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

Lord Bridges of Headley Excerpts

Friday 25th April 2025 Lords Chamber

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[Lord Bridges of Headley]

That this House takes note of the Report from the Economic Affairs Committee National debt: it’s time for tough decisions (1st Report, HL Paper 5).

[Lord Bridges of Headley (Con)]

My Lords, it gives me great pleasure to open this debate. Let me start by thanking everyone who has come in on this lovely sunny day, and, in particular, the members of the committee for their hard work and commitment over the years in which I was chair. Sadly, I no longer chair the committee, but I have passed the baton to the very capable hands of the noble Lord, Lord Wood, who we look forward to hearing from later. Before I move on, I thank the committee’s clerks, both past and present, our policy adviser and our specialist adviser, Isabel Stockton, and all those who gave evidence to this report. This report showed this House, as I think of it, at its best. It was a great cross-party effort—a team effort—and I thank everyone for all that they did.

The sustainability of our national debt is, in my mind, a central issue of our time. How we manage it and ensure that it remains sustainable touches on almost every aspect of our economy and our way of life. Between the turn of the century and March last year, public sector net debt, excluding the Bank of England, trebled to just under 100% of GDP. This rise was turbocharged by successive Governments’ responses to the financial crisis, to Covid and then to the energy shock. In the past, such a sustained increase happened only during wartime. This time, as our debt grew, so did the conspiracy of silence about it. None of the major parties wanted to confront head-on the economic and social consequences of this rising tide of red ink. Therefore, at the start of last year, the Economic Affairs Committee decided to give this issue the attention it truly deserved by asking a very basic question: how sustainable is our national debt?

Before I go any further, let me define what the committee meant by sustainability. Debt sustainability depends on tax and spending policies which credibly align with expectations for economic growth and the cost of borrowing. It is the trajectory, rather than the level of debt, and our ability to service our debt which should be the principal considerations when assessing debt sustainability. A debt level risks becoming unsustainable if there is an insufficient buffer to absorb future economic shocks, or if a Government’s approach to fiscal policy creates a long-term trajectory of increasing debt service costs.

Looking at our nation’s debt through this prism, our findings paint a very dark picture of our nation’s finances. Our core conclusion was that, without an appropriate fiscal policy that addresses the challenges the UK faces, there is a risk of the debt becoming unsustainable. We stated that if we wish to maintain the level and quality of public services and benefits that we have come to expect, we face a choice: taxes will need to rise, or the state will need to do less. Addressing this will demand clarity as to the responsibilities and role of the individual versus that of the state. Muddling through is not an option. If this choice is ducked in this Parliament, the UK risks being on a path to unsustainable debt.

Why did we come to this conclusion? First, the trends that helped us manage and bring down our debts in the past have been thrown into reverse. We now face what I call the Ds: higher defence spending; the pressure of demographic change; decarbonisation and the green transition; dependency, especially around labour market inactivity and welfare costs; and, of course, the cost of servicing debt itself.

Another reason for our concern was growth. If real interest rates exceed the growth of national income, there must be a primary surplus. In other words, government expenditure, net of interest payments, must be less than government revenue to prevent the debt ratio rising. With growth anaemic, we heard evidence of how the UK risks being sucked into a debt trap. Furthermore, we pointed out that while high net migration has boosted GDP growth, it cannot be the solution to debt sustainability, for it has made little impression on GDP per head.

The third reason for our concern was the structure of our debt. Successive rounds of quantitative easing have seen long-term debt exchanged for short-term debt, and a greater proportion of debt is index-linked and held by overseas investors. This has made the cost of servicing the UK’s debt more sensitive to rises in interest rates and inflation, as well as to sudden changes in investor sentiment. Given today’s geopolitical risks, the Government need a larger fiscal buffer if they are to weather future economic shocks.

Finally, we were concerned about the fiscal rules. We said that rules should hold Ministers accountable for reducing debt steadily, as a proportion of GDP, over time. The concept of a rolling target for debt creates a misleading impression as to the true state of the public finances and hides the need to take difficult decisions to secure debt sustainability in the medium to long term.

Since the report’s publication, we have had a Budget, we have had a Spring Statement, we have seen the impact of other challenges created by another D—this time Donald Trump—and we have received the Government’s written response to our report.

In that response, for which I am most grateful, the following passage stuck out. Let me quote it:

“The government agrees with the … Report that difficult decisions are required to avoid the UK’s debt being on an unsustainable path. The Budget took the necessary difficult decisions to put the public finances on a sustainable path—setting realistic plans for public spending while raising revenue—to create the conditions for growth. This will be supported by the government’s new fiscal rules”.


Let us dissect this passage. First, on the difficult decisions, tax as a share of GDP is going to rise to an historic high in 2027 and remain at that level for the rest of this Parliament. I do not think any of us would dispute that raising taxes to an historic high counts as a difficult decision, but has it put our public finances on a sustainable path and is this course of action creating growth, as the Chancellor’s letter stated?

Let us start with debt sustainability. On Wednesday, the latest figures showed that net debt as a percentage of GDP remains at levels last seen in the 1960s. Looking ahead, the OBR shows that, from 2025-26 to the end of the decade, debt will rise by an average of almost £11 billion more every year. Although public sector net debt is forecast to fall a fraction next year, it will then rise back to 96.1% in 2029-30. Obviously, the Government have changed the definition of debt that they use for their fiscal rules, but, as the OBR states, whichever of the four definitions of debt one uses, all four show debt remaining at historically high levels within the forecast period and show debt to be higher in 2029-30 than in 2024-25.

Next, are the Government creating the conditions for growth, as the Chancellor states? Growth largely stagnated over the second half of 2024 and is now forecast to be 1% this year—half of the October forecast—and that forecast could itself easily be blown off course. I make one point: were bank rates and yields on gilts issued across the forecast both 0.6% higher—this is less than the 1% volatility in 10-year gilts since early October—that alone would be enough to eliminate the minuscule headroom that the Government have to meet their fiscal mandate.

On tax and spending, the OBR assumes that the fuel duty indexation and the reversal of the 5p cut will take place and that unprotected departments’ budgets will be cut. It flags that the proposed welfare reforms are “very uncertain” and that previous reforms have saved much less than previously expected. Given all these uncertainties, the probability of meeting the fiscal target is 54% and the probability of meeting the debt target is 51%.

That brings me to the fiscal rules. The debt target is pinned to the third year in the forecast—a year that continuously moves forward. The Chancellor’s letter states that this

“avoids the need to make sharp policy adjustments in response to small changes in the forecast or economic shocks”.

I do not buy this argument for rejecting our proposal, which was for debt to hit a fixed target in a given year

“unless there are exceptional reasons”.

In other words, economic shocks would be catered for. If small changes in the forecast mean that the Government cannot meet their rule, this suggests that their plan failed to build in a fiscal buffer.

I highlight this key point: the committee proposed that the fiscal framework should show whether the Government have a sufficient fiscal buffer to withstand an economic shock. The Government’s plans show why this is so badly needed. Look at the buffer for meeting the debt rule—it has a margin of just 0.4% of GDP, or £15 billion, in 2029-30. This is not a fiscal buffer; it is a fiscal wafer, so thin and fragile that it will snap at the slightest tap, let alone an economic shock.

The central question in my mind is not whether the Government have taken tough decisions on our public finances but whether the Government have taken the right tough decisions. Yes, the world has changed since we wrote the report, but, back in September, we knew that defence spending was going to have to rise; we knew the pressures that our public services were under; we absolutely knew that, in a volatile world, we had to build up a fiscal buffer to protect us from unforeseen shocks. We knew this, and the committee said so in the report.

I would like to hear from the Minister some answers to some very basic questions about the Government’s approach. First, given that the Chancellor wrote to me on 15 November, saying that her Budget had put our finances on a sustainable path, why did she then have to rewrite her plans in the Spring Statement, just 131 days later? Next, given that the Chancellor wrote in her letter that her Budget had created the conditions for growth, why has the growth forecast been halved? Thirdly, given that the Chancellor has assured us that her Budget has taken the tough decisions to put our finances on a sustainable path and that she is not going to change her fiscal rules, will the Minister repeat the Chancellor’s assertion that she is

“not coming back with more borrowing or more taxes”?

I have a sneaking suspicion that we will not get clear answers to these questions, confirming my fears that, as our report said, we will continue muddling through and not being honest about the scale of the challenges that we face and the impact that they will have on our tax and spending policies, and therefore the risk of our debt becoming unsustainable will continue to grow.

--- Later in debate ---

[Lord Bridges of Headley (Con)]

My Lords, I thank all noble Lords for an excellent debate and their fantastic speeches. The debate has shown this House at its very best and shown why our committee is able to produce such hard-hitting reports. I thank all noble Lords for their very kind words about me, which were entirely unwarranted—I have had enough compliments to last me for several years.

From this debate, it is clear that it is utterly unavoidable that we are living in a world of extreme change and high volatility, that is becoming more dangerous by the day. That said, what has not changed—a number of noble Lords made this point—are the enormous trends and challenges we face, the Ds: debt, demographics, decarbonisation, dependency and defence. All these challenges were in the report. They are extreme challenges. As my noble friends Lord Forsyth and Lord Lamont, and the noble Lord, Lord Razzall, said, these are challenges that merit much more debate than two hours on a Friday morning.

Our approach to them raises enormous questions: ones that fall into the immediate category—those about policy and process—as well as far more fundamental questions of philosophy and belief. Let me briefly touch on what we have covered this morning. On the policies and the processes, as a number of noble Lords said, we face a dire problem with growth and productivity. As my noble friend Lord Forsyth quite rightly said, the responsibility of that falls on this side of the House as much as on anyone else, but we must confront and grapple with these challenges.

Noble Lords spoke about investment in infrastructure. The noble Lord, Lord Horam, spoke about the problems of energy. The noble Lord, Lord Weir, spoke about planning. My noble friend Lord Moynihan of Chelsea spoke about the crushing tax burden and our whole tax system. The noble Baroness, Lady Kramer, spoke about trade. Each one of those is a massive issue. Then there is the fiscal rule, which, as the noble Lord, Lord King, so rightly said, is Augustinian in nature.

Another enormous issue is about how we tackle and treat the concept of borrowing for investment—and today noble Lords could see the kind of debate we have in the Economic Affairs Committee between the noble Baronesses, Lady Wolf and Lady Kramer, and the noble Lord, Lord Davies. There is the question of whether our entire fixation on fiscal rules is overwhelming us and whether we should actually look at the substance of fiscal policy, as my noble friend Lady Noakes and the noble Lords, Lord Macpherson and Lord Burns, said.

Of course, an entirely new approach could have taken: the debt break approach of the Germans and the Swiss, to which the noble Lord, Lord Griffiths, pointed. That leads us on to the role of the OBR. Are we assigning too much importance to the OBR and has it grown too big for its boots?

[Noble Lords]

Yes.

[Lord Bridges of Headley (Con)]

We hear some answers here from our Front Bench, and my noble friend Lord Howell discussed that point. Then there are the further pressures we will face: the noble Lord, Lord Browne, spoke about defence and welfare, and the noble Baronesses, Lady Cash and Lady Grey-Thompson, tackled the intergenerational issues. Each of those points merits debate in itself and deserves to be heard.

What we did not hear today was assurances that taxes will not need to rise further; instead, we heard that the Government are sticking to their course, that they believe that debt is on a sustainable path and that we are able to weather the storm we are in. I dearly hope that I am proven wrong, for I fear that we lack a credible strategy for the problems we face.

That brings me on to the bigger, more fundamental problem of philosophy and belief. If we truly want to tackle these challenges, we need to have a debate about the role of the state versus that of the individual. It boils down to a simple question: do we trust the state to do more to tackle these challenges? In which case, taxes may inexorably have to rise. If so, what will be the impact on our economy, competitiveness and growth? Alternatively, do we take a different course, and do we trust the people? If so, what does that mean for the social contract? Where does the boundary lie between the responsibilities of the state and the individual?

These are enormous questions, which this debate on our report begins to open up. My deep concern is that we will continue to kick the can down the road and not have that debate, because all these challenges—all those Ds—come head-to-head with the other, massively bigger D: the D of democracy. Having this debate—and confronting these challenges—raises the enormous and, at times, tough and unpopular decisions and difficult trade-offs that have to be faced. However, if we do not have this debate, and we continue to try to tackle these problems piecemeal in an incoherent way, I fear that not only will the solutions fail but we will lack the legitimacy to take the action required. As the noble Lord, Lord King, said, we owe it to our children and grandchildren to muster the courage and have the honesty to confront these challenges now, so as to put our debt on a sustainable path before it becomes too late.

Motion agreed.