Baroness Neville-Rolfe (Con)
My Lords, I am grateful for the opportunity to contribute to what I agree has been an outstanding debate, and I thank my noble friend Lord Bridges of Headley for setting out the scale of the challenge facing the country in his usual persuasive style. He rightly drew attention to the conclusions of the Economic Affairs Committee two years ago that the UK’s national debt risked becoming unsustainable. This was echoed by my noble friend Lord Howell of Guildford.
Our public finances are in a worse state now than two years ago, when Labour took office. The party opposite likes to talk about Liz Truss, but, this morning, 10-year gilt rates were at 5.24%, which was more than in the financial crash of 2008. This is significantly higher than under Liz Truss. My noble friend Lady Morrissey warned us that there is no safety in numbers among bond investors. In some sense, we are
“in hock to the bond markets”.
We have heard that debt is approaching £3 trillion, borrowing was approximately £130 billion last year, and debt interest costs around £109 billion now and is expected to continue rising. We cannot allow this to happen. At the same time, the tax burden is forecast to rise to 38.5% of GDP by 2030-31, which will be its highest level since records began in 1948.
The truth is that our fiscal position is much worse than the public realise, and it will not take anything major to trigger a surge in the bond markets, leading to a crisis. The Chancellor would be wise to study what happened in 1976, when another Healey had to be bailed out by the IMF—and, indeed, the experiences of 1981 and 1993, referred to by the noble Lord, Lord Burns.
The international pressures we are experiencing come at a time when the UK is combining historically high levels of taxation and public spending with weak productivity, pressure on our public services and very little margin for error. Unfortunately, the Government do not have a credible plan to restore fiscal resilience, generate stronger economic growth and put the public finances on a sustainable, long-term footing.
I will make three further points. The first is that the Government’s fiscal rules cannot be a substitute for an economic strategy capable of delivering genuine growth. The Government’s so-called headroom is already extremely limited, but it is not nearly as important as the wider economic context. Growth is forecast at just 1.1% this year, while the deficit remains some 4% of GDP. This is unsustainable.
Over the past two decades, as we have heard, we have experienced a global financial crisis, a pandemic, war in Europe, energy shocks and repeated geopolitical disruption in the Middle East. It would be a reckless Government who constructed fiscal policy on the assumption that there will not be another crisis.
We need over £300 million every day simply to service the national debt—and we can all imagine what a difference that would make to our Armed Forces or our services, or, indeed, in tax cuts geared to generating growth. Dr Arthur Laffer, as we have heard, was in London this week, saying that we are taxing ourselves to death and explaining how, in contrast, over the years, tax cuts have increased revenues and fired growth in the United States.
My second point is that we cannot tax our way out of a productivity problem. The denominator in almost every fiscal ratio is the size of the economy. Without stronger growth, fiscal consolidation ultimately becomes an impossible choice between higher taxes, poorer public services and still more borrowing. Productivity must therefore sit at the heart of any credible fiscal strategy—it was good to hear from the noble Viscount, Lord Chandos, that it might be edging up. That means creating more of an enterprise culture, as the noble lord, Lord Londesborough, said, and using AI effectively, as we heard from the noble Baroness, Lady Lane-Fox. It is right to think of our strengths, as the noble Baroness, Lady Kramer, said. That includes our very strong network of SMEs in this country.
Productivity also requires conditions in which businesses are prepared to invest and innovate, energy is internationally competitive, skills are better matched to the needs of employers, regulation becomes simpler, and, most importantly, people who are able to work, work. The employment rate was estimated at 75.1% in the second quarter, in a soft labour market. At the same time, welfare spending is forecast to increase from about £334 billion to £409 billion by 2030-31.
Alan Milburn has rightly condemned the insane sick-note culture as NEET figures reach an all-time high, with £25 spent on benefits for every £1 spent on employment support, as we heard from my noble friend Lord Elliott of Mickle Fell. A CSJ report has laid bare a worrying post-pandemic trend of graduates coming straight from university on to sickness benefits. That is the opposite of how welfare should function. On this side, we are agreed on the damaging effect of the Employment Rights Act on new employment.
My third point is that we must become much more willing to confront our spending pressures. I agree with my noble friend Lord Redwood on this. The demands on defence, social care, infrastructure and public services will be substantial, especially if the PM seeks to move utilities into public ownership, as my noble friend Lady Meyer suggested he might. Every major new commitment should therefore be accompanied by a credible timetable, a long-term costing, an identified source of funding and a clear assessment of the consequences for wider public finances. That will be our conservative way under Kemi Badenoch.
In politics, we spend a great deal of our time discussing inputs. The Government announce another billion pounds here or another programme there, and present the scale of the expenditure as though it were in itself evidence of success. It is not. We need to know what expenditure actually achieves. The taxpayer is entitled to expect not simply higher spending—an input without an output measure—but better value and better outcomes.
Like others, I was particularly struck by the thoughtful contribution from my noble friend Lord Hill of Oareford. We need honesty over the challenge of things such as pensions, and a change to the 24-hour political system buffeted by the demands of different lobby groups. Incidentally, I agree with the noble Lord, Lord Rooker, that the poorest pensioners should not be taxed by stealth. I was also very concerned to hear from my noble friend Lord Elliott that public sector pay had risen by 6.9% compared with 2.8% in the private sector, with public sector numbers going up by 42,000 and numbers in the highly taxed private sector declining by 110,000. This is not right.
In a typically trenchant analysis, my noble friend Lady Noakes set out the dilemma facing the Chancellor in his Budget on 28 October—we must have some sympathy for him—and the need to learn from the last Chancellor’s record, which has hit business and entry-level jobs so hard. As my noble friend said, there is no living example of taxing into prosperity. I also look forward to the reply to the rather challenging questions from my noble friends Lord Bridges and Lord Howell.
In conclusion, the fiscal outlook is grim. I agree with those who argued that we should tackle that by reducing spending and not by tax rises, which would only reduce growth and risk a downward spiral. Yet today’s leading story is of a visitor levy, which will hit growth, and a TUC request for a bank tax. Is it a surprise that so many high-rate taxpayers are leaving the country?
The Parliamentary Secretary, HM Treasury (Lord Pitt-Watson) (Lab)
My Lords, I thank the noble Lord, Lord Bridges, for securing this debate, and congratulate him on his opening speech. I also thank all noble Lords for their contributions today. It is a pleasure to respond to this debate. In doing so, I must say that I absolutely cannot do justice to the number of comments that have been made and the expertise that has been brought to the debate. But I will try to frame my response around some logic: first, the economic context; secondly, the fiscal rules and OBR; and, finally, the fiscal outlook and long-term challenges. I have to warn that, with the Budget coming up, there are things I cannot talk about because they could be in it, nor can I say anything that could lead to market speculation. But I hope that within the framework I have laid out, I can at least respond well.
I frame my remarks around the lead given to us by my noble friend Lady Alexander. I believe there is considerable consensus in this House. This is an Opposition day debate, and I heard a number of speeches that were a bit polemical, which is understandable, and a few Aunt Sallies about Britain being like the Soviet Union—I think that if you had ever visited the Soviet Union, you would not be saying that. There was also the odd speech that sounded a wee bit funereal about our wonderful, resilient country. But there were lots and lots of speeches which expressed a shared overall goal, which is to drive good growth in every postcode and to back investment, innovation and jobs across our economy. That is what the Chancellor set out in his speech earlier this week.
I believe the choices that have already been taken since this Government came to office put Britain in a stronger position today to deliver those plans and capitalise on the growth opportunities ahead. I know that one swallow does not make a summer, but in the first half of this year we had the highest growth in the G7 and government borrowing fell to its lowest level in six years. My noble friend Lord Chandos mentioned productivity. We need to be very careful about productivity figures, but last year we saw a greater than 2% increase in productivity, which was the best in 10 years when you adjust for the effect of Covid.
The Government are trying to build on our strengths—my noble friend Lord Chandos mentioned our world-class universities, and we have world-leading sectors such as life sciences, defence, technology, creative industries and, as the noble Baroness, Lady Kramer, mentioned, financial services. On the need for growth, which the noble Lord, Lord Londesborough, made absolutely clear, there are a whole set of things, including trade deals and planning reform, that we are trying to do.
Nevertheless, as was made clear in the debate, global instability, conflict and trade frictions are continuing, and they drive up inflation and interest rates around the world. Although these shocks are international in nature, their impact is particularly being felt here in the UK, from the cost of the weekly family shop to the cost of government borrowing. But Britain has shown a resilience in the face of these pressures, and I think the country is on the up. In the context of a more uncertain world, we must continue to make responsible choices, and fiscal discipline will underwrite every promise that this Government make.
I do not want to dwell on how we got to 100% borrowing or on the moment when Britain ended up having the highest borrowing costs among the G7. We are looking for a coherent policy going forward, which the noble Lord, Lord Hill of Oareford, was pushing us to look for. In the past, we have had so many different fiscal rules. Every time a Government were going to break the fiscal rules, they just changed what the fiscal rule was going to be—that point was made by the noble Lord, Lord Turnbull. Both the Prime Minister and the Chancellor have been unequivocal in committing to meet the fiscal rules in the Budget next month with a buffer for uncertainty.
The first fiscal rule, the stability rule, moves the current budget into balance so that day-to-day spending is met by revenues and ensures the Government will only borrow for investment. Previous fiscal rules discouraged investment. The second fiscal rule, the investment rule, ensures that net debt falls as a proportion of GDP, which is what the noble Lord, Lord Burns, was advocating. This keeps debt on a sustainable path while supporting over £120 billion of additional departmental capital spending in housing, energy, transport, and other growth-driving infrastructure—also in some pump-priming, which the noble Lord, Lord Howell, was encouraging us to think about. Taking this approach is responsible: it means the Government will balance the books with a buffer to protect against uncertainty, will control borrowing, and will reduce long-term pressures on our public finances. As the Chancellor said, there is nothing progressive about spending £1 in every £10 on debt interest.
I thought the speech by the noble Baroness, Lady Morrissey, was a classic speech from the House of Lords of such insight and expertise about how the bond market works. I will not try to respond to it in this talk. Beyond the fiscal rules, the Government have also taken a number of steps to strengthen the wider fiscal framework, including holding regular multi-year spending reviews so that departments have certainty on what their funding will be and protecting and respecting the independence of the OBR.
The Office for Budget Responsibility will produce an updated review of the economic and fiscal outlook alongside the Budget on 28 October. As I said at the outset, our economy is beginning to turn a corner; at least I hope it is. It is an uncertain world, and Britain has shown such resilience in the face of global pressures. We see this in the uptick of confidence among many businesspeople, including the successor to the noble Baroness, Lady Lane-Fox, at the British Chamber of Commerce. But clearly there remain challenges to the fiscal outlook. The war in Iran has pushed up energy costs and inflation, which in turn raised the cost of borrowing in all major economies, including in the UK. That is why the Chancellor has committed to reduce borrowing and get debt down, because that is the route to lower inflation, lower interest rates and higher economic growth.
The central point is to get debt under control, as the noble Lord, Lord Bridges of Headley, reminded us. As a result of the action the Government have already taken, borrowing fell last year from 5.2% to 4.2% of GDP. Okay, there is still borrowing, but the lowest in six years, and according to the IMF, for the first time since 2004 we are forecast to be borrowing less this year than the rest of the G7 on average. But this problem, which arose over half a generation ago, will take time to solve. It will take careful thought and clear discipline.
In the longer term, the OBR’s recent Fiscal Risks and Sustainability report confirms the need to boost growth and maintain sustainable public finances, and that is what the Government intend to do. People have raised questions about tax, particularly business tax. I spoke in the House about this only last week. It is true that businesses have been paying more tax, but it is also true that businesses have been responsible for that productivity increase and growth. The noble Baroness, Lady Neville-Rolfe, made a point about the Government stopping going on about inputs and starting to think about outputs. I agree that that is fundamental.
There were lots of questions about pensions and where pensions are invested. The Government are taking action on this by—let me acknowledge it—picking up a baton from the previous Government about the asset allocation of pension funds not being as good as it could be.
We had questions about employment and training. I say to the noble Lord, Lord Londesborough, that a 1% increase in productivity for every business would solve many problems. One statistic strikes me when we talk about people not in work: in the past 150 years there were only two peacetime years when the average annual employment rate was higher than in 2025.
Great things are there for us to do. The corporation tax rate for businesses is the lowest in the G7. The effective tax rate for a single individual with no children on average earnings is the lowest in the G7. The tax paid by a worker on a low or average income is at a historically low level. Lots of good stuff is going on.
For me, the standout speech of this debate was by the noble Baroness, Lady Lane-Fox, about productivity, creativity and imagination. They are in no way the exclusive preserve of Parliament or government. They belong to the British people and British businesses. Fiscal credibility is the bedrock for economic stability and national security, because without sound public finances we cannot give businesses and families the breathing space and stability that they need for the future. The ultimate goal, as the noble Baroness, Lady Kramer, reminded us—we have both congratulated the noble Baroness, Lady Lane-Fox—is growth: good growth in every postcode. It will be delivered not by the Government alone but by the people and businesses of Britain, the strong horse that pulls the whole cart. The foundation for that is a sensible, well-financed Government with real fiscal discipline, and that is what I think this Government are offering to the country.