Balanced Budget Rule

Debate between Lee Rowley and Alex Chalk

Wednesday 23rd January 2019 Westminster Hall

[Lee Rowley]

Before we went to vote I was talking about the moral case for low debt and ensuring that the servicing of that debt was as minimal as possible, to retain and support our ability to ensure economic activity in the future. It was not for nothing that Herbert Hoover intoned sarcastically:

“Blessed are the young, for they shall inherit the national debt.”

In this context, perhaps we can bestow a few less blessings on them in the future.

Putting aside the morality of debt, the key issue, which should drive all politicians regarding the accretion of Government debt, is the year-on-year cost of servicing and holding it, as mentioned earlier. The proponents of unfunded spending may highlight how the markets are not that concerned with relatively high borrowing so long as it can be funded. That may be the case. Let us hope, for all of our sakes, that we do not enter a period of high interest rates in the coming decades when national debt is to be rolled over.

The opportunity cost of that funding, on an ongoing basis, is much less understood in this place than in public discourse. It comprises a tax, year on year, on today’s generation for yesterday’s spending. Unlike the total debt to GDP ratio, which has oscillated wildly in the last century due to wartime spending, the cost of servicing the UK’s debt has been on an upward trajectory for the last century. Adjusted for inflation, the cost of servicing that debt has risen from an average of £12 billion per annum between 1900 and 1960 to nearly £30 billion at the turn of the 21st century. Since 2009, that average has hit £43 billion every year. In total, since 1900 the UK has spent something like £2.5 trillion just on servicing its debt. About half of that has been spent since I was born—I still like to think of myself as being relatively young.

The bad news is not likely to stop there. With the continuing running of deficits until well into the 2020s, the annual cost of servicing that debt is projected by the Office for Budget Responsibility to hit more than £50 billion by the start of the next decade. In this Parliament alone, debt servicing costs are projected to be about a quarter of a trillion pounds over the five years. The sums are huge and growing. They represent a significant opportunity cost to the UK as a whole.

[Alex Chalk (Cheltenham) (Con)]

My hon. Friend is making a powerful point. To put it into sharp focus, does he share my concern that the annual cost of servicing the United Kingdom’s national debt is more than we spend on schools? As a matter of morality, we need to keep debt under control so that we can truly allocate resources where they are most valued.

[Lee Rowley]

I could not concur more with my hon. Friend, as I will address in my next paragraph. Putting this into context, about 8% of all current Government spending is diverted towards debt servicing. In 2015, that made interest payments the joint fourth largest proportion of spending by the UK after health and welfare, and on a par with defence. Spending on education, the police and transport pales in comparison with the budget allocated to debt interest. That budget could be used, as my hon. Friend has just outlined, for myriad other more socially useful activities, such as paying for a hospital to be built every four days, or for approximately 2,500 nurses, police or teachers to be hired every day throughout the year. For those of us with a more centre-right political outlook, the £45 billion spent on interest costs in 2015 could even have been used to reduce the size of the state through tax cuts, perhaps as large as 8% or 9% in the standard rate of income tax. If the populace actually knew that such a significant chunk of the taxes they paid every year was being used to pay for spending chalked up 20, 30 or 50 years ago, would they be content doing the same or worse for their children, given the sacrifices and opportunity costs involved?

We know what the problem is, so why do we not just do something about it? Why do we need a legislative solution for this issue? The problem is that we as a country are not that good at stopping adding to our debt. Our Labour friends—who have temporarily deserted the Chamber—have a tendency to spend money without a huge amount of regard for the implications. My party usually ends up having to clean up the mess. Even on my side, there are not insignificant number of people who cannot resist the temptation to spend when it comes down to it.

Our parliamentary system and representative democracy are excellent at pushing the cause of individual spending requirements, many of which, I do not contest, are no doubt noble. Yet there are few people who will exercise proper restraint or promote proper fiscal responsibility to ensure that all of these myriad pots of money are truly paid for. It is always tomorrow’s problem. Mañana, mañana, as they say. The numbers show just that: over the last century, the United Kingdom has consistently increased its national debt and its deficit spending. Both in absolute terms and as a proportion of GDP, the UK’s debt burden has grown significantly since the turn of the 20th century. The recent political consensus in the UK demonstrated a clear disregard—if we are honest—for the consequences of deficit spending.

Prior to the second world war, deficit spending tended to be closely correlated with war and national defence. In more than half the years between 1900 and 1939, the UK ran an absolute surplus, including during much of the late 1920s, during economic crisis. Since 1945, however, the achievement of a surplus in the UK’s national spending has been relatively rare. Only 13 out of 71 years saw the deficit being reduced, and on only two separate occasions—the late 1980s and the late 1990s—has the UK run surpluses for more than a couple of years at a time.

If all that sounds like one long criticism, it is not intended that way. It is just a statement of fact. Whether poverty or plenty, feast or famine, there is one almost universal constant: the Government spend more than they take in. That is not unique to the United Kingdom, but a feature of western democracy: red ink reigns supreme. The main variable in western liberal democracies is whether they overspend by a little or a lot. France has never run a Government surplus as a proportion of GDP since the 1970s, nor has Italy. The United States has managed to do so only once since 1960. Even Canada, one of the more enlightened in tackling public debt, has only managed to run surpluses in less than one third of financial years since the 1970s. The Maastricht protocol on excessive debt procedure says that countries should not exceed a 3% borrowing ceiling. Just think on that for a moment: there is a protocol that automatically sets an expectation of overspending—just that it is not excessive. And we wonder why debt has significantly increased in most western democracies over the past 30 years. There is an urgent requirement, over the long term, to address this inherent deficit bias in democracies.

The idea that we need to take more drastic legislative solutions is not that new; it is just that we have never properly applied it to national spending before. Sure, the Government have their charter of budget responsibility and an equivalent office creating the data and watching what is happening. Yet the charter requires people only to identify that they are changing policy. It does not really hold people to account or limit them.