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

Lord Burns Excerpts

Friday 25th April 2025 Lords Chamber

[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.

Autumn Budget 2024

Lord Burns Excerpts

Monday 11th November 2024 Lords Chamber

[Lord Burns (CB)]

I thank the Minister for his introduction to the debate. The first Budget of a new Government is always a significant event, and I am very pleased to see the emphasis on sustainable public finances.

However, I worry that in the Budget speech there was too much attention on the short-term politics of dealing with the “black holes” and, by contrast, rather insufficient attention on the lasting impact of the major worldwide shocks of the past 15 years, which continue to cast a shadow on economic performance.

At the time, there was general political consensus that these crises—the global financial crisis, the Covid crisis and the energy crisis—should be dealt with by large-scale government borrowing and spending. As a result, public sector debt increased from under 40% of GDP in 2007 to 100% today. This has inevitable consequences and implications for the cost of government borrowing, and debt interest has become a significant budgetary item.

It has also been painfully clear that, in common with many other countries, the underlying growth rate in the UK has been lower since the global financial crisis. That means a slower growth in the tax base, which of course matters hugely for public finances. For many years, we became used to a growth rate of about 2.5%. Since 2008, the annual growth rate has averaged only 1% a year.

There are other consequences of the crises. There is the continuing concern about the impact on health, as evidenced by the continuing high welfare claims for long-term sickness. Consumer prices in the services sector are still rising well above the 2% inflation target, and there is general concern about the disruptions to major public services despite a considerable increase in the number of people employed in those services.

In addition, we face major challenges over the next 15 years which will throw up problems of their own. These have been set out in recent reports by both the Lords Economic Affairs Committee and the OBR: a growing proportion of people at or above retirement age; the need to develop infrastructure for achieving our carbon targets; rising defence expenditure; and the amount of labour market inactivity among those of working age.

This all means that it has been clear for some time that taxes were going to have to go up. This was no secret, but the previous Government struggled with the question of how to pay for the massive recent public spending interventions and too little attention was given to the need to raise more revenue. It now falls to the new Government to address how to get the debt ratio back on a downward path. As I said, the need for higher taxes has been evident for some time; however, in this first Budget, the increase in spending is well ahead of the increase in taxes, rather than the other way around. I fear that these tax increases are unlikely to be the last.

I am generally content with the new draft charter for the OBR; in particular, the emphasis on a balanced current budget and the need for the public sector debt ratio to fall over time. I also understand the separate treatment of fixed investment—not so much because I am greatly convinced that it is better for growth than day-to-day spending but because it is much easier to cut back fixed investment than current expenditure, as the costs come well before the benefits. It needs some protection, and I am pleased to see that we have in place an arrangement that will give it protection. History shows that fixed capital has often been hit disproportionately when savings are needed.

I will offer three observations about the detail of the Budget; I will leave much of that to other noble Lords. First, I agree that it is unfortunate that the Government’s manifesto pledge has led to increasing national insurance contributions on employers rather than reversing the previous cuts for employees. Secondly, it is disappointing that, once again, we are overriding the indexation of fuel duties. Fuel duty has been falling in real terms almost every year since the time of the financial crisis, despite our net-zero objective.

Finally, when the primary objective is raising revenue, my own experience in dealing with Budgets suggests that it is much better to focus on the major taxes, where the consequences are reasonably predictable. The impact of changes to taxes on wealth and inheritance are very difficult to predict. They are largely about incentives and fairness, and they are much better handled under the heading of tax reform than as part of a tax-raising Budget.