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

Baroness Manzoor Excerpts

Friday 25th April 2025 Lords Chamber

[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.