Fortifying the Fiscal Framework (Economic Affairs Committee Report)

Baroness Neville-Rolfe Excerpts

Tuesday 3rd November 2026 Grand Committee

[Baroness Neville-Rolfe (Con)]

My Lords, I thank the Economic Affairs Committee for producing this excellent report and the noble Lord, Lord Liddle, for his enjoyable and historically-focused introduction. As he said, we are lucky to have two Permanent Secretaries, the noble Lords, Lord Burns and Lord Macpherson, speaking in the debate. I also want to pay tribute to the noble Lord, Lord Wood of Anfield, for his work in chairing the committee and congratulate him on the positive start he has made as FCDO Minister. I look forward to the Minister’s response to the interesting points made by my noble friend Lord Redwood on different macroeconomic targets, 2% inflation and 2% growth, and on the quirks that he identified in national insurance funding and the ownership of bonds by the Bank of England, a theme that was also picked up the noble Lord, Lord Sikka.

His Majesty’s Opposition broadly support the report’s conclusions. This debate is exceptionally timely coming, as it does, in the immediate aftermath of an unsatisfactory Budget. Let us quickly come to the essence of the matter, which is to be found in the final paragraph of the report’s summary:

“On current tax and spending settings, the UK is on a path to unsustainable debt levels”.


There we have it, starkly put. Noble Lords may ask if the position has been affected by the recent Budget? The answer is “not much”. This Budget can only be described as a missed opportunity. However, since the necessary decisions have been put off—yet again—the position has deteriorated somewhat since the Committee’s report was drafted.

In short, the recent Budget presented 108 tinkerings to the Commons, while probably the most pressing and ominous shadow facing us as a country went unaddressed. When the markets decide, as at some unknown time they will do, that enough is enough and the prospect of debt being repaid eventually has become too small to countenance, 10-year plans and other gimmicks will not cut the mustard. Very unpleasant things will happen. Just look at the experience of another Healey, Denis, Lord Healey, in 1976.

With the level of national debt close to 100% of GDP, a responsible Government would be planning to move as quickly as possible to a position of surplus, not making up excuses for doing nothing about it. My noble friend Lord Howell of Guildford quoted the £3 trillion debt figure on this point, which was echoed by the noble Lord, Lord Londesborough, who said it had trebled over the last 15 years.

I turn to two lesser, but still important, matters. The first is the committee’s conclusion, echoed in discussion, that the current debt rules can be gamed. As noble Lords will know, the existing rule requires debt to fall as a proportion of GDP only in the final year of a rolling forecast, meaning that debt can rise substantially in the preceding years, while the Government continue to promise a reduction. As the forecast period moves forward, this may never materialise. In other words, a Government can comply with their fiscal rules year after year, even as the national debt continues to rise. The committee recommended an additional debt target, requiring debt in the third year of the forecast to be lower than in the first. This is an interesting and sensible proposal that warrants serious consideration, as the noble Lord, Lord Razzall, said.

The Government have rejected this recommendation. I would be grateful if the Minister could explain why. How do the Government consider that the present debt rule provides a meaningful guarantee of fiscal discipline, when it is possible to meet that rule without achieving a genuine reduction in debt over the forecast period? The current system is satisfied if you predict a fall, rather than measuring one that has actually taken place, resulting in an upward spiral. Is that the Government’s plan? I add that the OBR is unlikely to go along with that indefinitely. I agree that Jonathan Haskel will be a respected new chair, and I am sure we all miss his father, Lord Haskel.

I agree with the noble Viscount, Lord Chandos, that the long list of changes in the fiscal rules in Appendix 4 is unsettling. I remember presenting a similar annexe for our Built Environment Committee report on demand for housing, but that listed the large number of Housing Ministers that there had been. These long lists are worrying.

A further risk arises from the growing use of public financial institutions. Under the Government’s chosen debt measure, borrowing can appear less burdensome where it creates a corresponding financial asset. Ministers must ensure that PuFins, such as the British Business Bank, do not become a means of moving borrowing outside the effective constraint of the fiscal rules, while leaving the public exposed to the risk of future losses.

My second point concerns the so-called fiscal headroom. The current Budget rule requires receipts to cover day-to-day public spending, with a deficit of no more than 0.5% of GDP permitted in 2029-30. Once that year becomes the third year of the forecast, the current Budget must be forecast to be in surplus in the third year of the rolling forecast period. Fiscal headroom is the estimated margin by which the Government are forecast to meet that rule. It is intended to provide some protection against adverse changes in the economy, higher spending, lower tax receipts and the ordinary uncertainty inherent in forecasting. Of course, if there were a serious plan to reduce the deficit over time this would be of less importance—but, for now, it is important. Following the Budget, the Government now have just £15 billion of headroom, down from £24 billion in the spring forecast and contrary to the recommendation in paragraph 40 of the report, which the noble Lord, Lord Razzall, also supported.

Indeed, the OBR estimates that the Government have only a 56% probability of meeting that rule, which I find extraordinary. We face a time of considerable economic and geopolitical uncertainty, while the Government have left themselves with a margin for error which could be eliminated by a relatively modest deterioration in the forecast. The OBR has noted, for example, that a 1 percentage point change in gilt yields and bank rate expectations across the forecast could change medium-term borrowing by approximately £16 billion. That single risk is greater than the Government’s entire £15 billion margin against the current Budget rule.

Further, the Government’s forecast assumes that the extraordinary post-pandemic growth in health-related benefit caseloads will moderate significantly. The OBR forecasts that annual spending on health and disability benefits will nevertheless rise from £86 billion in 2025-26 to £120 billion in 2031-32, an increase of almost £35 billion under its central forecast. However, if incapacity and disability caseloads continued to rise at their post-pandemic rates, the OBR estimates that welfare spending in 2031-32 would be approximately £25 billion higher than in its central forecast. That additional expenditure is for one year alone. The fact is that just one assumption in one department could eliminate the headroom the Chancellor has left himself.

Nor is welfare the only area of concern. We have growing commitments to defence, considerable pressures across our health and social care systems, and a prison and justice system that requires substantial investment to meet its existing obligations. These are not some remote or unforeseeable possibility. That, to me, is the central problem. If our fiscal rules can be breached by the continuation of existing spending trends, an ordinary forecasting revision or a relatively modest economic shock, what confidence can we have that those rules are being met today?

This brings me to the wider economic picture presented in the Budget. The OBR forecasts real growth of just 1.2% this year and 1% next year, with no real earnings growth in 2027 or 2028. This is too low. I agree with the noble Lord, Lord Liddle, that we need a simpler tax and welfare system and need to do more on public sector productivity. However, I do not agree that we should reopen Brexit, ushering in years of more uncertainty for business and citizens.

The situation is worrying. May I give noble Lords one or two more figures? Borrowing remains at approximately £133 billion this financial year, debt is expected to reach around 97% of GDP, and the tax burden is forecast to reach a record 38.6% of GDP, as we heard from the noble Lord, Lord Bilimoria. Meanwhile, the cost of servicing government debt has risen from £39 billion in 2019-20 to £109 billion in 2025-26 and is forecast to reach £160 billion, which is 4.2% of GDP, by 2031-32. 

These are enormous sums increasingly being spent on servicing debt. They are burdens on our children, grandchildren and later generations. That is a reason, indeed, for a greater focus on the OBR’s annual risks and sustainability report, as recommended by the committee. The noble Lords, Lord Liddle and Lord Bilimoria, drew our attention to the enormous figure for the 2070s if markets were to allow that, and the noble Baroness, Lady Wolf of Dulwich, and the noble Lord, Lord Macpherson, rightly praised this annual report by the OBR. I very much agree that this should be given a higher profile.

Despite the historically high level of taxation, as I said earlier, the Budget contains no plan to reduce the deficit. That is why I welcome the committee’s emphasis on the long-term sustainability of the public finances, rather than simply considering the Government’s compliance with an arbitrary target in a particular year. Fiscal rules matter, independent forecasting matters, and the credibility of our public finances matters enormously—not simply to financial markets but to every household and business.

We all know why the Government are not dealing properly with this huge challenge: their Back-Benchers will not face up to the actions necessary to do so. As the committee has effectively demonstrated, meeting the rules on paper is no substitute for achieving those objectives in practice. I fear that the Budget has illustrated precisely the weaknesses which this excellent report identifies. We will return to that in our debate next week—by then, I will have seen the Keynes play mentioned by my noble friend Lord Howell of Guildford.