Lord Turnbull (CB)

My Lords, there are two pillars to the Government’s financial framework: monetary policy and fiscal policy. Monetary targets were introduced in the late 1970s, being replaced by inflation targets in 1992. Since 1998, the MPC has been given responsibility to adjust interest rates when the inflation rate target is not being met. With the egregious exception of 2021 where it misjudged the economy after Covid, the Bank has kept inflation reasonably close to target—not perfect, but a creditable record. Fiscal targets for deficits and debt were introduced in 1997. The governance here is different and the record is much poorer. If the fiscal metrics go off target, it is for the Government themselves to respond. Too often they have not done so. Instead, the metrics have been changed, with new definitions, new baselines and new time horizons. Announcements have been made that have been quickly reversed. Meanwhile, the debt to GDP ratio has continued to rise. The OBR produces two reports a year. The Economic and fiscal outlook comes out with the Budget, providing a five-year outlook. As a result, it receives quite a lot of attention. The other is the Fiscal risks and sustainability report, which provides projections for another 40 years, starting where the EFO leaves off. It comes out mid-year and receives much less focus, though it is arguably the more important of the two. The two reports appear to have been written by two different organisations. In the first period, the fiscal position improves with a dramatic turnaround in the primary balance by 2030, enough to stop the debt ratio from rising. In the second period, covered by the Fiscal risks and sustainability report, it gets progressively worse all the way through to 2070, when it could have risen by 300%. Neither of these projections on its own is plausible. The improvement in the EFOR five-year programme is because the OBR is required to embody the path being assumed by the Government, even though few people believe it. The path tracked by the FRSR would blow up long before we got to 2070. If we look through this bizarre first down and then up trajectory, some features are clear. The EAC report of 2024, which we are discussing today, said that the path we are on was not sustainable. Two years later, it is still not sustainable. Not enough is being done on either tax or spending, difficult decisions are being dodged and too many commitments are not being followed through. That many other large economies face similar problems is no comfort. We are not in the world of Tom Lehrer’s “We Will All Go Together When We Go”. Markets may well pick on what is perceived to be the weakest economy outside of the US. Of those, it is the UK that now has the highest cost of borrowing. It would be much better to be an early adopter of a more credible policy. The term “headroom” can be ambiguous. Headroom, which is seen as a margin providing resilience, allowing time to respond to shocks, is fine, but it has to be replenished in better times. Otherwise, it slips into being a cosy back pocket to get you around the next corner, leaving you no better off to face the next shook. As society ages, an increase in spending on collectively provided services will be unavoidable, as will spending on defence. Ruling out increases in major taxes would be unwise. The Government will not be able to rely on funding from domestic pension funds to the extent that they have been in the past. It is vital to improve the structure of the tax system as well as increasing the level. There are many choices to be made, and I have time to mention only a few. As highlighted in last week’s debate on an ageing economy, it will be essential to increase the participation rate of those between 50 and 70, and to help more people into jobs rather than leaving them stranded on benefits. We need to be building more affordable homes to reduce the cost of rents in the housing benefit bill. We need to look at reforming the taxation of wealth that is locked up in owner-occupation. We need a more measured approach on climate change to reduce the cost of electricity closer to that of our competitors, by being prepared to exploit our own fossil fuels rather than importing them, but there many other difficult choices beyond that.