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

Motion to Take Note

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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).

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.

My Lords, I start by saying what an excellent and challenging report this is. It is exactly the kind of thing that the House of Lords exists to do and which political parties find very difficult to address. I congratulate the noble Lord, Lord Bridges of Headley, whom I have always seen as one of the stars of the Benches opposite, on his excellent introduction to this debate. I did not agree with some of it, but it was challenging, and he asked a lot of the right questions.

I suppose that the side of the argument that we should not be as worried about this question of debt, as the noble Lord, Lord Bridges, lays out, is that we are in the middle of the international pack. That is some reassurance. However, we live in a very unstable world—goodness knows what is going to happen in the United States. As the noble Lord pointed out, we have very particular vulnerabilities. We are dependent on the kindness of foreigners to fund our borrowing. We do not have the high domestic savings levels that countries such as Italy and Japan have. I do not want to get back into the European arguments that I have always made, but it is worth pointing out to the House that Greece now pays a lower interest rate on its debt than we do, because it has the power of the European Central Bank behind it. That is my view.

I also agree with the noble Lord, Lord Bridges, that really big challenges are coming down the track. My worry is that we must not set a debt rule that rules out investment in growth. If the interest rate is higher than the growth rate, we are in deep trouble, so we have to find a way of raising the growth rate, which requires a very strong policy of public investment, which the Government are doing. Things such as the Oxford-Cambridge link and the developments around it are very important. My own favourite development would be a massive transformation of urban connectivity in the north of England, which would have a very beneficial effect on productivity.

My Lords, in the light of recent events, the last report from the noble Lord, Lord Bridges, as the brilliant chair of our Economic Affairs Committee, could not have been more opportune. As he indicated, the growth of government borrowing in the last 20 years tells us why we have a problem. In Gordon Brown’s last Budget as Chancellor, public sector net debt was 35.1% of gross domestic product. When Covid struck five years ago, debt rose to almost 100% of GDP. Record borrowing of £314 billion the following year pushed public sector net debt up to £2.8 trillion pounds in cash terms, which is £1 trillion greater than before the pandemic and more than five times the £535 billion when Gordon Brown presented his 2007 Budget.

Historically, we have funded our deficit by the Government issuing a high proportion of long-dated gilts. This has meant that annual refinancing needs are lower than in other G7 countries and changes in interest rates take longer to have effect. Nevertheless, quantitative easing increased the sensitivity of government borrowing costs to short-term movements in interest rates. The unwinding of quantitative easing will take until 2028, according to the Office for Budget Responsibility, before the effective maturity of our debt returns to the pre-QE level of seven years.

There can be no doubt that the market requires the Chancellor to stay within her fiscal rules. As the noble Lord, Lord Bridges, indicated, it is never going to take much for the targets to be missed, even before the reduction in our growth forecast and Trump’s tariff wars. The Chancellor will already be hearing siren voices urging her to ignore her fiscal rules and increase borrowing, but as Sir John Kingman—now chair of Legal & General and Barclays, and formerly a Treasury mandarin—put it so well the other day, those who believe additional borrowing to be the answer should

“glance at the significant rise in the premium the UK is already having to pay in world markets to borrow very large sums each year … That is a clear warning sign. Of course no fiscal rule can be perfect. But the UK … is already treading a very delicate path, along a cliff-edge in deep fog. The protective fence may or may not be in quite the optimal place. But removing it seems unlikely to be a good idea”.

My Lords, I thank the noble Lord, Lord Bridges, for his time as chair of the Economic Affairs Committee and for securing this debate. He played a crucial role in ensuring that the committee’s work was relevant, timely and newsworthy. We can see that in the reports that were published during his time as chair. He summarised very well this report, which was completed last September. It remains pertinent—even more so considering many recent developments.

As has been said, the main emphasis of the report is on the need for a fiscal framework for delivering long-term financial sustainability. However, it also addresses some of the challenges that we face and presents some of the inevitable choices. As the report emphasises, two fundamental issues cast a shadow over future fiscal policies. The first is the persistent poor growth performance since the 2008 financial crisis. The second is the consequence of the succession of crises in recent years that have been addressed through substantial government spending and borrowing.

First, on growth, in conjunction with other high-income European countries, we have experienced a protracted economic slowdown since the financial crisis. The decline has been accompanied by a decline in the share of investment in the economy. The reasons for this are debatable—I do not think that there is any simple, compelling explanation. However, personally, I am persuaded that one contributing factor is that the European countries, including the UK, overreacted to the financial crisis by imposing excessive regulation on the banking system and the regulations that followed reduced the available finance for many small and medium-sized businesses.

In contrast, the US has managed to avoid the extent of the slowdown in growth that Europe has experienced. However, both the US and Europe are grappling with the consequences of deindustrialisation of traditional industries, and we are now witnessing the unfortunate resort of the United States to extraordinary tariff levels. I do not think anybody can be confident about growth rates over the medium term, which is going to have a significant impact on our own debt arithmetic.

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.

My Lords, it is a pleasure, if somewhat daunting, to follow the former Permanent Secretary of the Treasury and the former Chancellor of the Exchequer, and to be shortly followed by the former Governor of the Bank of England. However, as a member of the Economic Affairs Committee, I first acknowledge and salute the noble Lord, Lord Bridges, for his astute and incisive chairmanship of the committee and his spot-on introductory comments.

It is indeed time for tough decisions, but I have to admit to growing increasingly cynical about our appetite to face up to them, let alone to take them. We have ducked those decisions for the majority of the last 20 years, and I fear we will go on doing so for the next 20. This highly topical report was published last September, just weeks before Rachel Reeves’s first Budget, which saw another rewriting of the fiscal rules as we ushered in another £30 billion of borrowing. Yes, taxes were raised by £40 billion, but at the cost of future growth.

Our public sector net debt has grown by almost 10 times over the last 25 years, from £300 billion in 2001 to approaching £3 trillion next year. We have had the financial crisis, the pandemic, Russia’s invasion of Ukraine and this ensuing energy crisis. Each event led to exceptional, “one-off” increases in government spending financed entirely by borrowing. But I argue that those shocks explain less than half of this £3 trillion debt pile and obscure the real malaise: low growth and poor productivity.

Not only is there no peace dividend or surplus in stable years, but we routinely borrow at least £100 billion a year to fund our budget deficits. In fact, it was £130 billion last year and, as we have learned this week, in the year to March it has grown to £152 billion—rather worryingly, £15 billion more than the OBR predicted; more on that in a moment.

The resulting interest bill of more than £100 billion a year cannot be paid by tax revenues. We meet those interest payments only through additional borrowing. It is a vicious cycle and it is, of course, unsustainable. I am afraid that business is usual is that R, representing interest rate on debt, exceeds G, our GDP growth rate, even in non-crisis years. So we are caught in a cycle of low growth and productivity accompanied by high borrowing and, crucially, that borrowing has not led to productivity gains.

My Lords, it is a pleasure to take part in this debate. I add to the congratulations to my noble friend Lord Bridges, as chairman of the committee, and its members for producing this—I was going to say “timely” report, but this debate is some seven months after the report was published and quite a lot has changed in that time.

Short of national security, it addresses the biggest issue facing the country. That we have an advisory speaking time of four minutes tells you everything about the way in which Parliament is increasingly becoming the decorative part of the constitution. We now, apparently, take on huge, unlimited, unknown debt in nationalising industries over a weekend and give powers to civil servants to force people in private companies to do things on pain of being sent to prison if they do not—and Parliament has no say. It is clearly important that we address this issue not just in Parliament but in the country.

The lesson of this report is that our people—the constituents of the Members at the other end of this building, our families—have no idea of the crisis that is facing our country and the threat that it presents to our ability to deliver pensions and important public services.

Even this week we learn that borrowing has turned out to be £15 billion more than expected. In the year to March, as the noble Lord, Lord Londesborough, said, we spent £151.9 billion more than we had in income, and we are relying on growth, which we have not seen since 2008, to rescue us from that situation. As the report points out, there are fundamental strategic reasons why we need to tackle this now, and the longer we wait to bite the bullet the bigger the problem will be.

These reasons include the fact that, in the 1980s, we thought we had a peace dividend, but now we realise that we should not have spent that money, but we had committed that expenditure to welfare and other matters. The baby boomers were creating wealth and now they, like me, are a burden on the state in one form or another. The notion that we can finance the triple lock on pensions, however popular it may be, is ridiculous in these circumstances. We need to get the country to understand that and to lower its expectations for the future.

My Lords, the noble Lord, Lord Weir of Ballyholme, is taking part remotely. I invite the noble Lord to speak.

In the noble Lord’s absence, I suggest we move on to the next speaker in the Chamber.