Baroness Morrissey (Con)

My Lords, it is an honour to follow many interesting and thoughtful contributions to this timely debate. I thank the noble Lord, Lord Bridges of Headley. I bring a distinct perspective as a former bond fund manager. For 15 years, I managed both UK gilt and global government bond funds totalling several billion pounds. As set out in my register of interests, I continue to have several active investment roles. I chair Eton College’s endowment fund, I serve on the board of a US investment company and I chair a US-listed insurance company whose balance sheet is invested mainly in government debt. All these roles require me to keep my finger firmly on the pulse of markets and, I am afraid, make me all too aware of our perilous position today. Of course, many Governments have seen a sharp jump in their debt levels in the past two decades thanks to the triple whammy of the global financial crisis, Covid policies and the inflationary pressures of the Russia-Ukraine and Middle East wars. Also, nearly $500 billion of debt has been issued year to date by tech companies in the US and that has recently increased the pressure on US Treasury yields, which act as the reference point for all the bond markets of developed Governments. There is no safety in numbers, as far as bond investors are concerned. Moreover, as the noble Lord, Lord Bridges, mentioned at the start, the UK gilt market has specific structural features that make us more vulnerable to a borrowing crisis in a high inflation, low-growth world. Today, just as an example, 10-year gilts yield a full percentage point above Italian 10-year bonds. That is a risk premium demanded by investors for the extra risk they see in investing in our government debt, compared to Italian government bonds. To give some historical perspective on that, in January 2012, Italy had to pay its bond investors five percentage points more interest every year than the UK. Why is the UK seen as a particularly deteriorating credit risk? The bond investors see us as running out of options to escape a fiscal doom loop because of the policy mistakes we have made over several Governments and the idiosyncratic features of the gilt market. I will give a couple of specifics on that to show the order of magnitude. First, a quarter of our debt mountain is index-linked. That is a far greater proportion than other countries. In France, for example, it is just 10%. In a persistently high inflation environment, like today, the UK suffers much more than other nations in terms of the incremental burden financing our national debt. Secondly, the average maturity of British debt is much longer than other G7 countries: it is around 13.5 years, compared with eight years for France and less than six years for the US. This is a big problem because of the changing nature of UK pension funds, which is resulting in dwindling domestic demand for long-dated gilts. Defined benefit schemes required pension funds to match their liabilities with assets, so they had to buy long-dated gilts, particularly long-dated index-linked gilts, which offer the best match for inflation-linked, final-salary pensions. However, in today’s increasingly defined contributions pensions world, that no longer applies. Of course, the Debt Management Office is aware of that, and it is going to experiment later this month with what it is calling a switch auction. It is just an operational test; no gilts will actually be switched. It is trying to see if it can reprofile the maturity of outstanding debt. The problem is that holders of long gilts will be crystallising their losses if they swap them for shorter bonds, so that may not fly. One of the most active sellers of long gilts today is the Bank of England, as it tries to reverse the long period of quantitative easing after the global financial crisis. The bank will announce its plans for the so-called quantitative tightening in a weeks’ time. So, next Thursday is another worrying date for gilt market participants. Bond investors are acutely aware that there are very limited ways for a country to escape spiralling interest payments on its national debt. My noble friend Lady Noakes mentioned three ways; I will add a fourth. In many cases, a country may be able to try inflating its way out of the problem, by devaluing the face value of the outstanding debt. However, as I mentioned, that is not an option here, because we have the huge preponderance of indexing bonds. The other three are growing our way out; raising taxes, which has been discussed a lot; and cutting public spending—or, of course, some combination of the above. I will add my two pennies’ worth to the options. We would all love to see robust economic growth. As we all know, over the past two years, the Labour Government have often described this as their priority, but the fact is that their policy actions have undermined and not supported business and growth. Others have mentioned many examples: the increased national insurance burden on employers is the most obvious. As we have heard, economic growth depends on wealth creation, which goes hand in hand with internationally competitive levels of taxation. My noble friend Lord Elliott of Mickle Fell just mentioned the departure of Chris Rokos from these shores. As well as contributing £333 million to the Treasury coffers last year, he has also been an incredibly generous benefactor to Cambridge University and Eton College. All of us are left poorer by his departure, and I remind those who have the ear of the Treasury that 100% of nothing is obviously nothing. We are well past the optimal point of taxation rates that yield the most revenue. There is just one option to curb government spending. The noble Lord, Lord Davies of Brixton, talked about political choices, but sometimes we do not have the choice. Sometimes, we do not have that luxury. Today, the warning lights are flashing. There is a headline in today’s City AM: “Could Britain collapse under the weight of Labour spending?” As a nation, we are in hock to the bond markets. When I am personally in significant debt to a bank, it is the bank that sets the terms and can call in the loan, raise the interest rate and refuse to lend me more. Unhappy gilt market participants are like banks and taxpayers, and they will vote with their feet. They will not accept vague reassurances about fostering growth or taking responsibilities of a fiscal nature seriously. They need and demand specific, concrete actions. To avert a fiscal crisis, Chancellor Healey must not raise spending and taxes in next month’s Budget. Instead, he must set out quantified and credible plans to cut spending. That would be the first but critical step towards restoring government finances, so that we can start regaining control of the national debt, escape the fiscal doom loop and start to focus on our economic future.