National Debt: It’s Time for Tough Decisions (Economic Affairs Committee Report)

Baroness Wolf of Dulwich Excerpts

Friday 25th April 2025 Lords Chamber

[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.