Contribution
My Lords, I, too, salute the noble Lord, Lord Bridges of Headley, for securing this critical, timely debate and for his compelling opening remarks. It was a pleasure to sit on the Economic Affairs Committee under his astute chairmanship, especially during our inquiry into the sustainability of our national debt. Some noble Lords will remember that we debated the title National Debt: It’s Time for Tough Decisions for some time, as many of us, me included, had little confidence that Governments of any colour would make those tough decisions. So it proved with Keir Starmer and Rachel Reeves, as I fear it will with Prime Minister Burnham and Chancellor Healey—more on that in a moment.
The committee’s two subsequent inquiries raised further concerns about our fiscal outlook: one was on preparing for an ageing society, which, in short, we are not doing; and earlier this year we looked at our fiscal architecture and asked the key question of whether the fiscal framework is fit for purpose. In short, it is not. Our track record, as the noble Lord, Lord Bridges, has pointed out, is disturbing to say the least. Debt is at £3 trillion. It has tripled in size over the past 20 years, and yet we have so little to show for it—witness our anaemic growth rates. The annual interest bill now stands at £110 billion, almost double our defence budget, and our budget deficits continue to run well north of £100 billion a year, financed by yet more borrowing despite our overall tax burden rising above 36% of GDP and heading, I fear, for 40%. The OBR copped a lot of flak for its projection that debt would climb to 270% of GDP in 50 years’ time, but given our economy’s vulnerability to global shocks, let alone our baseline trends, that forecast strikes me as conservative.
That is enough fiscal hammering from me, as I want to focus on the outlook and the need for turnaround. Here I draw on lessons learned from my private sector experience in rebooting companies that have lost their great momentum and become overly dependent on outside financing. Turnaround always involves taking tough, unpopular decisions on costs in the interest of financial sustainability; the triple lock is a classic example. However, far more important than cost controls, turnaround depends on sustained revenue growth. What areas do you need to protect and nurture to accelerate growth? That is the only way out of our fiscal trap, yet Government after Government have failed to address this. Rachel Reeves’s first Budget was a classic example, trumpeting economic growth as the number one mission yet hitting the supply side, our businesses and employers, with an extra £25 billion on NICs, doing huge damage to jobs, growth and investment. I have seen the impact first hand across SMEs that I chair, invest in and advise, and I should declare my interests as set out in the register.
It is deeply disappointing to hear Andy Burnham repeat Keir Starmer’s pledge not to touch income tax, employee national insurance or VAT, because that points to raising taxes on businesses and wealth creators. This Government appear to be hanging their growth strategy on the peg of devolution, “Good growth in every postcode”. It is a mission that may come back to haunt them, because such ambitions will generate pain before gain—if, indeed, we get the gain. It will mean increased spending on reallocating resources and power, recruitment, training, management and execution, and that is before we even address infrastructure. It is a long-term strategy which in parts of this country has some merit, but it requires financing up front and will disrupt output and productivity, adding even more fiscal pressure that will not go unnoticed by the bond markets.
Economic growth is the only way out of our fiscal hole, but we need to address this head on and with realism, so let me conclude by suggesting a pathway. We need a plan and a coherent strategy that delivers a minimum of 2.5% real GDP growth from 2027 to 2032, compared to our current rate of 1% to 1.5%. This would be achieved not by shifting resources around the country or building high-speed railway networks but by addressing the core productivity issues within our workforce of 34 million, in both the public and private sectors.
I am talking about performance: management and leadership, the way we pay and incentivise our workers, recruitment and retention, training and adoption of technology, especially AI. Above all, we need to target productivity gains and reward performance—an enterprise culture, in other words. I contend there are very few organisations or companies out there that cannot achieve a 2% annual improvement in productivity if that is their prime focus.
What would this do fiscally? By adding just one percentage point of real GDP growth in each the next five years, we would see £60 billion to £70 billion a year of additional tax revenues by the end of that period without increasing tax rates. Of even greater benefit would be the impact on interest rates because debt sustainability turns on the gap between the interest rate the Government pay and the growth rate of the economy or “r minus g”. Right now, that gap is unfavourable: gilt yields are sitting at 5.2% to 5.9% against nominal growth—real growth plus inflation—currently running closer to 3.5%. We have to close this credibility gap otherwise our economy will remain chronically dependent on borrowing at unfavourable and unsustainable interest rates while our miserable GDP growth rates continue.