Contribution
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.