Contribution
My Lords, the noble Lord, Lord Bridges, has outlined the challenges facing fiscal policy very well. I was a member of the Economic Affairs Committee that he chaired so ably, and he has summarised the conclusions of the report of that committee two years ago. Since then, the OBR too has set out the significant risk that UK debt could become unsustainable unless offsetting action is taken. While the previous Chancellor was successful in stabilising the debt ratio, we now need to make significant progress in reducing it, not just in the forecast but in practice. The need for early action is not removed because the debt ratio of other countries is similar or even worse than that of the UK. Having a shared problem might make it feel less urgent, but the UK debt ratio can be brought on to a sustainable downward path only by our own actions.
The noble Lord also set out the initial source of the problem very clearly. Since 2007 we have engaged in three rounds of exceptional expenditure in response to events. There were good reasons in each case why that was undertaken, even if in some cases it was overdone. In one case, the financial crisis, we were trying to protect savings and maintain a functioning financial system; the Covid crisis required support for people who were suffering in lockdown; and there was a sharp rise in energy prices after the invasion of Ukraine. So some of that was right in principle, but I cannot recall any Government giving much warning that these rounds of fiscal support would eventually have to be paid for, even if not immediately. Nor did Governments warn that the longer the delay, the greater the cost in terms of higher debt interest. Taxes were cut when the opportunities arose, and expenditure control proved to be too difficult politically.
While there is general support for changing the fiscal rules to accommodate public sector investment, less has been said about the debt service costs involved in that, at a time of rising and very high global interest rates. Taking out a mortgage means starting your monthly payments immediately. The same applies to government borrowing and we are, of course, experiencing that.
Both the Economic Affairs Committee and the OBR have set out the significant headwinds we are facing, and they are very tough. They include an ageing society, increased defence spending and rebuilding our energy grid to make the best use of renewable energy.
Dealing with these matters will not be easy. In my view, it means a combination of increased taxes, restraint on increases to benefits and improved public sector productivity. As far as possible, this should involve reducing the array of exemptions and tax credits that are characteristic of our tax and benefits systems, and we need closer scrutiny of claims for benefits. The goal should be a wider tax base and a narrower welfare base, and we should be doing our best to avoid the high marginal tax rates or damaging cliff-edge withdrawal rates that are also very evident now.
Faster growth could improve the situation, but we need to be cautious. The OBR has pointed out that if faster growth is simply translated into proportionate growth in the provision of public services, growth on its own will not be sufficient to solve the problem.
Here lies a fundamental challenge. Demand for the major public services tends to increase more than proportionately in a growing economy. We see this with health, social care, education and some aspects of welfare. So, it is not surprising that costs rise more rapidly than the growth rate itself. Indeed, in the case of the triple lock the arrangements mean that pensions will grow faster than earnings. It was designed to produce that effect. This explains why growth alone will not solve this problem.
In an earlier phase of my career, I had close experience of three difficult periods for fiscal policy: 1976, 1981 and 1993. I was an academic and commentator during the first, and a Treasury official during the second and third. In each case, decisive action was taken, even though it involved difficult and often unpopular decisions, as the noble Lord, Lord Lamont, will remember in the case of the 1993 event. But eventually, we saw an improvement in the balance of the economy and improved market confidence.
If coping with excessive debt becomes the priority for a Government, it tends to crowd out discussion of longer-term structural policy and issues such as tax reform, which are so necessary. Once debt is clearly on a downward trajectory, life becomes much calmer, leaving more time for dealing with the longer-term issues that really deserve scrutiny. Above all, if we could get on to a path of a falling debt ratio, we might spend less time discussing the fiscal rules and whether they are a sufficient buffer for the next Budget—and I suspect we would all welcome that.