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

Lord Macpherson of Earl's Court Excerpts

Friday 25th April 2025 Lords Chamber

[Lord Macpherson of Earl’s Court (CB)]

My Lords, I congratulate the noble Lord, Lord Bridges, and his committee on their timely and well-argued report. I agree with pretty much all of it. The fact is that Britain’s national debt has more than doubled as a percentage of national income in 20 years and we have nothing to show for it in terms of increased productive capacity. The country is now far more vulnerable to the vagaries of the bond market, the performance of which reflects global as much as domestic factors.

I confess that I spent much of my final decade at the Treasury crying wolf about the potential inflection point in the gilt market. I was proved wrong at the time; helped by QE, the gilt market navigated the global financial crisis and Brexit. But every dog has its day. The Truss Government tested the bond market to destruction and, since 2022, funding the national debt has caused the Treasury more worry than at any time since 1976.

In recent years, fiscal rules have come and gone at alarming speed. Of course, “rule” is a misnomer. They are not rules any more than the inflation target is a rule, and successive Governments have found there are few consequences for breaking them—you just claim force majeure and adopt a new one. I accept that Governments need a fiscal framework, and that the guard-rail the rules provide helps the Chancellor manage her Cabinet colleagues. But, like my noble friend Lady Wolf, I worry that excessive focus on so-called rules can discourage Governments from focusing on the substance. As my noble friend Lord King put it, the rules, especially those of a rolling variety, allow Governments to pursue an Augustinian policy. We never quite get fiscal consolidation, invariably because spending projections prove undeliverable.

I broadly welcome the changes the Government have made to the framework, but what matters is not whether the Government stay within the rules. Much more important is the substance of fiscal policy. Is the deficit being reduced at sufficient speed? When will debt begin to fall in relation to national income? Is the proportion of public expenditure accounted for by debt interest on a downward path? Are fiscal policy decisions addressing long-term pressures, and are the policies the Government are putting in place likely to facilitate economic growth or to hinder it? The Government have taken some tough decisions over the last six months, but I fear they will have to take many more if they are going to deliver a sensible fiscal policy.

I shall finish with two small points. First, I encourage the Chancellor to agree a new framework for future bouts of quantitative easing, which will give the Treasury a greater locus to debate the implications for fiscal policy with the Bank of England and make the Treasury more accountable for the outcome. This did not seem necessary when the then Chancellor Alistair Darling agreed the first framework with my noble friend Lord King back in 2008. QE was thought to be an emergency measure that would not last long. But future rounds of QE, whether or not they were necessary—and I have my doubts—have changed the relationship between monetary and fiscal policy and we need to recognise this.

Secondly, my final point is that the Government should do all they can to raise the profile of the OBR’s fiscal risks and sustainability report. For my part, like my noble friend Lord King, I would amend the Industry Act so that the Government no longer have to produce two economic forecasts a year. Instead, the parliamentary time set aside for the Spring Statement should be devoted to a debate on the OBR’s fiscal risks and sustainability report, to raise its profile in the country and to encourage a greater focus on long-term projects. Who knows? It might even result in better proposals when the Chancellor comes forward with her annual Budget.