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

Lord Wood of Anfield Excerpts

Friday 25th April 2025 Lords Chamber

[Lord Wood of Anfield (Lab)]

My Lords, it is a pleasure to speak in this debate on such an important topic, and I congratulate the noble Lord, Lord Bridges—my predecessor as chair of the Economic Affairs Committee—and thank him for his kindness in the tricky transition period between our tenures and for his time chairing the committee. I have the privilege of succeeding him and now working with the excellent team that helped produce this report.

There is a lot in the report that is worth careful study—particularly that on the nature and composition of debt, as the noble Lord, Lord Lamont, and others have discussed. As the report says, the question of what exactly is our debt problem is not straightforward. It is a complex combination of the level of the debt-to-GDP ratio, its trajectory over time, the maturity profile changes, the robustness of the tax base that finances paying it off, fiscal policy plans and changing world circumstances. This report talks eloquently about the pressure points and why debt is a particular problem and under what circumstances. It discusses the key trends—the five Ds that the noble Lord, Lord Bridges, mentioned earlier—which push debt even higher. It also provides an excellent and crucial explainer of why, especially since Covid, the composition of the debt has changed in a worrying way.

It has not been said yet, but it is important to note that this report was written with reference to fiscal rules, before the current Chancellor changed various aspects of the fiscal framework. I think the Chancellor should be congratulated on those changes. In some respects, they make positive differences that very much chime with some of the concerns in the report. In particular, and most importantly, the shift to targeting the current budget balance, rather than overall borrowing as under the previous Government, reduces the budgetary incentives to cut valuable investment. I also very much welcome the switch in the debt definition to public sector net financial liabilities.

The Chancellor retained, of course, the principle in her second fiscal rule that debt needs to be falling at the end of a five-year period—now a three-year period as of 2026. The report’s main criticism of that is that a rolling target means the rule is easily gamed—you could have four years of rising debt and then one year of decline and meet the rule but still have a net increase in the stock of debt over time. That is a concern and is part of the design flaw of this five-year rolling, or three-year rolling, system. My concern about this rule is slightly different. The main problem is that it results in Governments basing long-term investment decisions on highly contingent, uncertain projections that are so dependent on complex, unknowable real-world developments. Making concrete long-term public investment decisions that have to be changed in virtue of forecasts that probably turn out not as accurate as you need them to be is a bit like chasing shadows.

In the spirit of being perhaps a friendly devil’s advocate to this report, let me just finish with three quick reflections. The first, to put some perspective on this, is that the debt-to-GDP ratio in the UK is now lower than it was in just under half of the entire 20th century.

Secondly, the question that financial markets are concerned with is less the level of debt-to-GDP ratio but whether Governments are using borrowing for productive growth-enhancing investment, as the noble Lord, Lord Liddle, referred to earlier, and whether they are prepared to take steps towards fiscal consolidation when the shocks that trigger debt increases subside. Our focus needs to be as much on those two concerns as it is on a numerical debt-to-GDP ratio.

Lastly, I personally have sympathies with the NIESR and economists who think that investment in service of long-term objectives crucial to the national interest should be taken out of the debt target. That does not mean they are taken out of public scrutiny; there are lots of things the OBR can and must do, but there is a case for the kind of long-term certainty, which the noble Lord, Lord Liddle, referred to, that the private sector needs in order to know that Governments will complete long-term transition investments.