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

Lord Lamont of Lerwick Excerpts

Friday 25th April 2025 Lords Chamber

[Lord Lamont of Lerwick (Con)]

My Lords, it is a pleasure to follow the noble Lord, Lord Burns, not for the first time in my life. It is also a pleasure to congratulate the noble Lord, Lord Bridges, on his incisive speech today and his excellent chairmanship of the committee that produced this report.

Despite the time lag, this debate is timely in another sense because of the IMF’s warning this week that global debt—that of all Governments in the world—is likely on track to exceed 100% of GDP. It said that is a risk to the financial system, so this debate is perhaps not just about the UK; it could be about many countries, including the United States of America. Nevertheless, I think many people were surprised in 2024 when the OBR came out with the projection, on certain assumptions, that debt to GDP in this country could rise to 270% in the 2070s. That seems an astonishing increase and would plainly pose a threat to sustainability. How could this be?

The reason, as has already been said by the noble Lord, Lord Bridges, is that in 2020 we saw one of the largest surges in debt since the Second World War. The UK debt-to-GDP ratio was below the G7 average in 2001; it then grew faster and is now forecast by the IMF to be above the G7 average in 2029. The problem is not just the ratio but the structure and the maturity of our debt, and it has also been, as the noble Lord, Lord Bridges, said, that this Government and previous Governments have tended to react to shocks by spending more money. Public expenditure and borrowing have increased, then public spending comes down but not to the pre-crisis level. That is the story of Covid and the response to the financial crisis.

Why is it that we have this threat to our sustainability? One reason is interest rates. Interest rates are unlikely in the future, many people think, to be as low as they have been in the recent past. It was the very low nature of interest rates, particularly with quantitative easing, that got us into this situation in the first place. Nobody knows whether interest rates are going to be higher in the long run, but many people think that is the case—they are higher today than they were. As the noble Lord, Lord Liddle, said, if the interest rate on government debt is higher than the growth of GDP, the debt-to-GDP ratio will increase in the absence of a primary surplus. I do not think the Government’s fiscal rules—perhaps the Minister will comment on this—provide for a primary surplus.

The funding of the existing stock of debt is a substantially greater burden today than it has been in the past. In the 2010s, debt could be stabilised while running a government deficit of over 2% of GDP. Today, because of higher interest rates in money and real terms, you need a primary surplus greater than 1% of GDP in order to stabilise the debt ratio. The Government will say they are aiming to achieve growth—that is their “get out of jail” card—but can they actually get a rate of growth that is higher than the interest rate? They may increase the growth rate but find that interest rates have increased further, and so they are not able to escape from the challenge that confronts them.

Then there is the significant risk of an ageing society. We are living through a period that is unique in world history. By 2070, one person in work will be equalled by one person in retirement. This poses huge problems fiscally. The dependency ratio will go up. The Prime Minister of Japan, a country further along this road of an ageing society than we are, said the other day:

“Japan is standing on the verge of whether we can continue to function as a society”.


These words are chilling, and we should reflect on them. The fiscal challenge of an ageing society is massive. There are no easy answers. As the noble Lord, Lord Bridges, said, we need to make some tough decisions. Nothing is inevitably going to happen, but if something looks unsustainable, the chances are that it will prove unsustainable, and that is the risk we face.

--- Later in debate ---

[Lord Livermore (Lab)]

I absolutely hear what the noble Lord says and will of course pass those comments on.

I congratulate the Economic Affairs Committee on its report and the committee’s chair, the noble Lord, Lord Bridges of Headley, on his excellent opening speech, which achieved the extraordinary feat of summarising in just 12 minutes such a wide-ranging and in-depth report. As the noble Lord, Lord Forsyth, just mentioned, I had the privilege of serving on the Economic Affairs Committee under his chairmanship, so I know the amount of time and effort that go into producing reports such as this. As the Chancellor did in her response to the committee last November, I thank all members of the committee and the committee staff for producing this thoughtful and considered report.

As the report rightly recognises, and as the noble Lords, Lord Bridges, Lord Razzall, Lord Lamont and Lord Londesborough, highlighted, the UK’s national debt has risen rapidly over recent years, from around 64% of GDP in 2010 to over 98% in August last year, the highest level since the 1960s. Latest figures to the end of March this year show public sector net debt at 95.8% of GDP, which still remains high by recent historical standards. As the noble Baroness, Lady Wolf of Dulwich, said, debt interest payments alone now stand at £105.2 billion this year—that is more than we allocate to defence, the Home Office and justice combined.

The title of the report speaks of “tough decisions” to prevent national debt from being on an unsustainable path. The Government agree. That is why in the Budget last October, we took action to fix the foundations of our economy and repair the public finances, as the noble Lord, Lord Horam, observed. That included repairing—and noble Lords would expect me to say it—the £22 billion black hole in the public finances that we inherited. That meant making difficult choices. They were not easy decisions, but they were the right decisions.

Since the committee’s report was published in September last year, and then the Budget in October, as many noble Lords have rightly said today, the world has changed further significantly. As the noble Lords, Lord Burns and Lord Forsyth, and the noble Baroness, Lady Kramer, observed, new tariff barriers are now disrupting global trade. Borrowing costs have risen in all major economies; volatility in global markets has seen bond yields rise, including in the US; and growth has been downgraded across the world, with the IMF now predicting global growth to be 0.5% weaker than it was expecting as recently as January.

Of course, the UK has not been immune to these challenges. As the noble Lord, Lord Bridges, said, the OBR downgraded the UK’s growth forecast for this year at the Spring Statement, reflecting the worsening global outlook, and earlier this week the IMF did the same. In this context, maintaining sustainable public finances is a shared challenge for major economies right across the globe.

Against this backdrop, the decisions we took in the Budget to fix the foundations look ever more necessary. Imagine if we were now facing this global economic uncertainty with that black hole still in the public finances. What confidence would that have given to the Bank of England to cut interest rates? What signal would that have sent to investors about the stability and resilience of our economy?

The OBR will produce an updated forecast in the autumn, and despite the kind invitation of the noble Lord, Lord Bridges, I will not speculate now on the impacts of recent global events on the fiscal outlook ahead of that. But, as the committee’s report rightly concludes, global instability underlines the need to put debt on a sustainable trajectory and build resilience to future shocks. It also reaffirms the importance of stability as the foundation of our approach.

That is why, as the noble Lord, Lord Bridges of Headley, asked about, in the Spring Statement we again took tough decisions so that we continued to meet our non-negotiable fiscal rules, even when they were tested. That meant restoring in full the headroom against the stability rule, maintaining a surplus of £9.9 billion in 2029-30. It is why we continue to work with international partners, as the Chancellor has done at the IMF spring meetings this week, to make the case for free and open trade.

The noble Lords, Lord Bridges, Lord Burns and Lord Lamont, and the noble Baronesses, Lady Noakes and Lady Cash, all mentioned the importance of economic growth. It is why we are doubling down on our growth agenda of stability, investment and reform, including £13 billion of new capital spending in growth-generating projects announced at the Spring Statement, as well as support, for example, for a third runway at Heathrow and a new Oxford-Cambridge growth corridor, as my noble friend Lord Liddle spoke about.

As the noble Lord, Lord Griffiths, mentioned, this week’s IMF report makes it clear that the “landscape has changed” and has downgraded the growth prospects of all G7 nations. However, the UK remains the fastest-growing European G7 country, and the IMF has recognised that this Government are delivering reforms which will drive up long-term growth in the UK. Our upcoming modern industrial strategy, mentioned by the noble Baroness, Lady Kramer, and spending review will say more about how we intend to drive long-term sustainable investment and boost productivity.

The committee’s report includes a number of key recommendations, central to which is the committee’s call for an “overhaul” of the UK’s fiscal framework. The Government’s thinking was clearly along very similar lines, and in the Budget in October, we implemented the most significant change to the fiscal framework since 2010—as my noble friend Lord Wood said. I congratulate him on becoming the new chair of the Economic Affairs Committee, and I look forward to working with him.

The new framework we have put in place is designed to support long-term growth, by ensuring the UK’s debt is put on a sustainable path and by prioritising sustainable public investment. First among these reforms are the Government’s non-negotiable fiscal rules, the embodiment of our unwavering commitment to economic stability. The first rule, the stability rule, moves the current Budget into balance, so day-to-day spending is met by revenues, and ensures that the Government will borrow only for investment, which the noble Lord, Lord King of Lothbury, questioned. This rule differs from the previous Government’s borrowing rule, which targeted the overall deficit rather than the current deficit and created a clear incentive to cut investment that is detrimental to growth, as the IMF has made clear.

The noble Lord, Lord Lamont, asked about the primary surplus, which the OBR forecast to move from a deficit of 1.9% of GDP in 2024-25 to a surplus of 1% by 2029-30. The Government understand and respect the argument made by the committee in respect of the fifth year. However, the Government’s position is that targeting the third year of the forecast provides a strong anchor for fiscal sustainability, while providing the necessary flexibility to respond to macroeconomic shocks in the short term.

Our approach is supported by the OECD, which recommended that the UK should

“shorten the time horizon of fiscal rules”.

Similarly, the Institute for Fiscal Studies has made it clear that a fiscal rule targeting debt falling in the fifth year of the forecast is

“more arbitrary and gameable than most”.

The second rule—the investment rule—ensures net financial debt falls as a proportion of GDP. This keeps debt on a sustainable path, while allowing the step change in investment our economy needs.

The noble Baronesses, Lady Wolf of Dulwich and Lady Noakes, and the noble Lord, Lord Forsyth, raised the issue of definitions. Net financial debt is an accredited official statistic that has been measured by the Office for National Statistics since 2016 and forecast by the Office for Budget Responsibility since that date. It recognises that government investment delivers returns for taxpayers by counting not just the costs of investment but the benefits.

The noble Lords, Lord Burns and Lord Howell of Guildford, spoke about the importance of investment to economic growth, as did my noble friends Lord Wood, Lord Liddle and Lord Davies of Brixton. As a result of this second fiscal rule, we were able to increase capital investment by over £100 billion in the Budget in October, boosted by an additional £13 billion announced at the Spring Statement. The OBR has confirmed that we are meeting both fiscal rules, and borrowing is forecast to fall in every year of the forecast—from the 5.3% of GDP that we inherited to 2.1% in 2029-30.

In addition to our fiscal rules, the Government’s Charter for Budget Responsibility contains a further serious of measures to improve certainty, transparency and accountability in our fiscal framework.

[Lord Lamont of Lerwick (Con)]

I am very grateful to the Minister for answering my question about primary surplus. He said that the OBR is saying that there will be a surplus in 2029-30. Am I not right in saying that that refers to the current Budget, but of course might mean that there was, overall, a primary surplus? By itself, it does not mean a primary surplus. Can the Minister indicate whether there would be an overall primary surplus, which many people are saying is necessary to alter the debt-to-GDP ratio.

[Lord Livermore (Lab)]

I am very happy to check that point and I shall write to the noble Lord.

The measures set out in the Government’s Charter for Budget Responsibility implement many of the recommendations in the committee’s report and provide important guard-rails to ensure that capital spending is good value for money and drives growth in our economy. The IMF has called these important reforms to strengthen the fiscal framework. They include a commitment to hold one major fiscal event each year, giving families and businesses stability and certainty on upcoming tax and spending changes. The noble Lord, Lord King, suggested moving to just one forecast, a point echoed by the noble Lord, Lord Macpherson.

We introduced the fiscal lock through the Budget Responsibility Act, ensuring all major fiscal announcements are subject to an independent assessment by the OBR. Spending reviews must now take place every two years, setting departmental budgets for a minimum of three years. According to the IMF, this will

“improve the credibility of the medium-term fiscal framework”.

The Government have accepted all 10 recommendations in the OBR’s review of the March 2024 forecast for departmental expenditure limits, to ensure that no future Government can conceal unfunded spending pressures from the OBR, as the previous Government did.

The committee’s report sets out a number of recommendations relating to the nature of UK debt and how it is managed. The report argues—and the noble Lord, Lord Bridges, made clear—that it is the trajectory of debt, rather than the level, which should be the principal consideration when assessing debt sustainability and that debt levels become unsustainable if there is an insufficient buffer to absorb future economic shocks.

The Government agree with this analysis, which is why the Chancellor rebuilt in full the buffer against the fiscal rules at the Spring Statement—which was mentioned by the noble Lords, Lord Bridges and Lord Burns, and the noble Baroness, Lady Manzoor—and why our investment rule requires net financial debt to be falling in 2029-30. Building this resilience is key to protecting the UK against global shocks.

The committee’s report recognises that the UK is not currently an outlier in the overall stock of debt but notes the relatively high share of index-linked gilts. Issuing index-linked gilts has historically brought cost advantages, and analysis shows direct savings of around £90 billion in total from the issuance of index-linked gilts. However, it is right that the Government keep the proportion of index-linked gilts under review to balance the benefits and risks.

Separately, the noble Lords, Lord Razzall, Lord Lamont, Lord Forsyth, Lord Macpherson and Lord Weir, noted that the report argues that quantitative easing has increased the sensitivity of government borrowing costs to short-term movements in interest rates. However, it remains the case that the average maturity of the Government’s wholesale debt continues to be consistently longer than the average across the G7 group of advanced economies. This helps to limit how quickly changes in interest rates affect debt interest costs. Other countries also face significant effects because of quantitative easing. Quantitative easing is now unwinding, which will increase the effective maturity of the UK’s debt, all else being equal.

The last concern raised by the committee in this section of the report relates to the UK’s reliance on debt purchases by overseas investors, which my noble friend Lord Liddle and the noble Lord, Lord Forsyth, mentioned. The Government deliberately maintain a varied gilt-issuance strategy, to promote a well-diversified investor base. Overseas investors help maintain a diversity of gilt investors, keeping demand for UK debt strong and ensuring that the Government are not overly reliant on any one type of investor.

The committee’s report covers the longer-term challenges of getting debt to fall—the noble Lord, Lord Bridges, referred to these as the “Ds”. These include the impact that demographic shifts, such as an ageing population and a rising dependency ratio, will have on the public finances, as my noble friends Lord Davies of Brixton and Lord Browne of Ladyton said. The Government recognise these challenges, including the rising cost of care, which is set to double in the next 20 years alone. That is why, for example, we have established an independent commission, led by the noble Baroness, Lady Casey, to develop a new national care service, able to meet the needs of older and disabled people into the 21st century. We are taking immediate action to stabilise the care sector and invest in prevention, carers and care workers.

Other spending pressures discussed in the report include migration, the green transition and defence. The noble Lord, Lord Macpherson, made an interesting suggestion about debating annually the OBR’s fiscal sustainability report.

On migration, the report concludes that high net migration cannot be the solution to debt sustainability, as many noble Lords mentioned today. The Government’s position remains that we value the contribution that legal migration makes to our country, and will continue to strike a balance between ensuring that we have access to the skills that we need, while encouraging businesses to invest in the domestic workforce. Further detail will be set out in the forthcoming immigration White Paper.

The noble Lords, Lord Horam and Lord Weir, mentioned the green transition. The Government believe that early and ambitious climate action is vital to delivering long-term economic growth and enabling a cost-effective transition to net zero. As the Chancellor said earlier this year:

“Net zero is the industrial opportunity of the 21st century, and Britain must lead the way”.


On that point, I agree with the comments made by the noble Baroness, Lady Kramer.

The noble Lords, Lord Forsyth and Lord Tugendhat, and my noble friend Lord Browne of Ladyton spoke about defence spending. The committee’s report was published before the Government’s announcement that defence spending will rise to 2.5% of GDP next year, which represents the biggest sustained increase in defence spending since the Cold War. This new funding, delivered within our fiscal rules, will deliver the stability that underpins economic growth and unlock prosperity for working people, through new jobs and opportunities.

Finally, the report considers the impact of productivity improvements in the context of the projected rise in government expenditure. The Government’s view is that tackling the UK’s historic weak productivity performance is central to delivering higher economic growth. The OBR estimates, for example, that every 0.1% increase in productivity growth will reduce the rise in the debt-to-GDP ratio by 25 percentage points over the next 50 years. It is for these reasons that we are pushing ahead with vital reforms to cut waste and bureaucracy, including in the planning system, and to make the state leaner and more efficient.

I once again sincerely thank and congratulate the Economic Affairs Committee on its work on this important report. The Government share the committee’s view that tough decisions are required to put debt on a sustainable path. That is why in the Budget last October we fixed the foundations of our economy and, at the Spring Statement this May, took the action needed to meet our fiscal rules, even when they were tested. The global instability we have seen over recent weeks demonstrates why this approach was necessary. It is only by delivering sustainable public finances that we can maintain resilience in the face of global shocks. The approach we are taking will continue to put debt on a sustainable path. It will provide certainty to families and businesses in an ever-changing world, and it will generate the long-term investment we need to grow our economy.