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

Baroness Noakes Excerpts

Friday 25th April 2025 Lords Chamber

[Baroness Noakes (Con)]

My Lords, I was a member of your Lordships’ Economic Affairs Committee under the excellent chairmanship of my noble friend Lord Bridges of Headley when this report kicked off, but the annual musical chairs of Select Committees saw my chair move to another committee before the report got seriously under way.

Since the global financial crisis, all Governments have normalised high levels of debt and focused on short timeframes. The report correctly calls out the lack of focus on medium to long-term debt sustainability, and we urgently need this to be a government priority. If we look back to the 1970s, when the debt-to-GDP ratio came back below 50% after about 60 years, there was no sophistry around whether R was greater or less than G, or whether tipping points could have been predicted; it was just accepted that keeping the debt ratio down to a sensible level was an important thing to do. There was not much science to Gordon Brown’s first iteration of his fiscal rules in 1997, which set the debt ratio at what he described as a “stable and prudent” level of 40% of GDP. It did not matter that the 40%—or indeed the EU’s 60%—could not be proven with intellectual rigour. These were rules of thumb which conveyed a sense of sound financial management.

These debt targets provided a sustainability underpin, as they allowed economies to absorb inevitable shocks. However, sustainability now seems to mean absorbing those shocks by being able to borrow more: as long as we keep borrowing, we will be okay. That is the approach to balance sheet management that brought Thames Water to its knees. Operating just the right side of a tipping point is a gamble, and it is one small shock away from financial disaster.

The prudent rules were thrown out of the window after 2008, and all iterations after that point, including that of the current Government, assume, in effect, that high levels of government debt are normal. These rules have allowed successive Governments to carry on spending as if the only issue were a few basis points on the trajectory of debt in a few years’ time. We currently have the crazy spectacle of debt levels hovering around 100% and the Chancellor making microadjustments to her fiscal strategy every time the OBR produces another forecast that eats into her tiny headroom. Changing the debt measure to one based on net financial liabilities is just another layer of smoke and mirrors. There is no plan to get debt levels seriously trending back towards pre-global financial crisis levels, and, equally, no plan to cope with debt hurtling towards 300% of GDP as demographics and other long-term pressures take their toll.

The Government are betting the farm on getting growth back into the economy, but it is going to take levels of growth way beyond those we have seen in recent years if debt is to trend down convincingly towards much lower levels. No one outside the Treasury bubble thinks that the growth mission has any traction whatever, and most government policies are pulling hard in the other direction. I agree with the Economic Affairs Committee that it is time for tough decisions, but the report should have been more explicit about what “tough” really means. The complacent government response to this report shows that the Government are completely blind to the problem.