlight this key point: the committee proposed that the fiscal framework should show whether the Government have a sufficient fiscal buffer to withstand an economic shock. The Government’s plans show why this is so badly needed. Look at the buffer for meeting the debt rule—it has a margin of just 0.4% of GDP, or £15 billion, in 2029-30. This is not a fiscal buffer; it is a fiscal wafer, so thin and fragile that it will snap at the slightest tap, let alone an economic shock.
The central question in my mind is not whether the Government have taken tough decisions on our public finances but whether the Government have taken the right tough decisions. Yes, the world has changed since we wrote the report, but, back in September, we knew that defence spending was going to have to rise; we knew the pressures that our public services were under; we absolutely knew that, in a volatile world, we had to build up a fiscal buffer to protect us from unforeseen shocks. We knew this, and the committee said so in the report.
I would like to hear from the Minister some answers to some very basic questions about the Government’s approach. First, given that the Chancellor wrote to me on 15 November, saying that her Budget had put our finances on a sustainable path, why did she then have to rewrite her plans in the Spring Statement, just 131 days later? Next, given that the Chancellor wrote in her letter that her Budget had created the conditions for growth, why has the growth forecast been halved? Thirdly, given that the Chancellor has assured us that her Budget has taken the tough decisions to put our finances on a sustainable path and that she is not going to change her fiscal rules, will the Minister repeat the Chancellor’s assertion that she is
“not coming back with more borrowing or more taxes”?
I have a sneaking suspicion that we will not get clear answers to these questions, confirming my fears that, as our report said, we will continue muddling through and not being honest about the scale of the challenges that we face and the impact that they will have on our tax and spending policies, and therefore the risk of our debt becoming unsustainable will continue to grow.
Lord Liddle (Lab)
My Lords, I start by saying what an excellent and challenging report this is. It is exactly the kind of thing that the House of Lords exists to do and which political parties find very difficult to address. I congratulate the noble Lord, Lord Bridges of Headley, whom I have always seen as one of the stars of the Benches opposite, on his excellent introduction to this debate. I did not agree with some of it, but it was challenging, and he asked a lot of the right questions.
I suppose that the side of the argument that we should not be as worried about this question of debt, as the noble Lord, Lord Bridges, lays out, is that we are in the middle of the international pack. That is some reassurance. However, we live in a very unstable world—goodness knows what is going to happen in the United States. As the noble Lord pointed out, we have very particular vulnerabilities. We are dependent on the kindness of foreigners to fund our borrowing. We do not have the high domestic savings levels that countries such as Italy and Japan have. I do not want to get back into the European arguments that I have always made, but it is worth pointing out to the House that Greece now pays a lower interest rate on its debt than we do, because it has the power of the European Central Bank behind it. That is my view.
I also agree with the noble Lord, Lord Bridges, that really big challenges are coming down the track. My worry is that we must not set a debt rule that rules out investment in growth. If the interest rate is higher than the growth rate, we are in deep trouble, so we have to find a way of raising the growth rate, which requires a very strong policy of public investment, which the Government are doing. Things such as the Oxford-Cambridge link and the developments around it are very important. My own favourite development would be a massive transformation of urban connectivity in the north of England, which would have a very beneficial effect on productivity.
On spending, we must be really tough. We have to attack bureaucracy, as we are now doing in the National Health Service. We have to take on vested public interests. This is very difficult for people on our side of the House who have a lot of friends in the public sector trade unions, but we must be prepared to have a policy of reform. In addition to that, and to being tough on things such as PIP and SEND, which have got ridiculous in terms of their growth, we must be fair. I end on one this point. Being fiscally tough does not rule out fairness. One thing that I would like to see in future is a redistributive package which addresses child and pensioner poverty.
Lord Razzall (LD)
My Lords, in the light of recent events, the last report from the noble Lord, Lord Bridges, as the brilliant chair of our Economic Affairs Committee, could not have been more opportune. As he indicated, the growth of government borrowing in the last 20 years tells us why we have a problem. In Gordon Brown’s last Budget as Chancellor, public sector net debt was 35.1% of gross domestic product. When Covid struck five years ago, debt rose to almost 100% of GDP. Record borrowing of £314 billion the following year pushed public sector net debt up to £2.8 trillion pounds in cash terms, which is £1 trillion greater than before the pandemic and more than five times the £535 billion when Gordon Brown presented his 2007 Budget.
Historically, we have funded our deficit by the Government issuing a high proportion of long-dated gilts. This has meant that annual refinancing needs are lower than in other G7 countries and changes in interest rates take longer to have effect. Nevertheless, quantitative easing increased the sensitivity of government borrowing costs to short-term movements in interest rates. The unwinding of quantitative easing will take until 2028, according to the Office for Budget Responsibility, before the effective maturity of our debt returns to the pre-QE level of seven years.
There can be no doubt that the market requires the Chancellor to stay within her fiscal rules. As the noble Lord, Lord Bridges, indicated, it is never going to take much for the targets to be missed, even before the reduction in our growth forecast and Trump’s tariff wars. The Chancellor will already be hearing siren voices urging her to ignore her fiscal rules and increase borrowing, but as Sir John Kingman—now chair of Legal & General and Barclays, and formerly a Treasury mandarin—put it so well the other day, those who believe additional borrowing to be the answer should
“glance at the significant rise in the premium the UK is already having to pay in world markets to borrow very large sums each year … That is a clear warning sign. Of course no fiscal rule can be perfect. But the UK … is already treading a very delicate path, along a cliff-edge in deep fog. The protective fence may or may not be in quite the optimal place. But removing it seems unlikely to be a good idea”.
Perhaps in more political terms the Chancellor should remember what happened to Liz Truss when she ignored the debt market. However, it was James Carville, President Clinton’s adviser, who put it best. He was the man who coined the election phrase, “It’s the economy, stupid”. In this context, I think his better bon mot was, when asked who he would like to be reincarnated as, he replied, “The bond market”. I suspect the Chancellor feels the same.
Lord Burns (CB)
My Lords, I thank the noble Lord, Lord Bridges, for his time as chair of the Economic Affairs Committee and for securing this debate. He played a crucial role in ensuring that the committee’s work was relevant, timely and newsworthy. We can see that in the reports that were published during his time as chair. He summarised very well this report, which was completed last September. It remains pertinent—even more so considering many recent developments.
As has been said, the main emphasis of the report is on the need for a fiscal framework for delivering long-term financial sustainability. However, it also addresses some of the challenges that we face and presents some of the inevitable choices. As the report emphasises, two fundamental issues cast a shadow over future fiscal policies. The first is the persistent poor growth performance since the 2008 financial crisis. The second is the consequence of the succession of crises in recent years that have been addressed through substantial government spending and borrowing.
First, on growth, in conjunction with other high-income European countries, we have experienced a protracted economic slowdown since the financial crisis. The decline has been accompanied by a decline in the share of investment in the economy. The reasons for this are debatable—I do not think that there is any simple, compelling explanation. However, personally, I am persuaded that one contributing factor is that the European countries, including the UK, overreacted to the financial crisis by imposing excessive regulation on the banking system and the regulations that followed reduced the available finance for many small and medium-sized businesses.
In contrast, the US has managed to avoid the extent of the slowdown in growth that Europe has experienced. However, both the US and Europe are grappling with the consequences of deindustrialisation of traditional industries, and we are now witnessing the unfortunate resort of the United States to extraordinary tariff levels. I do not think anybody can be confident about growth rates over the medium term, which is going to have a significant impact on our own debt arithmetic.
The second core issue that has been mentioned is the consequence of the series of crises in recent years: the bank bailouts, the Covid pandemic support and the energy crisis. In each case they were funded by increased public spending and borrowing, and that is really the cause of this extraordinary rise in the debt ratio. There was a similar outcome in many other countries, as has been said. However, this is not too much of a comfort to thank, as it still leaves us, as the noble Lord, Lord Bridges, mentioned, with an inadequate fiscal buffer for the possibility of future economic shocks.
The report outlines some of the challenges to debt sustainability. These include continuing high debt interest payments by government; adapting to an ageing population, which is the subject of our current inquiry; transitioning to net zero; and, of course, future defence commitments. We should also consider the decline in the number of people available for work since Covid as another challenge—it was discussed in the committee’s most recent inquiry—and what we now see today: the extraordinary threat of serious trade wars.
The report discusses the case for a fiscal framework that will bring down the debt ratio over time. In general terms, this is consistent with the framework established by the Government in the last Budget—at least in spirit, if possibly not in detail. However, experience suggests that attempting to fine-tune fiscal outcomes on a year-by-year basis is nearly impossible and can lead to poor decisions, especially when the margin for error is wafer thin. What matters most is the direction of travel and the need for the debt trajectory to be downward.
Finally, the report highlights the difficulties we could face in delivering public services without further increases in the tax burden. This all points to the necessity of a long-term approach and a willingness to take some very difficult decisions.
Lord Lamont of Lerwick (Con)
My Lords, it is a pleasure to follow the noble Lord, Lord Burns, not for the first time in my life. It is also a pleasure to congratulate the noble Lord, Lord Bridges, on his incisive speech today and his excellent chairmanship of the committee that produced this report.
Despite the time lag, this debate is timely in another sense because of the IMF’s warning this week that global debt—that of all Governments in the world—is likely on track to exceed 100% of GDP. It said that is a risk to the financial system, so this debate is perhaps not just about the UK; it could be about many countries, including the United States of America. Nevertheless, I think many people were surprised in 2024 when the OBR came out with the projection, on certain assumptions, that debt to GDP in this country could rise to 270% in the 2070s. That seems an astonishing increase and would plainly pose a threat to sustainability. How could this be?
The reason, as has already been said by the noble Lord, Lord Bridges, is that in 2020 we saw one of the largest surges in debt since the Second World War. The UK debt-to-GDP ratio was below the G7 average in 2001; it then grew faster and is now forecast by the IMF to be above the G7 average in 2029. The problem is not just the ratio but the structure and the maturity of our debt, and it has also been, as the noble Lord, Lord Bridges, said, that this Government and previous Governments have tended to react to shocks by spending more money. Public expenditure and borrowing have increased, then public spending comes down but not to the pre-crisis level. That is the story of Covid and the response to the financial crisis.
Why is it that we have this threat to our sustainability? One reason is interest rates. Interest rates are unlikely in the future, many people think, to be as low as they have been in the recent past. It was the very low nature of interest rates, particularly with quantitative easing, that got us into this situation in the first place. Nobody knows whether interest rates are going to be higher in the long run, but many people think that is the case—they are higher today than they were. As the noble Lord, Lord Liddle, said, if the interest rate on government debt is higher than the growth of GDP, the debt-to-GDP ratio will increase in the absence of a primary surplus. I do not think the Government’s fiscal rules—perhaps the Minister will comment on this—provide for a primary surplus.
The funding of the existing stock of debt is a substantially greater burden today than it has been in the past. In the 2010s, debt could be stabilised while running a government deficit of over 2% of GDP. Today, because of higher interest rates in money and real terms, you need a primary surplus greater than 1% of GDP in order to stabilise the debt ratio. The Government will say they are aiming to achieve growth—that is their “get out of jail” card—but can they actually get a rate of growth that is higher than the interest rate? They may increase the growth rate but find that interest rates have increased further, and so they are not able to escape from the challenge that confronts them.
Then there is the significant risk of an ageing society. We are living through a period that is unique in world history. By 2070, one person in work will be equalled by one person in retirement. This poses huge problems fiscally. The dependency ratio will go up. The Prime Minister of Japan, a country further along this road of an ageing society than we are, said the other day:
“Japan is standing on the verge of whether we can continue to function as a society”.
These words are chilling, and we should reflect on them. The fiscal challenge of an ageing society is massive. There are no easy answers. As the noble Lord, Lord Bridges, said, we need to make some tough decisions. Nothing is inevitably going to happen, but if something looks unsustainable, the chances are that it will prove unsustainable, and that is the risk we face.
Lord Londesborough (CB)
My Lords, it is a pleasure, if somewhat daunting, to follow the former Permanent Secretary of the Treasury and the former Chancellor of the Exchequer, and to be shortly followed by the former Governor of the Bank of England. However, as a member of the Economic Affairs Committee, I first acknowledge and salute the noble Lord, Lord Bridges, for his astute and incisive chairmanship of the committee and his spot-on introductory comments.
It is indeed time for tough decisions, but I have to admit to growing increasingly cynical about our appetite to face up to them, let alone to take them. We have ducked those decisions for the majority of the last 20 years, and I fear we will go on doing so for the next 20. This highly topical report was published last September, just weeks before Rachel Reeves’s first Budget, which saw another rewriting of the fiscal rules as we ushered in another £30 billion of borrowing. Yes, taxes were raised by £40 billion, but at the cost of future growth.
Our public sector net debt has grown by almost 10 times over the last 25 years, from £300 billion in 2001 to approaching £3 trillion next year. We have had the financial crisis, the pandemic, Russia’s invasion of Ukraine and this ensuing energy crisis. Each event led to exceptional, “one-off” increases in government spending financed entirely by borrowing. But I argue that those shocks explain less than half of this £3 trillion debt pile and obscure the real malaise: low growth and poor productivity.
Not only is there no peace dividend or surplus in stable years, but we routinely borrow at least £100 billion a year to fund our budget deficits. In fact, it was £130 billion last year and, as we have learned this week, in the year to March it has grown to £152 billion—rather worryingly, £15 billion more than the OBR predicted; more on that in a moment.
The resulting interest bill of more than £100 billion a year cannot be paid by tax revenues. We meet those interest payments only through additional borrowing. It is a vicious cycle and it is, of course, unsustainable. I am afraid that business is usual is that R, representing interest rate on debt, exceeds G, our GDP growth rate, even in non-crisis years. So we are caught in a cycle of low growth and productivity accompanied by high borrowing and, crucially, that borrowing has not led to productivity gains.
This raises the uncomfortable question: how much of this £3 trillion debt has been channelled into truly productive areas that will accelerate growth, as opposed to simply financing budget deficits? I suggest to the Minister that we produce an asset register on our borrowing worthy of its name, with a proper impact assessment focusing on ROI—return on investment—to answer this very question.
My final point is on the rolling fiscal rule that foresees a budget surplus in five years’ time. It is a recipe for deferring tough decisions, as we have already heard, and it is aided and abetted by the OBR’s record of optimistic forecasting. Since its inception, the OBR has predicted budget surpluses five years out in 20 of its 28 forecasts when, in fact, the UK achieved such a surplus just once in the last 20 years. Let us have some economic realism.
Lord Forsyth of Drumlean (Con)
My Lords, it is a pleasure to take part in this debate. I add to the congratulations to my noble friend Lord Bridges, as chairman of the committee, and its members for producing this—I was going to say “timely” report, but this debate is some seven months after the report was published and quite a lot has changed in that time.
Short of national security, it addresses the biggest issue facing the country. That we have an advisory speaking time of four minutes tells you everything about the way in which Parliament is increasingly becoming the decorative part of the constitution. We now, apparently, take on huge, unlimited, unknown debt in nationalising industries over a weekend and give powers to civil servants to force people in private companies to do things on pain of being sent to prison if they do not—and Parliament has no say. It is clearly important that we address this issue not just in Parliament but in the country.
The lesson of this report is that our people—the constituents of the Members at the other end of this building, our families—have no idea of the crisis that is facing our country and the threat that it presents to our ability to deliver pensions and important public services.
Even this week we learn that borrowing has turned out to be £15 billion more than expected. In the year to March, as the noble Lord, Lord Londesborough, said, we spent £151.9 billion more than we had in income, and we are relying on growth, which we have not seen since 2008, to rescue us from that situation. As the report points out, there are fundamental strategic reasons why we need to tackle this now, and the longer we wait to bite the bullet the bigger the problem will be.
These reasons include the fact that, in the 1980s, we thought we had a peace dividend, but now we realise that we should not have spent that money, but we had committed that expenditure to welfare and other matters. The baby boomers were creating wealth and now they, like me, are a burden on the state in one form or another. The notion that we can finance the triple lock on pensions, however popular it may be, is ridiculous in these circumstances. We need to get the country to understand that and to lower its expectations for the future.
We had growth in world trade. Now we have an—I hesitate to use an adjective—Administration in the United States who are determined to destroy world trade. I assume that we should forgive them, for they know not what they do, but the impact on growth will be enormous. As my noble friend Lord Bridges pointed out, life expectancy is increasing; this and the success of the National Health Service point to further pressures that will be difficult to sustain.
Whenever there is a consensus on anything, one ought to worry. There was a consensus on quantitative easing and on lockdown, and now we are paying the price for that quantitative easing—for printing money on a vast scale. It has left the country more vulnerable to rises in interest rates and more dependent on the kindness of strangers and foreign investors, at a time when the world as a whole is under severe pressure. The latest estimate is that QE will cost us some £150 billion. The decline in the workforce to support all of this is such that, by 2070, there will be one person in work for every person in retirement. That is a huge burden to place on the next generation.
Therefore, this report should be taken seriously by the Government and by the Opposition. We need a consensus in our country, to explain to our people the crisis that we are facing, in the context of the world crisis, and to cut our cloth according to our ability to pay.
The Deputy Speaker (Baroness Bull) (CB)
My Lords, the noble Lord, Lord Weir of Ballyholme, is taking part remotely. I invite the noble Lord to speak.
In the noble Lord’s absence, I suggest we move on to the next speaker in the Chamber.
Lord Wood of Anfield (Lab)
My Lords, it is a pleasure to speak in this debate on such an important topic, and I congratulate the noble Lord, Lord Bridges—my predecessor as chair of the Economic Affairs Committee—and thank him for his kindness in the tricky transition period between our tenures and for his time chairing the committee. I have the privilege of succeeding him and now working with the excellent team that helped produce this report.
There is a lot in the report that is worth careful study—particularly that on the nature and composition of debt, as the noble Lord, Lord Lamont, and others have discussed. As the report says, the question of what exactly is our debt problem is not straightforward. It is a complex combination of the level of the debt-to-GDP ratio, its trajectory over time, the maturity profile changes, the robustness of the tax base that finances paying it off, fiscal policy plans and changing world circumstances. This report talks eloquently about the pressure points and why debt is a particular problem and under what circumstances. It discusses the key trends—the five Ds that the noble Lord, Lord Bridges, mentioned earlier—which push debt even higher. It also provides an excellent and crucial explainer of why, especially since Covid, the composition of the debt has changed in a worrying way.
It has not been said yet, but it is important to note that this report was written with reference to fiscal rules, before the current Chancellor changed various aspects of the fiscal framework. I think the Chancellor should be congratulated on those changes. In some respects, they make positive differences that very much chime with some of the concerns in the report. In particular, and most importantly, the shift to targeting the current budget balance, rather than overall borrowing as under the previous Government, reduces the budgetary incentives to cut valuable investment. I also very much welcome the switch in the debt definition to public sector net financial liabilities.
The Chancellor retained, of course, the principle in her second fiscal rule that debt needs to be falling at the end of a five-year period—now a three-year period as of 2026. The report’s main criticism of that is that a rolling target means the rule is easily gamed—you could have four years of rising debt and then one year of decline and meet the rule but still have a net increase in the stock of debt over time. That is a concern and is part of the design flaw of this five-year rolling, or three-year rolling, system. My concern about this rule is slightly different. The main problem is that it results in Governments basing long-term investment decisions on highly contingent, uncertain projections that are so dependent on complex, unknowable real-world developments. Making concrete long-term public investment decisions that have to be changed in virtue of forecasts that probably turn out not as accurate as you need them to be is a bit like chasing shadows.
In the spirit of being perhaps a friendly devil’s advocate to this report, let me just finish with three quick reflections. The first, to put some perspective on this, is that the debt-to-GDP ratio in the UK is now lower than it was in just under half of the entire 20th century.
Secondly, the question that financial markets are concerned with is less the level of debt-to-GDP ratio but whether Governments are using borrowing for productive growth-enhancing investment, as the noble Lord, Lord Liddle, referred to earlier, and whether they are prepared to take steps towards fiscal consolidation when the shocks that trigger debt increases subside. Our focus needs to be as much on those two concerns as it is on a numerical debt-to-GDP ratio.
Lastly, I personally have sympathies with the NIESR and economists who think that investment in service of long-term objectives crucial to the national interest should be taken out of the debt target. That does not mean they are taken out of public scrutiny; there are lots of things the OBR can and must do, but there is a case for the kind of long-term certainty, which the noble Lord, Lord Liddle, referred to, that the private sector needs in order to know that Governments will complete long-term transition investments.
Lord Howell of Guildford (Con)
My Lords, like others, I congratulate my noble friend Lord Bridges on his ambition and boldness in leading the Economic Affairs Committee to study the proverbially complex and nebulous subject of trying to control and direct our borrowing and the growth of our national debt.
I confess that I do not set much store by fiscal targets at all, especially when they apparently are adjustable to suit any changing conditions. That does not give them a great value. They are certainly not the fountain of all goodness, whether one year, two year or five years. Shocks always happen, as my noble friends have already observed. In fact, we are in one now, and I just wish and pray that the authorities of the governing party, and indeed all parties, would listen to the warning we just had from my noble friend Lord Forsyth about the extreme seriousness and dangers of the potential financial anarchy ahead. The truth is that borrowing and annual requirements adding to the national debt are the outcome of many judgments, decisions, red lights, shocks, as I have already said, and opinions on the bond market in world-lending conditions.
I am also no fan of the OBR. I am sure it works hard, but it is no more right or wrong than the rest of us. In fact, it is often wrong. I see it as a fifth wheel, or a sixth wheel, on the whole coach of processes, filtering, establishing and trying to control the level of borrowing that is needed in the annual budgetary scene. Creating the OBR was only a quarter way to what we really should be doing with the machinery of central government, which is to have a proper central, strategic budgetary authority looking at the whole national picture and our resources to meet it, public and private, long-term and short-term, right under the Prime Minister at the centre of government. We have been arguing for that for years. We have not got it. Many other countries— America is the best example—separate these things out. Until we do that, we will have continual difficulties on understanding the whole picture.
I emphasise private because the state is obviously overwhelmed by every conceivable spending demand, as my noble friend Lord Bridges outlined, and there is much more to come. It is always short of money and always up against the limits of taxation and of borrowing and interest rates. The private sector has unlimited funds, by contrast, and it is absolutely ridiculous that we now have huge pension funds tucked away in trillions in this country, one of the biggest in proportion to our population, and yet they find themselves short of opportunities and the nation finds itself starved of the necessary investment it is crying out for on every side.
The real need is for new forms of collaboration between the public and private sector that do not blow up the public sector net debt and to find a new model that escapes from the outdated binary form of debate that has dominated thinking in the past. We tried the private finance initiative, the PFI, and it failed for various reasons, which there is not time to go into now. Missing in the report is the concentration on this crucial grey area between PSBR, government accounts and private money, which is in profusion. It is in not only the pension funds but in sovereign wealth funds, FDI and a thousand other resources as well.
Can the Minister reassure us that the brains in the Cabinet, his own party and the Treasury are looking at tough decisions in this area—not the tough decisions addressed in the report but those that require the highest priority—of how we mobilise the vast funds available in the private sector with such vast needs overwhelming the public sector? That is the key, and unless we can find the lock to put that key in, we will have much worse conditions ahead.
Baroness Wolf of Dulwich (CB)
My Lords, I thank the noble Lord, Lord Bridges, for his truly excellent chairing of the Economic Affairs Committee and this inquiry, and for his opening remarks. This report has indeed, unfortunately, become even more relevant than it was last September. I will highlight three rather general lessons I took away from the inquiry and report, which are to do with public awareness, borrowing for investment and fiscal rules.
First of all, we take far too little notice as a nation of either the levels of public sector net borrowing or the cost of servicing debt. The Government should, in my opinion, highlight them more, not continue to avoid the subject. Many people do not understand just how much Covid cost, nor the implications of this for future investment. It is not just the rise in net debt, nor our consistent pattern of net borrowing. The level of debt interest spending relative to both GDP and revenues, illustrated very vividly in figure 4 of the report, is what should really hit home with the public. That shot up in 2022-23 to a post-war record. Although it has fallen a little since, the latest OBR forecasts show it staying very high over the next five years, as other noble Lords have pointed out. The public debate about priorities and patterns of government expenditure very rarely refers to debt servicing. I question how many people, even in the policy community, realise that almost 10% of government revenue currently goes on debt interest spending. They should, however, and Governments faced with difficult decisions would do well to emphasise this and not continue to ignore and run away from the situation.
Clearly, all of this matters much less if the underlying economy has grown, as other noble Lords have noted, and that brings me to my second point, which is the almost mythic nature of the idea that we should borrow only for investment—something for which our report did not have a great deal of time. The subtext here is that if it is investment, it will pay in the future and therefore generate growth and so solve the revenue problem. I think this is hopelessly optimistic. Investment can be hugely wasteful and pointless, as the Soviet Union used to teach us.
Moreover, human capital—the skills and knowledge of the workforce—is just as important for the economy as physical capital; a school building is useless without good teachers in it. The problem is that, once you start down this road of having particular types of spending which are different, you can easily classify huge parts of government spending as investment. One of our witnesses asked, “Why not nurses’ wages?” Of course we should spend on infrastructure—I share the enthusiasm of the noble Lord, Lord Liddle, for northern connectivity as well as the Oxford-Cambridge link—but this is where I disagree with our new excellent chairman, the noble Lord, Lord Wood: we should not be seduced by the idea that borrowing for investment is different and does not count.
One reason I feel that is related to my third and final point: the influence on government thinking and behaviour on specific fiscal rules. Fiscal rules—whether they are to do with investment, moving towards a reduction in the debt level or whatever—inevitably and constantly focus governmental attention on the rules and not the underlying patents. I had a short period in government, during which I was struck by the obsession with whether the OBR will score something. I would ask, “Will this particular policy help the Treasury make its case that it is actually going to meet the fiscal rules?” The extent to which rules undermine sensible policymaking was a recurrent theme in the inquiry for very good reasons. We badly need to move away from a narrow focus on them and towards a much broader approach, as our report argues.
Baroness Noakes (Con)
My Lords, I was a member of your Lordships’ Economic Affairs Committee under the excellent chairmanship of my noble friend Lord Bridges of Headley when this report kicked off, but the annual musical chairs of Select Committees saw my chair move to another committee before the report got seriously under way.
Since the global financial crisis, all Governments have normalised high levels of debt and focused on short timeframes. The report correctly calls out the lack of focus on medium to long-term debt sustainability, and we urgently need this to be a government priority. If we look back to the 1970s, when the debt-to-GDP ratio came back below 50% after about 60 years, there was no sophistry around whether R was greater or less than G, or whether tipping points could have been predicted; it was just accepted that keeping the debt ratio down to a sensible level was an important thing to do. There was not much science to Gordon Brown’s first iteration of his fiscal rules in 1997, which set the debt ratio at what he described as a “stable and prudent” level of 40% of GDP. It did not matter that the 40%—or indeed the EU’s 60%—could not be proven with intellectual rigour. These were rules of thumb which conveyed a sense of sound financial management.
These debt targets provided a sustainability underpin, as they allowed economies to absorb inevitable shocks. However, sustainability now seems to mean absorbing those shocks by being able to borrow more: as long as we keep borrowing, we will be okay. That is the approach to balance sheet management that brought Thames Water to its knees. Operating just the right side of a tipping point is a gamble, and it is one small shock away from financial disaster.
The prudent rules were thrown out of the window after 2008, and all iterations after that point, including that of the current Government, assume, in effect, that high levels of government debt are normal. These rules have allowed successive Governments to carry on spending as if the only issue were a few basis points on the trajectory of debt in a few years’ time. We currently have the crazy spectacle of debt levels hovering around 100% and the Chancellor making microadjustments to her fiscal strategy every time the OBR produces another forecast that eats into her tiny headroom. Changing the debt measure to one based on net financial liabilities is just another layer of smoke and mirrors. There is no plan to get debt levels seriously trending back towards pre-global financial crisis levels, and, equally, no plan to cope with debt hurtling towards 300% of GDP as demographics and other long-term pressures take their toll.
The Government are betting the farm on getting growth back into the economy, but it is going to take levels of growth way beyond those we have seen in recent years if debt is to trend down convincingly towards much lower levels. No one outside the Treasury bubble thinks that the growth mission has any traction whatever, and most government policies are pulling hard in the other direction. I agree with the Economic Affairs Committee that it is time for tough decisions, but the report should have been more explicit about what “tough” really means. The complacent government response to this report shows that the Government are completely blind to the problem.
Lord King of Lothbury (CB)
My Lords, I congratulate my erstwhile colleagues on the Economic Affairs Committee on their excellent report on the national debt. I also congratulate the noble Lord, Lord Bridges, on the clarity of his opening speech and on his outstanding chairmanship of the Select Committee.
The Chancellor of the Exchequer deserves sympathy for the difficult fiscal position that she inherited, but, unfortunately, her new fiscal rules are flawed. When non-negotiable fiscal rules meet reality, my money is on the latter. The Government have two fiscal rules: first, the current Budget must remain in balance or surplus from the third year of the rolling forecast period; and, secondly, net financial debt must fall as a share of the economy by the third year of the forecast period or 2029-30, whichever is the later.
The problem with the first rule is the Chancellor’s argument that:
“Balancing the current budget means that … over the medium term, borrowing is only for investment. This means future generations will not be burdened with the costs of public services today”.
If only that were true. I sympathise with the noble Lords, Lord Liddle and Lord Wood; as my noble friend Lady Wolf said, we have a need for public investment in infrastructure with the hope that it might improve economic growth. However, unlike the private sector, investment in the public sector does not, in most cases, generate an income to the Government that can be used to pay the interest on the debt taken out to finance the investment, and the burden of servicing that debt will fall on future generations.
The problem with the second fiscal rule is perhaps even more serious. Projecting the ratio of debt to national income to be falling in the third year of the forecast horizon is better than the previous metric of a forecast over five years, but it is still Augustinian—“Make me fiscally stable, but not yet”—and even Saint Augustine did not believe in a three-year rolling horizon. As the Select Committee pointed out in its report, a rolling horizon permits the rule to be met while debt keeps rising as a share of national income. The Chancellor defended a rolling horizon by arguing that it avoids the need to make sharp policy adjustments in response to small changes in the forecast, yet in her Spring Statement only a few weeks ago, the Chancellor did exactly that: cutting spending to meet a change in the OBR’s point forecast for 2029-30.
Although the OBR discusses risks to the outlook several years ahead, it presents just one precise number, to which the Chancellor is supposed to respond, and it does so every six months. This is no way to manage public spending. I suggest that the OBR should report only once a year, before the Budget, and focus on a qualitative assessment of risks rather than the spurious precision of a point forecast.
The pandemic is behind us, we have yet to increase defence spending by any significant figure, yet debt is still rising as a share of national income. The choice between raising taxes or cutting spending should not be deferred by resort to a rolling horizon. We owe it to our grandchildren to take seriously the challenge of reducing the national debt.
Lord Tugendhat (Con)
My Lords, as a former member of the Economic Affairs Committee, I add my congratulations to my noble friend Lord Bridges and to the other members of the committee for the outstanding report that they have produced. It is a privilege to follow the noble Lord, Lord King, whose time at the Bank of England I remember clearly, when I was operating in the private sector under his general supervision.
I take as my starting point paragraph 138 of the report:
“If we wish to improve the level and quality of services, and continue the current provision of benefits, taxes will need to rise”.
It goes on to say that clarity is required on the role of the individual versus the state. We certainly need a good deal of clarity on the part of the state because, as everybody knows and everybody has said, the world has changed out of all recognition since the Government made their pre-election pledges. Indeed, it has changed a good deal since the report was published—President Trump’s activities have seen to that—and the result is plain for all to see. On the one hand, the Government are going to have to spend more, and on the other it will be more difficult to grow the economy.
So what does that mean if debt is to be kept on a sustainable path? Are we to believe that, in order to stick within the Chancellor’s rules, defence expenditure will not increase as it must and as the Government have promised it will? Or are we to believe that there will be further benefit cuts? Sooner or later, taxes will have to rise. The longer it takes the Government to grasp the nettle, the worse it will look and the more the national debt will become unsustainable. Instead of reacting decisively to changing circumstances as they unfolded, as the Prime Minister has done on the international stage, the Government have delayed facing up to reality. In so doing, they are repeating a doom loop of the Attlee and Wilson Governments.
In making that comparison, I am indebted to a recent Substack by Peter Kellner, the former president of YouGov, in which he argues that, by failing to devalue the pound in 1946 when circumstances demanded it and going on to fight a rearguard action until 1949, the Attlee Government condemned the country to needless pain and themselves to a great political defeat—likewise with the Wilson Government, which many in this House will remember, not devaluing in 1964 and holding out until forced to do so in 1967. Both those Governments got left behind as the world around them changed, and the same is happening to this Government in respect of the national debt and the subjects covered by this report.
Now is indeed the time for tough decisions, as the title of the report suggests, and not just to prevent the national debt from becoming unsustainable. The needs of our armed services and our public services require it. The Government must grasp the nettle.
Lord Davies of Brixton (Lab)
It is a great pleasure to take part in this debate. It is a bit like the Economic Affairs Committee 2024-25 reunion tour, with added guest stars. I was a member of the committee, and preparing for the debate gave me an opportunity to reflect on what we achieved—or what I achieved, I suppose. I give great thanks to the chair of the committee, the noble Lord, Lord Bridges of Headley, who was an excellent chair who encouraged the full participation of members. I have no criticism of him at all. The committee was extraordinarily interesting—the members of the committee as much as the witnesses. We received formal evidence from witnesses but not from members of the committee, even though some committee members knew a lot more than the witnesses.
I am happy to add my name to the report, but that does not necessarily mean that I agree with everything in it. Another tribute to the noble Lord, Lord Bridges, is that he was assiduous in making sure that my views were made clear, even if they were not always successful. The key issue for me is that the committee did not say we were facing an inevitable crisis; it said we had a choice, expressed in terms of the state doing less or in increasing taxes. An increase in taxes was not ruled out by the report; it was in the report as a choice and, speaking for myself, that is the choice that I would make. There is actually a third choice that we did not consider, and I regret that we ruled it out: that we should borrow even more. I slightly regret that we did not explore that in more detail. We said, “We’re not interested in listening to the views of people who promote modern monetary theory” and we did not really hear from them. I think they may provide valuable insights, even if I do not necessarily agree with all their conclusions.
A big loss in this debate is, of course, my noble friend Lord Layard, who was a valuable member of the committee. He was assiduous in making the point that, with increasing demand for public services, with people getting older and improvements in medical technology, and with increasing demands for higher standards of public service, there is inevitably going to be an increased role for the state and for public expenditure within the total economic budget. In and of itself, increasing levels of public expenditure is not a cause of concern; it is a reflection of the needs of a modern society.
The standout for me within the evidence we received was from Professor Stiglitz, who raised the issue of investment. We rather kept out of the issue of investment because it was so big, but he asked what counted as investment. He gave the example of nurses’ training. Is that an investment? For the Government it is not, but in fact we need investments of that type and the narrow terms of investment that we see defined in the Chancellor’s letter do not reflect the changing needs of what we need from public services.
Lord Horam (Con)
My Lords, this is an extremely worthwhile report. Its worth is reflected in the fact that, despite the turbulence of the last six months, it is as relevant today as it was when it came out in September last year. As the report says, it invokes the need to make some hard choices. The Government said in their response that they had indeed made some hard choices—and they have made some, but unfortunately not enough of the hard choices that will be needed if we to overcome this real difficulty.
The noble Lord, Lord Liddle, made the point, in his trenchant style, about the hard choices of Greece, for example. Greece was in a terrible situation about five years ago. Now, it is growing fast and reducing its debt. Portugal is the same. The noble Lord, Lord Liddle, said that the reason for that was the help from the European Central Bank. I do not know what role it played in the recovery of Greece, but I know that Greece made hard choices on public expenditure of the kind that the committee is posing in this report that the Government should make. Hard choices are necessary.
Not all the choices are hard. For example, I was reading an article in the Times by Simon French, the managing director and chief economist of Panmure Liberum. He said:
“It is hard to overstate quite how mad the UK’s energy policy looks to outsiders”.
Energy policy is a fundamental issue of economic policy. The Industrial Revolution took place in this country because of our energy resources and the way we exploited them. This is an absolutely key element. Simon French went on to say that
“many investors struggle to square the government’s primary mission for economic growth with a penal 78 per cent tax rate on energy profits and a commitment to no new licences for the UK’s North Sea continental shelf … It is an impediment to economic growth … hiding in plain sight”.
The committee makes the point that there is a choice here, which the Government have to make. The article also said:
“Investors fully recognise the global imperative to decarbonise but in reducing domestic supply of oil and gas the UK is, in fact, adding to carbon in its energy mix. It does this by increasing its reliance on dirtier foreign imports”.
There are choices—common-sense choices—which are not that difficult to make if we are to deal with this problem. Look at other countries which are facing the same sorts of situations: debt is high in America, China and India. However, all three of those countries are steaming ahead on economic growth because they have sensible energy policies. That is just one aspect. In four minutes, I cannot say much more, but I think the best thing the committee and the chairman, who has produced this excellent report, can do, is to repeat it in four years and see where we are.
Lord Macpherson of Earl’s Court (CB)
My Lords, I congratulate the noble Lord, Lord Bridges, and his committee on their timely and well-argued report. I agree with pretty much all of it. The fact is that Britain’s national debt has more than doubled as a percentage of national income in 20 years and we have nothing to show for it in terms of increased productive capacity. The country is now far more vulnerable to the vagaries of the bond market, the performance of which reflects global as much as domestic factors.
I confess that I spent much of my final decade at the Treasury crying wolf about the potential inflection point in the gilt market. I was proved wrong at the time; helped by QE, the gilt market navigated the global financial crisis and Brexit. But every dog has its day. The Truss Government tested the bond market to destruction and, since 2022, funding the national debt has caused the Treasury more worry than at any time since 1976.
In recent years, fiscal rules have come and gone at alarming speed. Of course, “rule” is a misnomer. They are not rules any more than the inflation target is a rule, and successive Governments have found there are few consequences for breaking them—you just claim force majeure and adopt a new one. I accept that Governments need a fiscal framework, and that the guard-rail the rules provide helps the Chancellor manage her Cabinet colleagues. But, like my noble friend Lady Wolf, I worry that excessive focus on so-called rules can discourage Governments from focusing on the substance. As my noble friend Lord King put it, the rules, especially those of a rolling variety, allow Governments to pursue an Augustinian policy. We never quite get fiscal consolidation, invariably because spending projections prove undeliverable.
I broadly welcome the changes the Government have made to the framework, but what matters is not whether the Government stay within the rules. Much more important is the substance of fiscal policy. Is the deficit being reduced at sufficient speed? When will debt begin to fall in relation to national income? Is the proportion of public expenditure accounted for by debt interest on a downward path? Are fiscal policy decisions addressing long-term pressures, and are the policies the Government are putting in place likely to facilitate economic growth or to hinder it? The Government have taken some tough decisions over the last six months, but I fear they will have to take many more if they are going to deliver a sensible fiscal policy.
I shall finish with two small points. First, I encourage the Chancellor to agree a new framework for future bouts of quantitative easing, which will give the Treasury a greater locus to debate the implications for fiscal policy with the Bank of England and make the Treasury more accountable for the outcome. This did not seem necessary when the then Chancellor Alistair Darling agreed the first framework with my noble friend Lord King back in 2008. QE was thought to be an emergency measure that would not last long. But future rounds of QE, whether or not they were necessary—and I have my doubts—have changed the relationship between monetary and fiscal policy and we need to recognise this.
Secondly, my final point is that the Government should do all they can to raise the profile of the OBR’s fiscal risks and sustainability report. For my part, like my noble friend Lord King, I would amend the Industry Act so that the Government no longer have to produce two economic forecasts a year. Instead, the parliamentary time set aside for the Spring Statement should be devoted to a debate on the OBR’s fiscal risks and sustainability report, to raise its profile in the country and to encourage a greater focus on long-term projects. Who knows? It might even result in better proposals when the Chancellor comes forward with her annual Budget.
Lord Moynihan of Chelsea (Con)
My Lords, I congratulate the noble Lord, Lord Bridges, and his committee on this valuable report and its hard-hitting title, and my fellow Peers in this debate on their many excellent speeches. It is a pleasure to follow the noble Lord, Lord Macpherson of Earl’s Court. I declare my interest as a businessman, investor and author on this topic.
I am concerned, as was my noble friend Lord Forsyth, that the report was published six months after most of the evidence being taken, with this debate being a further seven months later. Despite my noble friend Lord Horam’s good points, its recommendations are dated. Furthermore, as the noble Lord, Lord Macpherson, has just said, they are mostly process- or rules-based rather than action orientated.
I have a few more concerns. First, the rapid growth in debt is not because of economic shocks, Russia’s barbaric war on Ukraine, or Covid. It is because we spent profligately under the previous Government during Covid. No one worried about inflation when increasing the money supply. It is because of our ruinous energy policy, and because our too high spend continues unabated. We could have adopted the Covid policy of Sweden or Florida. We could have avoided inflation like other countries have. We could have reduced our post-Covid spend, but we did not.
The report proposes increasing tax revenues to pay for increased spend, but my somewhat egregiously named Moynicurve says there is a ceiling on how much tax overall a given country’s citizens will cough up. For 10 years I consistently, and so far correctly, predicted that the UK’s overall tax take would not rise much above 36% of GDP. Yet the OBR’s forecast for Chancellor Hunt’s 2023-24 Budget was that tax revenues would rise to 37.7%, almost 38%, well above that 36%. Did they? They did not. Actual tax receipts for that year were 35.7% of GDP.
Now, the OBR predicts that the tax take from Chancellor Reeves’s current Budget will, again, be 38% of GDP. But it will not be—how could it be, with so many business closures and the flood of high-flyers, ambitious youth, enraged millionaires and non-doms pouring out of our country? How long will this misplaced belief that the overall tax take can be goosed up continue? How many more large deficits do we have to see before sense prevails?
Will growth arrive to save us? Both the IMF and the OBR predict growth of just 1% this year. That is no help, and they are overoptimistic—the Government do not understand how to produce growth and that there is no money. Deficit and debt figures released this week support my prediction that our debt-to-GDP ratio will inexorably rise, over some 10 years, to 150% or more if we continue on this path. Nothing extraordinary is required to get this right; we just have to get back to the first few years of Tony Blair’s Government, when, courtesy of John Major’s Government, we ran a surplus and debt levels were reducing. We can do that again.
Our current levels of deficit and debt are unsustainable. Debt service, at 9% of government expenditure and rising, is crippling us. Will the Minister acknowledge that the current level of national debt is entirely unacceptable and commit to bringing it down as a top priority?
Lord Browne of Ladyton (Lab)
My Lords, it is a pleasure to have the opportunity to participate, albeit briefly, in this morning’s proceedings. I enthusiastically join all previous speakers in congratulating the noble Lord, Lord Bridges, and the wider committee on its report. It provides a forensic, grim and justifiably challenging—drawing on adjectives used by other noble Lords—diagnosis of many of the long-term challenges in which we engage in the interests of economic sustainability.
For reasons of both brevity and modesty, given the superior qualifications of other noble Lords—almost all who have spoken—to engage with the finer points of economic theory, I plan to discuss a couple of specific elements from chapter 4 of the report. First, I should like to mention the opening of chapter 4 and the section on underlying demographic factors.
When the welfare state was created, there were around five workers for every pensioner. Today, that figure stands at around 3.5, and, as other noble Lords have spoken about, ONS figures suggest that that ratio will narrow exponentially from the 2030s onwards. In autumn last year, the Prime Minister rightly told an interviewer that he was not in the business of telling people how many children they should have. However, Dr Paula Sheppard has identified that there is a fertility gap of 0.3% in the UK, meaning that, for every three children wanted, only two are born.
It was in similar circumstances that the previous socialist Prime Minister of Finland, Sanna Marin, commissioned work that was successful in policy adjustments to ensure that women, couples and families who wish to have children do so in a public policy environment that seeks to empower them to realise that wish. France has shown us that family-friendly policies can have a material impact on long-term demographics, and it may be an area of policy that repays further consideration.
Secondly, as paragraph 101 outlines, it is clear that much of the fiscal space that allowed the expansion of social and welfare spending as the welfare state expanded into its modern dimensions was afforded by a dramatic decrease in defence spending from the 1950s onwards. Defence spending, when handled properly, is long term and strategic as well as reactive—a necessarily swift response to geopolitical uncertainty. Nothing in the auguries that I have seen suggests that the current uncertainty and strategic jeopardy that we face is likely to abate in the near future. Modern wars do not end.
This means that we must anticipate at least the possibility of a further expansion of defence spending, and that this will be calculated not to an economic slide rule but to the magnitude of the threats we face. Again, as paragraph 103 of chapter 4 makes clear, this will have consequences for other areas of government spending. Carl Emmerson from the IFS gave evidence to the committee and described the decades-long practice of diverting savings from the defence budget to other, perhaps more electorally appealing, areas of government activity. As we have seen, not least through the determination of the actions of the Prime Minister and the Defence Secretary, this period is now at an end. This will have political and structural ramifications that will continue, certainly over successive Governments.
In closing, I reiterate my welcome for this report, not least because it demonstrates, even if somewhat elusively, the unenviable economic circumstances this Government inherited. I look forward not merely to my noble friend the Minister’s response but to the Government’s continued work to engage these challenges.
Baroness Cash (Con)
My Lords, I congratulate the noble Lord, Lord Bridges, on this excellent report and welcome the discussion today. It is more urgent than when it was published, of course, and it is an issue that is pressing on us as rapidly as it is possible to imagine, as we see birth rates dropping and the elderly demographic increasing. I thank the many noble Lords who have preceded me, with expertise on the numbers that I do not pretend to have. I am a business leader, not an economist, but I want to address this conversation and centre it around people, particularly young people.
At some point over the last 30 to 40 years, we broke the contract with the younger generations in ensuring that we leave behind a safe legacy for their futures. Fortunately, we still have their confidence: 60% of young people under the age of 35 express a desire to run a business, and 12% of 18 to 25 year-olds in this country are already active in entrepreneurial interests. That is an amazing positive future investment that, as the generation ageing ahead of them, we have to look after and invest in for our future.
I welcome particularly today the consensus that has emerged across these Benches and the importance of that conversation and consensus going forward. My appeal is that, as we think about and discuss this in the remaining minutes of the debate, we appeal to the Government and urge them to think again about the policies they have pledged in this term of Parliament that will destroy opportunities for young people, and that are already destroying the prospects of our small and medium-sized enterprises across this country.
We are seeing businesses close at a rapid rate, with higher percentages of petitions for winding up and more orders for winding up. This is a catastrophic situation for us to be in when we are standing on the precipice of fiscal ruin, with our debt at this level. We need growth. Governments do not make growth happen; people, businesses and our young people do. We need to think about them and about reversing, if necessary, the national insurance rises, which are crippling them. We need to halt our debate on the Employment Rights Bill next week and take seriously the punitive levels of costs that we are going to layer on top of businesses in this country.
Day after day, we see young people come into the Public Gallery to sit and listen to what we discuss here. Let us remember them and put them at the centre of this. Let us reach across these Benches and remember that we are all here because of public service and we all wish the best for this country. We now need to focus on how we address this crisis and build for the future.
Baroness Grey-Thompson (CB)
My Lords, I declare an interest as president of the LGA and a recipient of personal independence payment. We are in a difficult economic position and, yes, we have to make difficult decisions. The benefits system currently supports 22.7 million people, which is not sustainable, but the Government’s wider reform strategy hinges on increasing labour market participation to ease long-term fiscal pressure. It aims to encourage more people to work by removing disincentives and providing personalised support. But will these measures result in a meaningful increase in employment, especially for disabled people? We do not need another tick-box scheme.
Tom Pollard, head of policy at the New Economics Foundation, highlights that these economic reforms are straight out of an economics playbook, but they overlook the lived realities of millions and the extra costs of living for disabled people, particularly those managing long-term conditions without consistent care or those who live in regions with low job availability or inadequate support services. It feels like we are about to tighten eligibility without discussing the real barriers to employment. I completely support getting disabled people into work, but we also need to look at the discrimination in housing, education, employment, physical activity, health and social care—and, of course, transport.
The Disability Discrimination Act said that all trains would be accessible by 1 January 2020. Every single Government have allowed derogations, which means that trains will not be step free for another 100 years. That means that people like me, who work, will not be able to get on a train without the support or permission of a non-disabled person for another 100 years. Access For All funding and level boarding must become a priority to enable disabled people to contribute to society; we cannot keep avoiding the issue. I pay tribute to Tony Jennings, a disability rights campaigner who has campaigned pretty much single-handedly to remove discriminatory bans on scooters travelling on trains and trams. Tyne and Wear still bans scooter users. How is a scooter user meant to get to work if they are not allowed to use public transport?
I am unsure how stopping under-22s accessing universal credit incentivises more young people to work when it is increasingly difficult for young people to find employment, regardless of disability. They need to be in work, but we need to find a better way. The words of the noble Baroness, Lady Cash, have given me a little bit of hope but, by pushing more children and more families into poverty, the Government are pushing the barriers to employment further away for those families.
As we have seen in the past, welfare reforms incorporated into previous OBR forecasts have in many cases saved much less than initially expected, as shown by the transition from disability living allowance to PIP and the delay in the rollout of universal credit. An estimated 800,000 people are set to lose their entitlement to PIP, which has often been misrepresented in the media as an out-of-work benefit. PIP can be received both in and out of work, making it less likely that it will boost claimants’ incentive to work. PIP restrictions currently form the largest part of the Government’s potential cuts. This is a failing system. You have to prove what you cannot do to get support and not what you can do and the ways that you are able to contribute. The Department for Work and Pensions’ own figures show that fraud rates are extremely low. There is an issue of overpayment and underpayment—but the system is failing.
I understand that the Minister may wish to write to me, but is he aware that disabled people appear to be receiving emails asking them how they spend their personal independence payment? It is instilling fear, when again there may be a better way of obtaining this information and developing a better process for a failing system.
Lord Griffiths of Fforestfach (Con)
My Lords, I acknowledge my debt as a member of the committee to the noble Lord, Lord Bridges, as chairman. He was totally engaged, always impartial and invariably responsive to members’ requests, so I thank him.
From the evidence that we have heard in this debate today and from the report, no one can judge that we are in other than a very serious position as a nation. If anything more was needed, there were flashing red lights earlier this week in March’s government borrowing figures. On any sober assessment, this debate has shown that public spending and public borrowing are out of control. At the same time, as the noble Lord, Lord Burns, made very clear, the potential tax revenue we can get from economic growth is going to be meagre, with growth forecasts by the Bank of England, by the OBR and this week by the IMF having been slashed.
I accept, of course, that the Chancellor is not helped by the paralysing uncertainty of the global economy, but we must face the fact that our debt problems are primarily homegrown. Government spending is clearly not under control, and the tax take, despite that, is at its highest level for years.
Meanwhile, the Chancellor recognises that tough choices need to be made. The debt or bond vigilantes may have saddled up, but I do not think that they are hostile to the Chancellor. What they are concerned about is that the Government’s fiscal policy is drifting; there is no clear direction, despite what is said. It appears that the Government are not really in control. This week, the IMF published its annual report and said that the outlook was “severely adverse” for all advanced economies.
I want to mention something that we touched on in the review—certainly questions were asked about it, but they were explored only superficially—and that is a fiscal rule, such as a debt break, placing a ceiling on the ratio of debt to GDP. This is a measure in which I have taken a particular interest because of my academic connections with Switzerland, which adopted a debt break, while Germany followed Switzerland and adopted it too. Today, the ratios of national debt to GDP are 38% in Switzerland and 63% in Germany, and their 10-year bond rates are significantly below the UK’s.
A debt break rule is not simple: it needs to have a ceiling, a cyclical adjustment and an exemption clause. The irony is that the UK once had such a fiscal rule—and who no less than Gordon Brown was Chancellor at the time? In his first Budget of 1997, he introduced a ceiling of 40% of national debt to GDP. When the euro was set up, we did not enter it; the euro set a ceiling of 60% and still does—yet Gordon Brown carried on insisting that the UK should have a rule of 60%.
In conclusion, I believe that there is a strong case for the Government introducing a debt break rule in the UK, accompanying it with actions that restrain the growth of government and reduce the overall burden of taxation.
Lord Weir of Ballyholme (DUP) [V]
My Lords, having now overcome technical difficulties, I belatedly commend the work of the noble Lord, Lord Bridges, and this committee in producing this excellent report, which pulls off the magnificent achievement of containing a thorough level of detail while keeping a focus on the strategic issues facing the United Kingdom of our vulnerability on issues such as quantitative easing, the level of foreign investors and their role in terms of debt, and inflation sensitivity. It also highlights the threats of the trajectory of the rising tide of debt as we move further into the century.
The report highlights the need for a strong fiscal framework. Undoubtedly that is true. However, as a number of noble Lords have highlighted, the political reality is that Governments will always view fiscal rules as a means to an end rather than an end. In an increasingly volatile world, in which we are getting further away from the ill-judged comments of Fukuyama that we were at the end of history, the need to ensure a level of agility in our economy to be able to deal with financial shocks is more pertinent now than it has ever been.
With that constraint in mind, there are two main areas that we need to concentrate on. First, in terms of growth, we need to move beyond the mantra of simply saying that growth is our priority and deliver the action points to ensure that growth is a priority. While we wait for the Government to put some meat on the bones of their planning reforms and indeed their aim of increasing productivity, the first lesson that the Government need to learn is not to score own goals when it comes to increasing the level of growth. In particular, I believe that the national insurance increase on employers is a strategic mistake by the Government which will only deter growth rather than facilitate it. We must also ensure that we have an appropriate energy policy. Energy costs in the United Kingdom are well above those of our competitors, and we therefore need a change in our energy policy. The Government need to move away from some of the doctrinaire approaches they take. We can either have strong growth or we can have the current energy policy, but we cannot have both. Finally in terms of growth, we need a more nuanced migration policy. Migration can play a very positive role in fuelling economic growth, but, as the report highlights, we are currently adopting a strategy which at best is creating a neutral impact.
Secondly, we need to ensure that we have a balanced budget. As the report highlights, there are really only two levers in connection with this: either higher taxation or lower spending by the Government. It seems to me that, as we hurtle towards one of the highest levels of taxation in our history, there is very little elasticity left in the situation of creating higher taxes. Indeed, those who would simply seek higher tax rates do not seem to bear in mind that what is really important is tax yield: simply increasing levels of taxation will not only be likely to be counterproductive in terms of economic growth but will also be unlikely to actually bring in more money into the Exchequer. That means we need a fundamental examination of the role of the state in terms of expenditure. During Covid, we saw, perhaps quite understandably, a large increase in the role of government and the amount of expenditure. We have never recovered from that situation, and we need to look at how much more we can move back towards a pre-Covid situation. That means more than simply targeting the vulnerable or soft targets for some cuts; there must be a more strategic and fundamental examination of the role of the state to see whether we are doing too much.
With all these levers, there is not a single silver bullet: I think we need to take all these measures if we are going to tackle this key strategic aim of reducing our debt burden.
Baroness Kramer (LD)
My Lords, first I congratulate the noble Lord, Lord Bridges, and the committee on taking on such a significant but challenging issue. I have great respect for the committee. I am one of its more distant alumni, if you like, but my years as a member were not just enjoyable but a brilliant opportunity to learn. I say to those who manage the parliamentary diary that bringing this debate seven months after the publication of the report, with four minutes for some of the most expert Back-Benchers we have, is simply not wise.
We are holding this debate in the age of Trump, when chaotic tariff wars have become a reality and the IMF has seriously downgraded growth forecasts for the UK and across the globe. The committee warned that we need sustainable debt which allows a contingency for unknown unknowns, of which Trump must be pretty much the worst possible, but I hope the committee acknowledges that this takes years to build. It is not within the capacity of a new Government, in less than a year in office, especially when handed a scorched earth by the last Government.
I also dispute the committee’s list of the shocks that have undermined our economy. Yes, it lists the financial crisis, Covid, Russia’s war in Ukraine, extended use of QE, but there is no acknowledgement in the report of Brexit. To ignore Brexit is in effect to get into a car and try to find your way forward while wearing a complete blindfold. A 4% scarring by Brexit, year in and year out, is the difference between a resilient UK and a struggling UK, and we have to recognise that.
I have a final disagreement. I am with those who believe that investment should be treated differently from day-to-day spending when we set debt targets if we are ever to tackle the short-term mindset that keeps undermining our economic future. I see this as essential for the growth agenda and for revival across all the regions of the UK, but I think we all acknowledge that, even without Trump and the reversal of globalisation that now seems under way, the UK faces very difficult economic headwinds. We have collapsed public services. We just listened to the noble Baroness, Lady Grey-Thompson, and I think everybody recognises that she speaks the truth. We have inadequate infrastructure and housing right across the country, an ageing population—others have spoken about the demographic challenge we face—but also economic inactivity. As the noble Lord, Lord Browne, says, we have inadequate defence spending in a very unstable world. We have low business investment, low productivity, high public debt and high taxes. Climate change, just like AI, is both an opportunity and a risk, depending on whether we drive to be a leader to seize the benefits and turn these into opportunities, or hang back and just bear the cost. I call for us to be a leader; indeed, green industries are currently a key growth area and one of our few areas of real success, which one would not know from listening to this debate.
I find it fascinating that, when I read the reports this week of the appalling figures from the ONS on soaring public debt and declining business activity, when I read the analysis and the follow-up, the focus falls on our failure and loss of exports. This is where I suggest we should concentrate our efforts. I believe that the Government need to move rapidly towards an EU customs union: we have to drive vigorously to revive our whole export profile. It has to be backed by a coherent, ambitious industrial strategy. I know that that is due soon, but it will be critical and it genuinely needs to tackle the full range of issues that are necessary for growth. Frankly, I think we should be taking full advantage of the brain drain from America. Growth was not the topic of this report, but the report says that this is where we should be focusing our conversations now. The noble Baroness, Lady Cash, talked about the young people who are our future: I can think of so many levers that would forward small business, scale-ups, new opportunities, and that is where we should be concentrating, rather than getting trapped in this current analysis.
Let me explain in part why. I do not think the report intends it, but it could easily be read as calling for us to focus on creating a new fiscal framework now. It is not the fiscal framework I would have chosen. If we were debating this back in September, when the report was published, I would have been talking about the Lib Dem manifesto at the last general election, which, whether you liked it or hated it, was certainly recognised as being fully costed. It would have been a very different kind of debate with a different focus. Now, I am looking at the world and saying that, at this time of absolute turmoil, when we do not even know that announcements that have been made today will change the growth profile to benefit it, disarm it or disadvantage it even more, when we face such a level of complete chaos, I hope that the Government will not feel that they have to jump forward and make immediate change, because, quite frankly, if the businesses that I talk to hear that there is going to be a dramatic change in the fiscal framework, they will basically be resorting to tranquillisers and therapy. There is a real need now for some measure of calm and stability; it is difficult, but the Government absolutely have to provide it.
The report says that we should not just muddle through, and that would be my normal instinct—do not muddle, seize the occasion and start making new decisions—but, at this point in time, I honestly have to say that muddling through until this chaos settles might actually start to look like success.
Baroness Manzoor (Con)
My Lords, I declare an interest, in that I am the chair of the Financial Ombudsman Service. I ask noble Lords to forgive me, as I am stepping in at very short notice for my noble friend Lord Altrincham, who was delayed in getting here earlier. He has listened to the debate and is here now.
I thank the Minister for hosting this important debate, and thank equally my noble friend Lord Bridges of Headley for bringing it forward, along with such an eminent group of noble Lords on the Economic Affairs Committee, whom I thank for attracting a distinguished group of witnesses. I thank my noble friend Lord Bridges for his outstanding opening contribution.
The report is an excellent example of parliamentary scrutiny and, with this debate, the transparency we have in the UK around fiscal rules and public debt targets. The report gathered comments from a wide range of economists—who were not always in agreement with each other—and we should be thankful for the committee’s grace and patience. The report was beautifully put together, and I thank committee staff for their excellent work. However, as my noble friend Lord Moynihan and others noted, it is seven months since the report was concluded, and much has happened since.
I will split my remarks broadly between the immediate short-term challenges raised in the report and the long-term systemic issues which underpin our overall debt trajectory, which formed the basis of the committee’s conclusions around sustainability.
In the short term, the UK continues to see a rising stock of public debt, as my noble friends Lord Bridges and Lord Forsyth articulated so well. This seems to be a one-way increase, going up again last month. Many of the contributors to the report expressed concern about both the flow rule and the stock rule, and, if there was any cause for optimism, it was not recorded in the report. As debt rises, the rules themselves are presenting some economic challenges.
As the noble Baroness, Lady Kramer, said, the figures released this week have shown that the Government spent £16.4 billion more than they received in income in March alone. This places the small fiscal headroom of £9.9 billion that the Chancellor presented in her Spring Statement under even greater threat. This is, of course, not counting the threat of tariffs, the increased cost of borrowing and future emergency spending decisions that the Government may face.
The very tight fiscal headroom that the Government have decided to leave themselves has shaken confidence in the Government’s fiscal plans. Ruth Gregory, deputy chief UK economist at Capital Economics, said this week that the borrowing overshoot raises the chance of “more tax hikes”, as noble Lords have indicated. On Wednesday, Elliott Jordan-Doak, of Pantheon Macroeconomics, warned,
“we think both taxes and borrowing will need to be raised in the October Budget”.
As my noble friend Lord Lamont said, businesses and taxpayers have no idea what to expect on tax rises come the autumn, and public services are uncertain about how their budgets are going to be cut. As my noble friends Lord Howell and Lord Griffiths said, the Chancellor’s red lines create doubt, concern and conditions which limit economic growth.
The Government suffer by obsessing over their estimates of very small headroom, alongside OBR forecasting. The IFS said that the Spring Statement was
“fine-tuned to return to precisely the same amount of headroom”.
Dr Robert Jump and Professor Jo Michell told the committee that the fiscal rule has taken a
“central and unhelpful role in fiscal policy-making”.
By placing this single rule at the centre of government spending strategies, the Government have lost perspective. To maintain the headroom, they are reduced to constant firefighting, all the while UK net public debt stands at £2.81 trillion—equivalent to £95,300 per household—and our debt obligations increase, as my noble friend Lord Forsyth and other noble Lords have stated.
I therefore welcome the approach taken by the committee in its report to encourage us to take a step back. When the focus is on short-term measures designed to meet short-term targets, we are all distracted from the underlying systemic factors behind the debate on national debt. The scale of the challenge we face is so much greater than any of the proposals we discuss when trying to address debt in the short term. We need a broader approach to try to address these bigger challenges, as my noble friend Lady Noakes and the noble Baroness, Lady Wolf, and other noble Lords have argued and articulated so clearly.
Paul Johnson, the director of the IFS, is quoted in the report as calling for “big decisions and trade-offs”. The noble Lord, Lord Davies, referred to Joseph Stiglitz, who captured it well when he reminded us that a discussion around debt is meaningful only alongside a discussion about how the money is spent. Does the Minister recognise that a broad approach is required to address debt? Are the Government undertaking an assessment of these deeper issues?
The committee’s report made several important recommendations, one of which was to alter the fiscal buffer to better prepare the UK economy for economic shocks. Can the Minister assure the House that the Government are confident they have the fiscal capacity to weather further financial shocks, while remaining within their fiscal limits and without violating their commitments on spending and tax rises?
I turn to the longer term, which was discussed briefly at the end of the report. The trends are for a significant increase in public debt, as in other developed countries. Richard Hughes suggested that there is an opportunity to address this trend in rising debt over the next five to10 years.
The report does not address intergenerational unfairness, but the steady passing on of costs to future generations erodes the social contract. As the noble Lord, Lord King, my noble friend Lady Cash and the noble Baroness, Lady Grey-Thompson, said, young people today are experiencing severe economic disruption and significant unemployment in the cohort under 28.
Long before we get to the dependency ratio, the UK will need to maintain consent for high taxation and potentially low growth. Richard Hughes is right to draw attention to the issue of not confusing the financing of UK public debt today with the appropriate level tomorrow. While year-to-year increases may be okay, financed by our own savers and debt investors around the developed world, it is possible that deficit financing of the Government is creating excessive levels of public expenditure today, and that part of our economic malaise comes from public sector productivity, the crowding out of the private sector, and the buffer-line declines in the marginal utility of public expenditure.
We need to have some serious discussions about how we can get the unemployment rate down and how we can work with educators and employers so that our young people have the skills they need to be positive contributors to our economy. These factors are central to improving productivity, which Professor David Miles in his contribution to the report called
“the almost pain free route to sustainability”,
which was also alluded to by the noble Lord, Lord Howell. Measures to cut long-term spending demands need to be incorporated as a priority across the public sector. We need to make sure that short-term political incentives do not discourage long-term sustainability measures.
I welcome the opportunity offered by the committee to discuss the wider problem we face, and to frame the discussion around fundamental issues as well as the immediate ones. We thank the Debt Management Office for its good work in volatile markets on behalf of the Government. It issued gilts yesterday, maturing in 2043.
I close by asking the Minister whether he believes that a longer-term strategy needs to be adopted by the Government to set a path to reducing the national debt, not just in year three or four but by the maturity of yesterday’s issuance in 2043.
The Financial Secretary to the Treasury (Lord Livermore) (Lab)
My Lords, it is a great pleasure to respond to this debate on the Economic Affairs Committee’s report on the national debt, and a privilege to do so alongside so many distinguished and genuinely expert noble Lords. It has been an incredibly impressive and well-attended debate, and I thank all noble Lords for their contributions.
Lord Forsyth of Drumlean (Con)
I am most grateful to the Minister. He is a former member of the Economic Affairs Committee, and he is right to pay tribute to the importance of the subject. Will he make representations to his colleagues who are responsible for the business of the House? It really is not acceptable to have a debate on a committee report such as this on a Friday when people are limited to four minutes to speak.
Lord Livermore (Lab)
I absolutely hear what the noble Lord says and will of course pass those comments on.
I congratulate the Economic Affairs Committee on its report and the committee’s chair, the noble Lord, Lord Bridges of Headley, on his excellent opening speech, which achieved the extraordinary feat of summarising in just 12 minutes such a wide-ranging and in-depth report. As the noble Lord, Lord Forsyth, just mentioned, I had the privilege of serving on the Economic Affairs Committee under his chairmanship, so I know the amount of time and effort that go into producing reports such as this. As the Chancellor did in her response to the committee last November, I thank all members of the committee and the committee staff for producing this thoughtful and considered report.
As the report rightly recognises, and as the noble Lords, Lord Bridges, Lord Razzall, Lord Lamont and Lord Londesborough, highlighted, the UK’s national debt has risen rapidly over recent years, from around 64% of GDP in 2010 to over 98% in August last year, the highest level since the 1960s. Latest figures to the end of March this year show public sector net debt at 95.8% of GDP, which still remains high by recent historical standards. As the noble Baroness, Lady Wolf of Dulwich, said, debt interest payments alone now stand at £105.2 billion this year—that is more than we allocate to defence, the Home Office and justice combined.
The title of the report speaks of “tough decisions” to prevent national debt from being on an unsustainable path. The Government agree. That is why in the Budget last October, we took action to fix the foundations of our economy and repair the public finances, as the noble Lord, Lord Horam, observed. That included repairing—and noble Lords would expect me to say it—the £22 billion black hole in the public finances that we inherited. That meant making difficult choices. They were not easy decisions, but they were the right decisions.
Since the committee’s report was published in September last year, and then the Budget in October, as many noble Lords have rightly said today, the world has changed further significantly. As the noble Lords, Lord Burns and Lord Forsyth, and the noble Baroness, Lady Kramer, observed, new tariff barriers are now disrupting global trade. Borrowing costs have risen in all major economies; volatility in global markets has seen bond yields rise, including in the US; and growth has been downgraded across the world, with the IMF now predicting global growth to be 0.5% weaker than it was expecting as recently as January.
Of course, the UK has not been immune to these challenges. As the noble Lord, Lord Bridges, said, the OBR downgraded the UK’s growth forecast for this year at the Spring Statement, reflecting the worsening global outlook, and earlier this week the IMF did the same. In this context, maintaining sustainable public finances is a shared challenge for major economies right across the globe.
Against this backdrop, the decisions we took in the Budget to fix the foundations look ever more necessary. Imagine if we were now facing this global economic uncertainty with that black hole still in the public finances. What confidence would that have given to the Bank of England to cut interest rates? What signal would that have sent to investors about the stability and resilience of our economy?
The OBR will produce an updated forecast in the autumn, and despite the kind invitation of the noble Lord, Lord Bridges, I will not speculate now on the impacts of recent global events on the fiscal outlook ahead of that. But, as the committee’s report rightly concludes, global instability underlines the need to put debt on a sustainable trajectory and build resilience to future shocks. It also reaffirms the importance of stability as the foundation of our approach.
That is why, as the noble Lord, Lord Bridges of Headley, asked about, in the Spring Statement we again took tough decisions so that we continued to meet our non-negotiable fiscal rules, even when they were tested. That meant restoring in full the headroom against the stability rule, maintaining a surplus of £9.9 billion in 2029-30. It is why we continue to work with international partners, as the Chancellor has done at the IMF spring meetings this week, to make the case for free and open trade.
The noble Lords, Lord Bridges, Lord Burns and Lord Lamont, and the noble Baronesses, Lady Noakes and Lady Cash, all mentioned the importance of economic growth. It is why we are doubling down on our growth agenda of stability, investment and reform, including £13 billion of new capital spending in growth-generating projects announced at the Spring Statement, as well as support, for example, for a third runway at Heathrow and a new Oxford-Cambridge growth corridor, as my noble friend Lord Liddle spoke about.
As the noble Lord, Lord Griffiths, mentioned, this week’s IMF report makes it clear that the “landscape has changed” and has downgraded the growth prospects of all G7 nations. However, the UK remains the fastest-growing European G7 country, and the IMF has recognised that this Government are delivering reforms which will drive up long-term growth in the UK. Our upcoming modern industrial strategy, mentioned by the noble Baroness, Lady Kramer, and spending review will say more about how we intend to drive long-term sustainable investment and boost productivity.
The committee’s report includes a number of key recommendations, central to which is the committee’s call for an “overhaul” of the UK’s fiscal framework. The Government’s thinking was clearly along very similar lines, and in the Budget in October, we implemented the most significant change to the fiscal framework since 2010—as my noble friend Lord Wood said. I congratulate him on becoming the new chair of the Economic Affairs Committee, and I look forward to working with him.
The new framework we have put in place is designed to support long-term growth, by ensuring the UK’s debt is put on a sustainable path and by prioritising sustainable public investment. First among these reforms are the Government’s non-negotiable fiscal rules, the embodiment of our unwavering commitment to economic stability. The first rule, the stability rule, moves the current Budget into balance, so day-to-day spending is met by revenues, and ensures that the Government will borrow only for investment, which the noble Lord, Lord King of Lothbury, questioned. This rule differs from the previous Government’s borrowing rule, which targeted the overall deficit rather than the current deficit and created a clear incentive to cut investment that is detrimental to growth, as the IMF has made clear.
The noble Lord, Lord Lamont, asked about the primary surplus, which the OBR forecast to move from a deficit of 1.9% of GDP in 2024-25 to a surplus of 1% by 2029-30. The Government understand and respect the argument made by the committee in respect of the fifth year. However, the Government’s position is that targeting the third year of the forecast provides a strong anchor for fiscal sustainability, while providing the necessary flexibility to respond to macroeconomic shocks in the short term.
Our approach is supported by the OECD, which recommended that the UK should
“shorten the time horizon of fiscal rules”.
Similarly, the Institute for Fiscal Studies has made it clear that a fiscal rule targeting debt falling in the fifth year of the forecast is
“more arbitrary and gameable than most”.
The second rule—the investment rule—ensures net financial debt falls as a proportion of GDP. This keeps debt on a sustainable path, while allowing the step change in investment our economy needs.
The noble Baronesses, Lady Wolf of Dulwich and Lady Noakes, and the noble Lord, Lord Forsyth, raised the issue of definitions. Net financial debt is an accredited official statistic that has been measured by the Office for National Statistics since 2016 and forecast by the Office for Budget Responsibility since that date. It recognises that government investment delivers returns for taxpayers by counting not just the costs of investment but the benefits.
The noble Lords, Lord Burns and Lord Howell of Guildford, spoke about the importance of investment to economic growth, as did my noble friends Lord Wood, Lord Liddle and Lord Davies of Brixton. As a result of this second fiscal rule, we were able to increase capital investment by over £100 billion in the Budget in October, boosted by an additional £13 billion announced at the Spring Statement. The OBR has confirmed that we are meeting both fiscal rules, and borrowing is forecast to fall in every year of the forecast—from the 5.3% of GDP that we inherited to 2.1% in 2029-30.
In addition to our fiscal rules, the Government’s Charter for Budget Responsibility contains a further serious of measures to improve certainty, transparency and accountability in our fiscal framework.
Lord Lamont of Lerwick (Con)
I am very grateful to the Minister for answering my question about primary surplus. He said that the OBR is saying that there will be a surplus in 2029-30. Am I not right in saying that that refers to the current Budget, but of course might mean that there was, overall, a primary surplus? By itself, it does not mean a primary surplus. Can the Minister indicate whether there would be an overall primary surplus, which many people are saying is necessary to alter the debt-to-GDP ratio.
Lord Livermore (Lab)
I am very happy to check that point and I shall write to the noble Lord.
The measures set out in the Government’s Charter for Budget Responsibility implement many of the recommendations in the committee’s report and provide important guard-rails to ensure that capital spending is good value for money and drives growth in our economy. The IMF has called these important reforms to strengthen the fiscal framework. They include a commitment to hold one major fiscal event each year, giving families and businesses stability and certainty on upcoming tax and spending changes. The noble Lord, Lord King, suggested moving to just one forecast, a point echoed by the noble Lord, Lord Macpherson.
We introduced the fiscal lock through the Budget Responsibility Act, ensuring all major fiscal announcements are subject to an independent assessment by the OBR. Spending reviews must now take place every two years, setting departmental budgets for a minimum of three years. According to the IMF, this will
“improve the credibility of the medium-term fiscal framework”.
The Government have accepted all 10 recommendations in the OBR’s review of the March 2024 forecast for departmental expenditure limits, to ensure that no future Government can conceal unfunded spending pressures from the OBR, as the previous Government did.
The committee’s report sets out a number of recommendations relating to the nature of UK debt and how it is managed. The report argues—and the noble Lord, Lord Bridges, made clear—that it is the trajectory of debt, rather than the level, which should be the principal consideration when assessing debt sustainability and that debt levels become unsustainable if there is an insufficient buffer to absorb future economic shocks.
The Government agree with this analysis, which is why the Chancellor rebuilt in full the buffer against the fiscal rules at the Spring Statement—which was mentioned by the noble Lords, Lord Bridges and Lord Burns, and the noble Baroness, Lady Manzoor—and why our investment rule requires net financial debt to be falling in 2029-30. Building this resilience is key to protecting the UK against global shocks.
The committee’s report recognises that the UK is not currently an outlier in the overall stock of debt but notes the relatively high share of index-linked gilts. Issuing index-linked gilts has historically brought cost advantages, and analysis shows direct savings of around £90 billion in total from the issuance of index-linked gilts. However, it is right that the Government keep the proportion of index-linked gilts under review to balance the benefits and risks.
Separately, the noble Lords, Lord Razzall, Lord Lamont, Lord Forsyth, Lord Macpherson and Lord Weir, noted that the report argues that quantitative easing has increased the sensitivity of government borrowing costs to short-term movements in interest rates. However, it remains the case that the average maturity of the Government’s wholesale debt continues to be consistently longer than the average across the G7 group of advanced economies. This helps to limit how quickly changes in interest rates affect debt interest costs. Other countries also face significant effects because of quantitative easing. Quantitative easing is now unwinding, which will increase the effective maturity of the UK’s debt, all else being equal.
The last concern raised by the committee in this section of the report relates to the UK’s reliance on debt purchases by overseas investors, which my noble friend Lord Liddle and the noble Lord, Lord Forsyth, mentioned. The Government deliberately maintain a varied gilt-issuance strategy, to promote a well-diversified investor base. Overseas investors help maintain a diversity of gilt investors, keeping demand for UK debt strong and ensuring that the Government are not overly reliant on any one type of investor.
The committee’s report covers the longer-term challenges of getting debt to fall—the noble Lord, Lord Bridges, referred to these as the “Ds”. These include the impact that demographic shifts, such as an ageing population and a rising dependency ratio, will have on the public finances, as my noble friends Lord Davies of Brixton and Lord Browne of Ladyton said. The Government recognise these challenges, including the rising cost of care, which is set to double in the next 20 years alone. That is why, for example, we have established an independent commission, led by the noble Baroness, Lady Casey, to develop a new national care service, able to meet the needs of older and disabled people into the 21st century. We are taking immediate action to stabilise the care sector and invest in prevention, carers and care workers.
Other spending pressures discussed in the report include migration, the green transition and defence. The noble Lord, Lord Macpherson, made an interesting suggestion about debating annually the OBR’s fiscal sustainability report.
On migration, the report concludes that high net migration cannot be the solution to debt sustainability, as many noble Lords mentioned today. The Government’s position remains that we value the contribution that legal migration makes to our country, and will continue to strike a balance between ensuring that we have access to the skills that we need, while encouraging businesses to invest in the domestic workforce. Further detail will be set out in the forthcoming immigration White Paper.
The noble Lords, Lord Horam and Lord Weir, mentioned the green transition. The Government believe that early and ambitious climate action is vital to delivering long-term economic growth and enabling a cost-effective transition to net zero. As the Chancellor said earlier this year:
“Net zero is the industrial opportunity of the 21st century, and Britain must lead the way”.
On that point, I agree with the comments made by the noble Baroness, Lady Kramer.
The noble Lords, Lord Forsyth and Lord Tugendhat, and my noble friend Lord Browne of Ladyton spoke about defence spending. The committee’s report was published before the Government’s announcement that defence spending will rise to 2.5% of GDP next year, which represents the biggest sustained increase in defence spending since the Cold War. This new funding, delivered within our fiscal rules, will deliver the stability that underpins economic growth and unlock prosperity for working people, through new jobs and opportunities.
Finally, the report considers the impact of productivity improvements in the context of the projected rise in government expenditure. The Government’s view is that tackling the UK’s historic weak productivity performance is central to delivering higher economic growth. The OBR estimates, for example, that every 0.1% increase in productivity growth will reduce the rise in the debt-to-GDP ratio by 25 percentage points over the next 50 years. It is for these reasons that we are pushing ahead with vital reforms to cut waste and bureaucracy, including in the planning system, and to make the state leaner and more efficient.
I once again sincerely thank and congratulate the Economic Affairs Committee on its work on this important report. The Government share the committee’s view that tough decisions are required to put debt on a sustainable path. That is why in the Budget last October we fixed the foundations of our economy and, at the Spring Statement this May, took the action needed to meet our fiscal rules, even when they were tested. The global instability we have seen over recent weeks demonstrates why this approach was necessary. It is only by delivering sustainable public finances that we can maintain resilience in the face of global shocks. The approach we are taking will continue to put debt on a sustainable path. It will provide certainty to families and businesses in an ever-changing world, and it will generate the long-term investment we need to grow our economy.
Lord Bridges of Headley (Con)
My Lords, I thank all noble Lords for an excellent debate and their fantastic speeches. The debate has shown this House at its very best and shown why our committee is able to produce such hard-hitting reports. I thank all noble Lords for their very kind words about me, which were entirely unwarranted—I have had enough compliments to last me for several years.
From this debate, it is clear that it is utterly unavoidable that we are living in a world of extreme change and high volatility, that is becoming more dangerous by the day. That said, what has not changed—a number of noble Lords made this point—are the enormous trends and challenges we face, the Ds: debt, demographics, decarbonisation, dependency and defence. All these challenges were in the report. They are extreme challenges. As my noble friends Lord Forsyth and Lord Lamont, and the noble Lord, Lord Razzall, said, these are challenges that merit much more debate than two hours on a Friday morning.
Our approach to them raises enormous questions: ones that fall into the immediate category—those about policy and process—as well as far more fundamental questions of philosophy and belief. Let me briefly touch on what we have covered this morning. On the policies and the processes, as a number of noble Lords said, we face a dire problem with growth and productivity. As my noble friend Lord Forsyth quite rightly said, the responsibility of that falls on this side of the House as much as on anyone else, but we must confront and grapple with these challenges.
Noble Lords spoke about investment in infrastructure. The noble Lord, Lord Horam, spoke about the problems of energy. The noble Lord, Lord Weir, spoke about planning. My noble friend Lord Moynihan of Chelsea spoke about the crushing tax burden and our whole tax system. The noble Baroness, Lady Kramer, spoke about trade. Each one of those is a massive issue. Then there is the fiscal rule, which, as the noble Lord, Lord King, so rightly said, is Augustinian in nature.
Another enormous issue is about how we tackle and treat the concept of borrowing for investment—and today noble Lords could see the kind of debate we have in the Economic Affairs Committee between the noble Baronesses, Lady Wolf and Lady Kramer, and the noble Lord, Lord Davies. There is the question of whether our entire fixation on fiscal rules is overwhelming us and whether we should actually look at the substance of fiscal policy, as my noble friend Lady Noakes and the noble Lords, Lord Macpherson and Lord Burns, said.
Of course, an entirely new approach could have taken: the debt break approach of the Germans and the Swiss, to which the noble Lord, Lord Griffiths, pointed. That leads us on to the role of the OBR. Are we assigning too much importance to the OBR and has it grown too big for its boots?
Lord Bridges of Headley (Con)
We hear some answers here from our Front Bench, and my noble friend Lord Howell discussed that point. Then there are the further pressures we will face: the noble Lord, Lord Browne, spoke about defence and welfare, and the noble Baronesses, Lady Cash and Lady Grey-Thompson, tackled the intergenerational issues. Each of those points merits debate in itself and deserves to be heard.
What we did not hear today was assurances that taxes will not need to rise further; instead, we heard that the Government are sticking to their course, that they believe that debt is on a sustainable path and that we are able to weather the storm we are in. I dearly hope that I am proven wrong, for I fear that we lack a credible strategy for the problems we face.
That brings me on to the bigger, more fundamental problem of philosophy and belief. If we truly want to tackle these challenges, we need to have a debate about the role of the state versus that of the individual. It boils down to a simple question: do we trust the state to do more to tackle these challenges? In which case, taxes may inexorably have to rise. If so, what will be the impact on our economy, competitiveness and growth? Alternatively, do we take a different course, and do we trust the people? If so, what does that mean for the social contract? Where does the boundary lie between the responsibilities of the state and the individual?
These are enormous questions, which this debate on our report begins to open up. My deep concern is that we will continue to kick the can down the road and not have that debate, because all these challenges—all those Ds—come head-to-head with the other, massively bigger D: the D of democracy. Having this debate—and confronting these challenges—raises the enormous and, at times, tough and unpopular decisions and difficult trade-offs that have to be faced. However, if we do not have this debate, and we continue to try to tackle these problems piecemeal in an incoherent way, I fear that not only will the solutions fail but we will lack the legitimacy to take the action required. As the noble Lord, Lord King, said, we owe it to our children and grandchildren to muster the courage and have the honesty to confront these challenges now, so as to put our debt on a sustainable path before it becomes too late.