Fiscal Outlook
Thursday, 10 September 2026
Contributions
Motion to Take Note
Moved by
Lord Bridges of Headley
That this House takes note of the UK’s fiscal outlook.
Lord Bridges of Headley (Con)
My Lords, one word hovers like a spectre over this debate on the fiscal outlook: debt. Two years ago to this very day, your Lordships’ Economic Affairs Committee, which I then chaired, published a report on our national debt, It’s Time for Tough Decisions . It concluded that the UK’s national debt risks becoming unsustainable unless tough decisions are taken in this Parliament to address the major challenges that the UK faces and put debt on a gradual downward path. We found that sustainability depended not just on the level of debt but on having sufficient fiscal buffers to absorb future shocks and on avoiding a trajectory of rising debt service costs. Two years on, our debt stands at nearly £3 trillion, over 94% of GDP, almost £96 billion higher than a year ago and, relative to the size of our economy, at levels last seen in the early 1960s. My argument today is that our debt remains on an unsustainable path. Our fiscal buffer is dangerously small. The risks facing our public finances have grown and are growing still. All this is thanks in very large part to the actions that this Government have taken. Some may point to the fact that the debt accumulated during the last Administration, which is correct. I have argued that the last Government made mistakes, but however critical one is of that Government, one must accept that they faced Covid and the energy shock. Others may argue that Britain has carried far higher debts before—notably after the Second World War. That too is correct. However, after 1945, the baby boom, the peace dividend and the opening of world trade all boosted growth, which helped to lower our debts. Today, Governments here and worldwide face the challenges of the Ds: higher defence spending, the demographic challenge of ageing populations, dependency—large welfare states—and decarbonisation, with the green transition. All these Ds increase demands for higher government spending at a time when Governments are already drowning in debt. Across the advanced economies, government debt rose from around 70% of GDP on the eve of the financial crisis to around 110% today. That debt explosion took place during an era of low inflation, ultra-low interest rates and unprecedented quantitative easing, and in a world that is largely at peace. That world has gone, but government debt remains at record levels and is growing. The OECD expects Governments to borrow around $18 trillion this year. Almost four-fifths of that is simply to refinance debt coming due. Advanced economies spent more than $2 trillion on debt servicing alone last year. Dozens of nations, including the USA, now spend more on debt servicing than defence. In this rising tide of red ink, the price that each Government pays on their debt—ours included—is ultimately determined by investors, by their judgment on the health of a nation’s economy. To coin the Prime Minister’s phrase, it is that thing of being in hock to the bond market. That brings us to the question that bond traders and all of us here today are asking: just how resilient are the UK’s finances? On Monday, the Chancellor told us that Britain is turning a corner. If so, surely debt should be on a steady downward path—but no, it is not. Debt will be higher at the end of this Parliament than at the start, before falling only slightly to around 95% of GDP by 2030-31. Even that fall is questionable. As the OBR notes: “Plans to reduce borrowing and stabilise debt have been a common feature of forecasts since the pandemic, but have not yet materialised in outturn”, or, as St Augustine might have put it, “Lord, make me fiscally responsible, just not yet”. Indeed, the OBR concluded in July that Britain’s public finances were “in a challenging position relative to history and to other similar countries, with … debt having increased by one of the largest shares of GDP of any advanced economy over the past two decades”. It is the structure of our debt that makes us unusually vulnerable. QE shortens its effective maturity, while Britain has a particularly large stock of index-linked debt, so when borrowing costs rise, we feel the effects very quickly. Even before the economic impact of the Gulf war, the OBR was forecasting that debt servicing would cost us £110 billion in 2025-26. That is 3.5% of our national income, which is more than we have spent on education and approaching twice what we spend on defence. By 2030-31, that figure is expected to hit £137 billion. The bond market is beginning to reflect investors’ anxiety about all this. Britain may not be an outlier in the amount it owes, but it is becoming an outlier in what it costs us to borrow. Our 10-year borrowing costs are now the highest in the G7 and the fourth highest in the advanced world. On Tuesday, Britain paid the highest borrowing cost on a sale of 30-year debt in almost three decades, and that rising interest bill is eating into the Government’s fiscal buffer. At the spring forecast, that buffer was around £24 billion. Against £3 trillion of national debt and £1 trillion of annual spending, that is not a buffer; that is a wafer, and some estimates suggest it has already shrunk to just £5 billion. The Chancellor’s optimism cannot camouflage the facts: debt is high and still rising, its structure leaves us unusually exposed to shocks, our fiscal buffer is wafer thin and shrinking, and investors are demanding an increasingly high price to lend to us. In that sense, though, the Chancellor may be correct: we are turning a corner. Ken Rogoff, the former chief economist of the IMF, now puts the chances of a major UK debt crisis by 2030 at more than 50:50. This brings us to a central question: what would convince investors that Britain has a credible plan to stabilise its debt? The answer, I would argue, lies not so much in economic theory as in political choices. A central conclusion of the Economic Affairs Committee two years ago was: “If we wish to maintain the level and quality of public services and benefits that we have come to expect, we face a choice: taxes will need to rise or the state will need to do less. Addressing this will demand clarity as to the responsibilities and the role of the individual versus that of the state. Muddling through is not an option. If this choice is ducked in this Parliament, the UK risks being on a path to unsustainable debt”. Two years on, my argument is not that the Government have failed to take tough decisions: it has, but it has taken the wrong tough decisions. Labour decisions have weakened growth, dug us deeper into the debt hole and increased our fiscal vulnerability. What is needed is a plan to control spending and strengthen the underlying budget so we live within our means, bear down on inflation and the cost of our debt, and, above all, get the economy growing faster. But the Government’s actions have produced the reverse of all that. Let us look at spending. I was intrigued to hear the Chancellor say on Monday: “Staying true to our values means being honest about the need to control government spending”. For a moment, I thought I was listening to fake news. By the end of this Parliament, the Government will be spending around £260 billion more a year than at the start. Public spending will absorb more than 44% of national income. That is a level we have not seen on a sustained basis, outside shocks and their aftermath, since the 1970s. Let us look where that increase is going. Welfare spending is set to rise by some £75 billion a year over this Parliament, to £390 billion. Within that, spending on health and disability benefits is forecast to hit £104 billion, an increase of more than a third. Instead of taking the tough decisions needed to control spending, the Government have chosen higher spending, financed by higher taxes. Working hard, investing, setting up a business, employing more people—the very activities that drive growth and generate the revenue needed to stabilise our debt—are being taxed more heavily. To give one example, the rise in employers’ national insurance alone means an employer now pays around £900 more a year for every worker on median earnings, and the tax burden is set to rise still further, to the highest level on record. Then there is inflation. I fully concede that the war in the Gulf has made the fight against inflation more difficult, but that is all the more reason for the Government to double down on measures to cut costs on business. I welcome the Government’s promise to take an axe to the bureaucracy holding back private investment, but why are they stopping there? If regulation is holding back investment and growth, the Government should take an axe to the burdens they have themselves imposed on business and employers, such as their energy policies and the Employment Rights Act—an Act that will impose direct costs on business of around £1 billion a year. These policies have undermined growth, which is the all-important ingredient to bring down our debt. The Government will rightly point out that there was stronger growth in the first half of this year, but two good quarters do not solve the structural problem. The OBR still puts our potential growth rate at only 1.5% and forecasts GDP per head to grow by just 1.1% a year over the rest of the decade. That is roughly half its pre-financial crisis rate. For debt sustainability, it is that underlying rate of growth—year on year, not a couple of strong quarters—that matters. Let us put this together. What lies around the corner? A higher-spending Government, extracting ever more tax from a weak, debt-laden economy. There is clearly a debate to be had about the role that the fiscal rules play in all this. My view is that today’s fiscal rules, like their predecessors, can be too easily gamed, and we can debate how to address that, but let us not lose sight of the main point. What matters is whether the underlying fiscal trajectory is credible, and that trajectory is shaped by political choices and political belief. Do you believe the state should be the driving force of growth, or do you trust people and the markets? Should the state encourage people to take greater control of and more responsibility for their lives, or should the state assume ever more responsibility for itself? The answers to these questions will shape our fiscal trajectory and the decisions in next month’s Budget. The Minister obviously cannot prejudge that Budget, but, that said, there are some simple questions he should be able to answer. First, does he think British business can afford to pay still higher taxes without damaging growth—yes or no? Secondly, the Prime Minister has said he will use “flexibility” within the existing fiscal rules. Can the Minister define what “flexibility” means? Thirdly, what did the Prime Minister mean exactly when he said: “We’ve got to get beyond this thing of being in hock to the bond markets”? Finally, what does the Minister think about the current trajectory of our national debt? Is it sustainable—yes or no? My answer to that question is a firm no. We may not face a debt crisis today, but the horizon is darkening, with weak growth, a record tax burden, sticky inflation, rising welfare dependency and more of our national income consumed by servicing the debts of the past. I do not see this as turning a corner. I see it as proof that, after two years of Labour, with its massive majority, we are on the wrong path and going in a very dangerous direction. We need to change course now, before that thing called the bond market forces us to change, and in a way that will be more painful and more costly. Let me end by taking us back 50 years to September 1976. Britain had just turned to the IMF for a loan. A few days later, standing at that Dispatch Box, Lord Carrington said something which echoes down the generations. He said that “you cannot go on spending vast sums of money which you have not got. You cannot go on improving your own standard of life on other people’s money because, sooner or later, they will not lend you any more. … Whether we like it or not—and we do not—and the sooner the better, we are going to have to cut our public expenditure. Of course, it is not going to be nice. Of course, we are all going to be hurt by it, and of course, we shall all have to cut the things we would much rather not cut. Of course, we will dislike it very much. But what other alternatives are there?”—[ Official Report , 4/10/1976; col. 953.]
Viscount Chandos (Lab)
My Lords, it is a privilege to follow the noble Lord, Lord Bridges of Headley, and I congratulate him on securing the debate. The challenges facing this country and many others globally because of the current fiscal outlook have been a consistent focus for him, both during his distinguished stint as Chair of the Economic Affairs Committee and since. I welcome my noble friend Lord Pitt-Watson to the Front Bench, as this is the first time I have spoken in a debate to which he will be responding. I should declare interests, as in the register, as a trustee of LAMDA, an adviser to the family office WFO and a director of Digbeth Loc. Studios. The survey of the fiscal outlook by the noble Lord, Lord Bridges, could be described, perhaps by Sir Humphrey Appleby, as very grounded, verging on the bleak. There is no denying that globally the challenges are formidable, with economies in a more vulnerable position to future new shocks, by some measures, than before the global financial crisis of 2008. As the noble Lord described, the UK is, unfortunately, not a positive outlier relative to the global picture and in too many respects is at the wrong end of the spectrum. Before I make my observations on these challenges and some of the responses to them, I begin on a positive note by welcoming the encouraging trend in productivity growth that has emerged in recent weeks. Output per job increased by 1.4% in the 12 months to 30 June and has been consistently above average since late 2024. It is premature to call victory or attribute the improvement to the effects of AI, but productivity is so central to the turnaround of the economy and the balancing of the fiscal books that there seem to be grounds for cautious, tentative optimism. It perhaps supports the argument that my noble friend Lord Eatwell made after the Government’s first Budget: that the increase in employers’ national insurance would drive productivity growth more than hit employment. But for all that, there are powerful headwinds to contend with. The Financial Times this week described the issue of national debt service globally as “a $2tn monster”. The US, France and the UK are all having to pay more debt interest than they spend on defence. This not only poses real challenges in setting steady state spending plans but, as I have already noted, gives less leeway to respond to future financial crises. The OBR, in its long-term forecasting, assumes a financial crisis every nine years. In this week’s announcement by the Dutch central bank that it was moving the physical custody of 14% of its gold from New York and Ottawa to London—an eloquent demonstration, perhaps, of the damage that the Trump Administration are doing to international confidence—it made a strikingly blunt assertion: “This ensures that DNB is … prepared for severe crises”. As my right honourable friend the Chancellor prepares his Budget, he is undoubtedly constrained by the commitment in the Labour manifesto not to increase the three most significant personal tax rates. Taxation policy has always been part of the political debate, but perhaps most acutely since the Conservative Party’s campaign—fake news—“Labour’s Tax Bombshell”, which can credibly be seen as having swung the 1992 general election result. It is understandable why the party, scarred by that, has sought to avoid a repeat. But, to be frank, it is not conducive to the best management of the economy in inevitably changing circumstances. Those changing circumstances include, most importantly, the effects of the war in Iran. The NIESR has estimated that every 10% increase in the oil price reduces GDP by 0.12%. So the rise of 40% or more since the US’s misconceived attack on Iran is likely to have reduced GDP by 0.5%, with the IMF having concluded that prior to this the UK economy was on a positive, improving trend. I will end on one or two more positive notes. The fiscal devolution started by the last Chancellor and turbocharged by the new Prime Minister has the potential to have disproportionately beneficial effects on growth, employment and housing, as I am already seeing in the work I am doing in the West Midlands. My right honourable friend Gordon Brown made a compelling analysis in the Financial Times of the role of innovation in driving growth and the UK’s world-leading strength in science and technology. I hope my noble friend the Minister can reassure the House of the Government’s understanding of the need to address the fragile state of the higher education sector. The scale and severity of the challenges that we face are formidable. These are global challenges, faced by multiple countries and exacerbated overwhelmingly by the policies of the US Administration. The noble Lord, Lord Bridges, is wrong to attribute the causes of that challenge to this Government. In fact, in contrast, I am totally confident that the Labour Government—governing, unlike its predecessors, in the national interest—are best placed to find a successful path through these challenging times.
Lord Burns (CB)
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.
Lord Hill of Oareford (Con)
My Lords, it is a great pleasure to speak after the noble Lord, Lord Burns, who brings so much experience and authority to his comments. They were extremely balanced and will be well received by all sides of the House. My noble friend Lord Bridges set out his case with his customary clarity. The figures he gave speak for themselves. The rest of the world is now catching up with the warnings two years ago of our own Economic Affairs Committee. Not a day goes past at the moment without more evidence of the stresses and strains, not just in the bond markets but in the wider world of geopolitics, that are adding to the pressures and bringing closer some kind of reckoning. Although I agree with my noble friend that the decisions the Government have chosen to take over the last two years—ducking cuts to the welfare budget and increasing taxes on business and employment—have made the problem worse, we on this side have to acknowledge that this is a problem that has been a long time in the making. Whereas in 1997, the Conservatives left office with a surplus—I repeat, a surplus—in 2024, the fiscal signs were already flashing red. That brings me to the main point I would like to make today. It may seem slightly to one side, but I want to bring it to the discussion. Our fiscal and economic problems are a consequence of structural political problems, and we will not be able to address them unless we also address the whole way in which our political system operates and our political classes have come to behave. When I started working in government back in the 1980s, the basic operating model for politicians was something like this: the leadership worked out their overall vision and values, and then developed policies that were coherent with that vision. The job of politicians was to make an argument in favour of that vision and seek to persuade as many people as possible of the wisdom of a particular course of action. I am not arguing that this was universally applied, nor that there were not sometimes contradictions, but I do argue that the Government and Parliament were fundamentally transmission mechanisms and that their core job was to make an argument that was as coherent as possible. We did not obsess over opinion polls. We did not carry out endless focus groups and taxpayer-funded market research. We did not, at bottom, think our job was to split the difference between competing interest groups. Contrast that with what we see today: incoherent and contradictory policy positions to please different lobby groups. For example, there is a drive on deregulation, on which I believe the Government are to be congratulated, but it sits alongside higher taxes on business, employment taxes on non-doms and laws to make it less attractive to hire workers. One set of measures is pro-investment but another is anti-investment. The result is incoherence. In essence, we have moved the Government and Parliament from a transmission mechanism into one that is always on receive and sits on top of a giant lobbying system, where the plaudits go to the politician who can negotiate the next 24 hours most skilfully or take most plausibly some ludicrous line—ideally, while wearing a high-vis jacket or hard hat. So is it a surprise that our fiscal problems have compounded as our political system has become ever more performative? I remember my noble friend Lord Lamont once saying, “To govern is to choose”. More recently, we have had a Prime Minister who said, “I’m pro-cake and pro-eating it”. Fortunately, we face a test that will show whether we have a political system that is indeed capable of being serious once again. What are we going to do about the pension triple lock? It is already clear that, in the circumstances we face, it is indefensible economically. But if, as a society, we believe in some kind of intergenerational fairness, it is clearly also indefensible morally. A policy that locks in the transmission of money from a declining number of young people to a growing number of relatively well-off older people—or, if you like, from our children to us—is not the path to a strong, balanced society. I hope we can rise to this challenge, which applies to my Benches as much as it does to the Benches opposite. As my noble friend Lord Bridges said, we can either take steps ourselves to start sorting out the mess or wait to have change forced on us. I know which I prefer and which I believe is better for our democracy, but honesty about our fiscal situation requires honesty in our politics. To restore seriousness to our fiscal position, we first need to restore seriousness to our politics.
Baroness Alexander of Cleveden (Lab)
My Lords, I also welcome this debate. I thank the noble Lord, Lord Bridges, for bringing it and welcome the noble Lord, Lord Pitt-Watson, to his place. As for the tone of the debate, it is inevitable that the conference season, immediately before the Budget, is a time when all parties lay out their stall, although I have been particularly encouraged by the contribution of the noble Lord, Lord Burns, and the contribution that we have just heard from the noble Lord, Lord Hill, about some of the thoughtful longer-term structural issues with which we are contending as a nation. The nation’s fiscal challenges are self-evident, and my party in government faces understandable public anxiety. As the noble Lord, Lord Hill, just noted, the party opposite is also contending with some public scepticism about their record in government. As for what that does to our politics, it brings to the forefront the populists: those who peddle easy solutions to these structural challenges and who are determined to convince the country that the answer to our fiscal challenges is to blow up the system. It is not made any easier by the markets being spooked by a US President who, on social media last week, was telling the Federal Reserve in capital letters to lower the rate and who today promised a “cash bung” to those who voted the right way. That creates a challenge for all of us, but, as the noble Lord, Lord Bridges, recognised, the real rocket fuel for populism and difficult politics is low growth. Low growth is the root of our fiscal pressures. It is a result of the financial crisis, as we have heard, which was exacerbated in Britain by Brexit and then a series of global shocks: the pandemic, the war on our continent, the rising energy prices and the Iran conflict. There is common ground here that on top of those pressures come spending pressures of an ageing population and the need to raise defence spending. All that requires a Government willing to face up to those headwinds, and I believe that is what we are seeing. Our times demand serious responses. We have heard from the noble Viscount, Lord Chandos, about Gordon Brown and I am going to come to that, but I took inspiration this week from the noble Lord, Lord Hague, who wrote: “The old Conservative philosophy … is no longer a convincing governing programme. That is because circumstances have changed. We now face ageing populations, housing scarcity, energy insecurity, technological competition with the US and China, Russian aggression, weak productivity, strained public services and increasingly expensive welfare states”. Those are wise words indeed, and they echo what we have heard in this Chamber today. However, there was also an honest acknowledgement of the new fiscal challenges and an invocation to us all to not be tempted by easy populist solutions. His remedy was growth, particularly innovation and entrepreneurship. Gordon Brown, who wrote 24 hours later in the Financial Times , also urged a focus on growth and innovation, both men arguing for a Budget as an economic event as much as a fiscal one. Encouragingly, the new Chancellor’s inaugural speech on Monday focused on growth and innovation and scaling start-ups in the north. I will put the case for the Government. Despite the headwinds, the Starmer Government delivered the economic stability that we promised. Growth is the best in the G7. I stress that we are cutting the deficit faster than others in any other G7 economy, although I accept that a sustainable long-term path is something we have to find. Productivity is up, wages are up, business investment is rising, with planning delays, judicial reviews and the Green Book all being tackled and young people put back to work. Meanwhile, the Chancellor has reaffirmed the Government’s commitment to fiscal discipline and respect for manifesto commitments, and wisely has made no false promises on tax. I say to the party opposite, we await what the new shadow Chancellor’s prospectus is. The last shadow Chancellor told us that his strategy was not to focus on innovation—indeed, he was proposing cuts to the British Business Bank—but for a rather implausible £23 billion to come from welfare. Welfare spending outside of pensions has hovered around 5% of our national wealth for the last 40 years, so there is scant evidence of where the axe would fall. We have been told that half a million children would be pushed back into poverty by restoring the child benefit cap. That, along with raising VAT on disabled drivers and cutting housing benefits, is not the totality of the solution. Nor is cutting overseas aid. That ship has sailed. We are told asylum hotels will be cut—another ship that has sailed. Legal and illegal immigration are both decisively down. Cutting back on some of the extra 150,000 civil servants employed in the last decade and a half is perhaps wise. My point is that the luxury of opposition should not involve aping the populists, because that is not a governing strategy. We have heard from the noble Lord, Lord Burns, that the way forward may be to look at tax. We have heard from others, including the noble Lord, Lord Hill, that we should perhaps look at the triple lock. There are legitimate differences around where and how spending might be addressed and where the axe should fall, but I simply say in conclusion that we know from the Chancellor that this Budget will be one that sticks to the fiscal rules, restores the fiscal headroom, as it must, and reinforces the Government’s commitment to growth with a 10-year plan to follow which signals where change is coming on devolution, social care and defence. I believe these are the priorities that resonate with the country.
Lord Howell of Guildford (Con)
My Lords, I congratulate my noble friend Lord Bridges on bringing forward this debate—he probably had to do a bit of pushing and shoving—and for his crystal-clear demonstration, which will be hard to challenge, that with our national debt interest we are on a path to unsustainability and no one has a clear idea what to do about it, including the present Chancellor. Fair enough, this is not new, as the noble Lords, Lord Hill and Lord Burns, with their enormous experience, have said. This is an old problem which has its seeds in the past. I can go back further than the late 1970s to 1970, when we talked about a new style of Government and Ted Heath slightly unexpectedly became Prime Minister. We urged that we should start unravelling the almost entirely socialised public sector inherited from the war years and begin to regain some balance between private enterprise and the market economy on the one hand and the necessary government framework of laws, guidance and support on the other. As I say, it is not new, and anyone who says it is all the fault either of the present Government or the past Government makes an interesting comment but it is completely irrelevant to what on earth we do about it now. I declare my interests, given that energy is often at the root of all these problems. I am a chairman of the Windsor Energy Group and I advise Crystol Energy, both without pay. I also advise the Kuwait Investment Office, which is an enormous sovereign wealth fund that longs to invest, as do others, in the British economy but finds great difficulty in doing so and has vastly reduced its commitment in the British economy rather as the pension fund has been vastly reduced. When I was young, pension funds with their surpluses put 60% of their money in the British economy and mostly in British equities. Now the figure is 3.8%. What on earth has gone wrong? No wonder there is a shortage of resources for investment if our main investors, at home and overseas, are quietly packing their bags and going elsewhere. I will put four points on the question the noble Lord, Lord Hill, has rightly raised: what to do about it. The roots are deep and the problems will require an enormous change of attitude in the digital age, which will be difficult for a lot of people to face, including a lot of politicians. First, around the world there are a lot of methods of merging or matching private finance and enterprise with public and state frameworks for basic needs—in particular, longer-term public infrastructure projects which simply cannot be delivered without a Government pump-priming and underpinning but for which there is no state cash left. There is no money. There is no more room to borrow, or if there is, the borrowing cost of interest cancels out what one was trying to borrow. And there is no room to tax, because if you tax beyond a certain point, as we know from Arthur Laffer and many others—although there are exceptions to this—you end up with less revenue, not more. So, the ceiling is being bumped against and there is no way out of that. Secondly, these new methods that I mentioned, which we invented here under the name of PFI 25 or 30 years ago and which are now called PPP, are being developed and used in several countries. They are not just experiments or hopes for the future, but what is actually going on at the moment. We dropped the idea back in 2018, but a whole range of countries, which I will come to if I have time, are adopting varieties of this method of harnessing private enterprise to public needs. Compatibility between state and private investment can be reached through risk analysis, insurance developments and careful phasing of projects. The whole resources of private enterprise can be brought in, easing the bond markets’ tensions, worries and consequent increases in interest rates for lending us their money. There are opportunities opening, certainly not for any more bogus financial headroom and that sort of thing but definitely for carrying forward some of the projects we need, from potholes to power stations, without burdening the bond markets or government accounting. These are being followed in a number of countries. Finally, these are immensely powerful new insights that I hope we can pursue and share, aside from the politics. We on this side think that the wrong Government are in office and that they are bound always to bow to the state. That is a statement of fact and raises all sorts of other issues. There is no point in bemoaning it. At this time, we have a role in opposition to try to state some constructive ideas. If the Government borrow them, that is fine—at least we are making progress. I hope that we can unlock a great deal of progress. A lot of this lies in the great energy transition and providing 24/7 reliable, affordable clean energy in the quantities that are going to be needed if we can ever get growth going. The experts planning our energy future have persistently underestimated the amount of clean, green energy we will need and the amount of investment we will need to achieve that—certainly for our modern growing economy and, even more certainly, to cover the enormous requirements of the data centres we will need to keep up with the world, which are very thirsty indeed. At present, our plans are proving totally inadequate for meeting their needs. The nations moving this way are the Netherlands, Ireland, France, Germany, Norway, Sweden, Finland, Canada, Australia, South Africa and some provinces and states in Canada and Australia. The province of Ontario is launching a huge new nuclear programme that is much quicker than ours, much more efficient and much more reliable, with the help of the Japanese and without going to its Government. There are many other examples, some of which might well bring down the cost of borrowing, which for this country is too much and too expensive, and we must call a halt. There is a third way of a sort. It does not let the Government or politicians off the hook, but we should realise that the private enterprise pattern for public expenditure of this kind is vital for the projects of the future and is attainable if we think clearly and wisely about it.
Lord Londesborough (CB)
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 D ebt: 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.
Lord Redwood (Con)
My Lords, the Conservative Government were swept from power, first because they did not deliver on immigration control in the way that they promised but, secondly, because they presided over a very major surge in inflation in the early 2020s, which had been brought about by excessive spending, excessive borrowing, the deliberate repression of interest rates and the artificial creation of very large sums of money by the Bank of England. Like many, I supported the first very substantial injections into the economy when lockdown was first announced. Lockdown took a lot of activity and income out of the economy and a very major offset was needed. However, I became increasingly critical and impatient in the recovery period because the Government and the Bank of England did not seem to understand that we were into recovery and carried on with excessive borrowing, excessive spending and excessive money creation. I and others told them that it was bound to be inflationary, but much of the great British economic establishment was slow to see that and the result was a nasty cost of living crunch that did damage to the electorate and drove the Conservatives from power in a perfectly understandable way. By 2024, however, the Conservative Government had got much better control of the economy and, for the first six months of 2024, under Conservative direction, the inflation rate came back down to the 2% target. For those six months, it was the fastest-growing economy of the G7. The Government set out a five-year plan in their 2024 Spring Budget, as always, which had entirely credible figures to show the deficit and therefore the borrowings coming down year by year to reassure bond markets. Under the Conservatives, of course, it was considerably cheaper than it is today for the Government to borrow because there was a bit more credibility in the medium-term prospects for controlling borrowing than there is today. I think the fairest thing to do to try and analyse where we are, because I want the Government to succeed and I think they need to consider very carefully where they are when framing their next Budget, is to compare the plans of the outgoing Conservative Government in the 2024 Budget for 2027-28 with those of this Government. Let us concentrate on 2027-28 because that is when the new Prime Minister and his new Chancellor can make any changes they like. They have inherited the current year and have chosen not to make many changes, just a few incidental, very small increases in spending. They have basically lived with the Reeves/Starmer construction of this year, but let us hope they think carefully about what they want to do for 2027-28. What have they inherited from Reeves and Starmer? Well, in two Budgets, Reeves and Starmer increased taxes by £66 billion by policy changes—there is also, of course, a much bigger increase in taxes from fiscal drag and inflation—and for 2027-28 they suggested that they wanted to borrow £97 billion more than the outgoing Conservative Government had planned to do. The Conservatives were planning to borrow £50 billion in 2027-28, and the current Government inherits £147 billion. There is then the level of spending: the Reeves/Starmer Government added £145 billion extra spending for 2027-28 compared with the £97 billion that the Conservatives were planning for that year. The total package is to borrow a lot more, tax a lot more and spend a great deal more. Looking at the economic performance of the last two years, we see that this has not been a benign policy mixture for the economy. Unemployment has gone up and inflation has gone up, not entirely because of world events in the Middle East, but also driven by public sector costs where there has been a very big increase in public sector wages. I have no problem with paying people in the public sector more, but there should be productivity gains to help pay for it, and those have been sadly lacking. We have seen the Government stumbling to maintain tax revenues at the more elevated levels because they have triggered what in the 1970s was called a brain drain. A lot of talented people and a lot of people with wealth have decided that they want to make their lives or to make their investments elsewhere, which is a considerable concern. I have no problem with wanting to tax the rich more than everybody else, because they have the money to tax, but if you overdo it they do not stay to pay the money you wish to raise from them and then everybody else has to pay rather more, because you have lost those easier amounts you can get if you tax the rich in a sensible and internationally competitive way. As has been made very clear by my noble friend Lord Bridges, the Government have to take action on spending. I do not think higher taxation is going to help get the Government out of this, given that they have ruled out the main taxes on most people. They would have to target the wealthy, the energetic, the people who work harder rather more than anybody else. More of that would do damage to growth and would mean less revenue rather than more, so they have to find public expenditure reductions that can start to bring the budget into a proper shape. I do not share the view of those who think we should pick on the pensioners or the disabled to make particular sacrifices at this juncture. Those who are genuinely disabled need our proper financial support and I think both parties were right to promise the triple lock in the election and should keep to their word. There are many easier targets, which I have often mentioned, but which time does not permit me to handle today, but my party has set out a very good set of cuts for the benefits bill to start us off.
Baroness Noakes (Con)
My Lords, I congratulate my noble friend Lord Bridges of Headley on securing this debate. The fiscal outlook, as my noble friend set out in his excellent speech, is pretty awful. The upcoming Budget will be particularly difficult. The small headroom left by the previous Chancellor has probably already disappeared. Public expenditure at 44% of GDP is too high, debt at approaching 100% is too high, taxes at 38% are too high and growth at around 1% is way too low. The Bank of England seems incapable of getting inflation down to its 2% target. The backdrop to the Budget could hardly be worse. The Government have now been in power for over two years. They may want to continue blaming their economic inheritance—as the noble Lord, Lord Livermore, did ad nauseam—but that simply will not wash. We are where we are because of choices made by this Government. They have been true to form: Labour Governments always spend too much, borrow too much and tax too much. The solution is definitely not more of the same, but there is no sign that the new leadership in No.10 and No. 11 will change course. I will focus my remarks today on two areas: debt, spoken about by my noble friend Lord Bridges of Headley, and taxation. We used to think that 40% of GDP was a de facto ceiling for debt. In the wake of the global financial crisis and then the pandemic, we seem to have normalised debt staying at historically high levels. The fiscal rules require only that debt falls, and that could be by any amount, by the end of the current forecast period. There is no commitment to putting debt on a serious downward trend. The noble Lord, Lord Burns, rightly emphasised the need for this. Debt has to be serviced, and the cost is rising. As we have heard, the UK’s long-term borrowing rates are the highest for 30 years; 10-year rates are the highest in the G7. Bond yields reflect the market’s view of our economic prospects: we are being judged as weaker than the rest of the G7. Persistent inflation, weak growth and worries about a Government that show no sign of controlling expenditure or moderating debt levels will keep our borrowing expensive. The ultra-low interest rates that we experienced after the financial crisis lulled Governments around the world, not just our own, into seeing borrowing as a cost-free option. But since rates have normalised again, the real cost is now visible and, as my noble friend Lord Bridges said, we will be spending over £100 billion a year on interest. This is way more than on defence. There are three ways to reduce debt. The Government seem to be betting on growth solving the problem. Many of their policies, however, are positively anti-growth: employment laws and the jobs tax in particular. The two other ways are to spend less or to tax more. I do not believe that this Government will cut expenditure. Does anyone believe that the Government will be able to keep a lid on the out-of-control NHS expenditure? Does anyone believe that they will have the courage to face down their Back-Benchers to cut the benefits bill? If they cannot make headway on these two big-ticket items, expenditure will remain too high. That leaves taxation. The Chancellor has refused to rule out raising taxes in next month’s Budget, but raising taxes is about the worst thing that he could do. He ought to learn from the last Chancellor’s dreadful decisions that hiking taxes has consequences. Loading more national insurance on to employers will simply destroy jobs, especially entry-level jobs. Increasing taxes on banks, as the TUC has called for this morning, simply means that they will have less to lend to the real economy. Taxing oil and gas companies might satisfy the green zealots, but it will threaten our energy security. The Chancellor may be tempted to satisfy calls from his left wing to tax the rich more, but that will backfire. Wealth taxes have not worked anywhere. Higher rates of capital gains tax are counterproductive, because people simply do not sell assets. Creating higher rates of income tax will drive even more wealthy people to head for the departure lounge. Some of us were privileged yesterday to hear Dr Art Laffer speak. He was clear that the decline in the UK economy over the past 70 years is highly correlated with periods of high rates of taxation. He was also clear that there is no example of an economy which has been taxed into prosperity. The Government would do well to take note of this. A serious response to our woes must be rooted in unburdening the private sector so that it can grow without interference. The economy needs less regulation, lower tax rates and increased incentives, and this applies to individual taxpayers as much as to our business sector. The state must play its part by doing less and spending less. I do not think that the Prime Minister or his Chancellor are remotely capable of achieving those things. That is a tragedy for us all.
Lord Davies of Brixton (Lab)
It is a privilege to take part in this debate. I enjoyed the typically powerful speech from the noble Lord, Lord Bridges of Headley. What I think he got right was his comment that this debate is really about political choices and political beliefs. It will come as no surprise to him that, on this side of the House, we have different beliefs leading to different choices; that is as it should be. I will speak about the triple lock, which on the OBR’s figures is a key element in determining the UK’s fiscal outlook. I support my party’s commitment to the triple lock up to the next election. The inevitable question is: what follows? A number of noble Lords have mentioned the triple lock, and it was raised several times in last week’s parallel debate. I will not mention them all, but it is clearly a big issue. A number of people simply say that we need to abolish it. I am sorry, but this is facile—that is only a part of the equation, because you also have to say what should replace it. Crucially, we must also discuss the right level of the state pension, because the debate about the triple lock is as much about this as the technical details of the revaluation basis. In my view, these are jobs for the Pensions Commission, and I hope that it will address them in its report early next year. I favour the triple lock because it is highly effective at protecting pensioners, particularly those on low incomes. I take it people understand the triple lock, but what is often missed is that it does not apply to the whole of the state pension. It applies only to the new state pension and the basic pension. The rest of the state pension is tied to the CPI. It does not, of course, apply to all the other sources of income received by pensioners. The net result for most pensioners is that incomes during receipt, as they get older, do not increase faster than those of the working population. There seems to be an implication that pensions are going up faster because of the triple lock. This is only part of the equation, and most pensioners experience a decline in their income during their retirement. The only people for whom it actually leads to a protection—even an increase, in some cases—are the poorest pensioners. This is because, by definition, their only income is the new state pension or the basic state pension. Any system of pension uprating serves three distinct objectives, hence the triple lock. First, it allows pensioners to share in rising living standards, which I hope we would all support. Secondly, it protects pensioners against inflation. Last but not least, it protects the Government against difficult political circumstances. The first two objectives could be achieved through linking pensions solely to earnings or prices. The triple lock, of course, goes further by guaranteeing the most favourable outcome each year. That reduces political risk but increases long-term costs through the ratchet effect. As I have explained, the core argument in favour of the triple lock is that it disproportionately benefits poorer pensioners. It is targeted and then recouped from better-off pensioners through them paying taxation like everyone else. For many low-income retirees, the state pension and related benefits make up the majority of their household income, and a significant minority have no income beyond their state support. It is these people that the triple lock benefits. The 2.5% minimum increase has raised the most questions. This floor was introduced partly in response to the politically controversial 75p weekly rise in the basic state pension in 2000, which complied with the rules at the time but was widely regarded as inadequate. It still ensures that pensioners receive a meaningful increase even during periods of low inflation and weak wage growth. The policy has helped bring the state pension close to the level anticipated by the 2005 Pensions Commission, which envisaged it being around 30% of median earnings—the sort of level it is at the moment. Coming back to the focus of this debate, clearly the triple lock’s most significant drawback is that it comes with a fiscal cost. It has increased pension spending more rapidly than was envisaged when it was introduced, particularly because the 2.5% floor has been higher than earnings growth over a number of years. Critics argue that pensioners as a group are now relatively better off, but that is not true of all pensioners: as I explained, there are large numbers of pensioners on low incomes. I agree with my noble friend Lady Alexander of Cleveden that we need a reassessment of the triple lock. What are we going to do after the next election? However, as part of that, we have to recognise the value that it brings to the poorest pensioners.
Baroness Lane-Fox of Soho (CB)
My Lords, I too thank the noble Lord, Lord Bridges, for securing this debate and for his masterful opening. I will be more modest than him in my remarks and direct my comments to just one number: that pesky 1%. As we have heard, that number is roughly the rate of productivity growth that the OBR assumes we will reach by the end of its forecast. As we know, it is one of the numbers on which the fiscal outlook turns. Higher productivity means higher wages, stronger tax receipts and more capacity to fund public services. Weak productivity means that every aspiration—better services, better jobs, lower taxes or lower borrowing—collides with the same hard constraint. We spend a great deal of time in this House debating how we divide up the economic pie, but we must help the pie grow faster. Every Chancellor will face increasingly miserable choices otherwise. Technology is not the only explanation for Britain’s productivity weaknesses, but investment in technology, and the ability to spread it rapidly through businesses and the public sector, is a vital part of the answer. I recently chaired the Mayor of London’s taskforce on AI and the future of work. Our starting point was that the future is not predetermined. AI is not a weather system rolling towards us that we merely observe; we still have choices. We can wait for disruption and deal with the consequences afterwards, or we can act early, shape the change and create opportunity from it. That distinction goes directly to our fiscal future. Successive PMs have assured us that Britain can produce the next great trillion-dollar AI company, and I for one very much hope that we can. But there is another race that matters just as much: can we get these technologies into the rest of the economy quickly enough to make Britain’s jobs more productive and fulfilling? AI sitting in a data centre is not productive, but AI used well in millions of workplaces might be. The latest ONS evidence gives us a glimpse of both the opportunity and the problem. Among businesses with more than 10 employees, reported AI use rose from around 12% in late 2023 to 35% in June this year, yet only one in 10 businesses using AI says that it is using it extensively or helpfully. That suggests that, in many cases, AI remains an add-on to existing work, rather than a chance to rethink what work is and how it is done. Having spent three years as president of the British Chambers of Commerce, I can say that SMEs are always at the forefront of my mind. The productivity revolution will not happen simply because another brilliant AI company opens up in King’s Cross; it will happen when a manufacturer in the Midlands, a hotel in Cornwall or an accountancy practice in Newcastle can use these tools to do things better and faster, increasing profits and increasing employment. My first ask of the Government is simple: do not treat the diffusion of AI through the economy, including in the public sector, as anything less than a national productivity mission every bit as important as the next invention at the frontier. We must help smaller firms to have the skills to use this new technology, redesign processes and build businesses around it. My second ask is to act earlier. One of our taskforce’s recommendations was an early-action system to spot changes in London’s labour market as they emerge, combining data with what employers and workers are seeing on the ground, as well as where opportunities are available. Its wider approach was to act early, shape change and create opportunity. We need the same discipline nationally. If we wait until somebody has lost their job before we think about retraining them, we have failed. Helping people move into new work is cheaper, more productive and far better than leaving them with the consequences of redundancy. Workers must not simply be the recipients of technological change. The people who do jobs understand best how technology could improve them. If we bring workers into the redesign of work, we are much more likely to use AI to augment people rather than simply removing them. I welcome the decision to put AI much closer to the centre of government, particularly with the recent appointment of the noble Lord, Lord Vallance, but AI will not rescue government systems and processes that do not work. Success must not be measured by whether Whitehall has an AI strategy; it will be measured by whether it becomes easier for a parent to obtain support, whether businesses spend less time navigating bureaucracy, and whether front-line public servants spend less time moving information between outdated systems. AI can make the Government more productive, but not by bolting new technology on to old and bad ways of working. We must start with the greatest points of friction, and then we must give good teams the freedom, tools and support to fix them. On Tuesday, I was lucky enough to see Demis Hassabis—as was the noble Baroness, Lady Batters, who I see is in her place. As noble Lords are well aware, he was the founder of DeepMind, and this week he received the Albert Medal from the RSA for his work. He is undoubtedly one of our greatest assets, and inevitably one of the most productive people on the planet. In his acceptance speech, Demis painted an optimistic and exciting vision of an AI future. He sees no reason to proceed with fear. But his caution was this: very few of us have an idea of what is coming, and we are not acting with enough creativity, imagination and urgency to make sure that the UK is in an advantageous position for the next decade. Let us heed Demis; let us be bolder. After all, the test over the next few years is, in some ways, remarkably simple: did that 1% go up?
Baroness Meyer (Con)
My Lords, I congratulate my noble friend Lord Bridges on securing this important debate and on his excellent opening speech. The Prime Minister wants to “bring back hope”, but he blames Thatcherism and Blairite economics—which he once supported—for Britain’s problems. What is his solution? More state control and more regulation. He calls it “business-friendly socialism”, but how can an economy be business-friendly with more union power and less economic freedom? We have been here before. In the 1970s, the state controlled large parts of the economy, while trade unions wielded enormous power. I remember those days: rampant inflation, power cuts, rubbish piling up during strikes, disrupted transport and economic decline. The Soviet Union offers an even starker lesson, with state-controlled production, prices and investment. Private enterprise was not allowed. The result was shortages, inefficiency and stagnation. The Soviet Union collapsed because central planning destroyed incentives, innovation and production. Governments cannot create prosperity by controlling the economy, yet the Prime Minister appears determined to take us back to an era in which the Government owned and trade unions ran the economy. Here lies the first contradiction. The Prime Minister says that growth cannot be ordered from the top down, yet he advocates public ownership of essential services and wants to decide which sectors of the economy should be prioritised. History shows us that Governments are notoriously bad at picking winners. The second contradiction is fiscal. The Prime Minister embarks on his 10-year plan when the fiscal headroom has fallen to just £8 billion, welfare accounts for almost a quarter of government spending and the national debt is approaching £3 trillion. Yet he has already run up a potential bill of more than £50 billion while proposing further uncosted public ownership. Nationalising water alone could cost some £140 billion. Where will the money come from? Will the Prime Minister break his pledge and Labour’s manifesto commitment not to raise taxes? The tax burden, as we have heard before, is already at a record high. Any further increases will discourage hiring, investment and entrepreneurship and accelerate capital flight. Some 27,300 high net worth individuals and 6,000 business owners have left Britain in the last two years, taking with them investment, ideas, jobs and tax revenues. There comes a point when higher taxes produce less growth and revenue by weakening incentives to work, save and invest. Policies that suppress growth do not protect the poor and vulnerable. Ultimately, they make the poor even poorer. Will the Prime Minister borrow more? We already spend £110 billion a year servicing our debt—money that could be spent on education and defence. As my noble friend Lord Hannan has said: “The markets are not interested in moral hazard or in justice. All they care about is whether they will get their money back”. The bond markets are taking note. As we heard before, 10-year yields are at a record high—higher than under Liz Truss. Some economists warn that Britain could again find itself going cap in hand to the IMF for a bailout, as we did in the 1970s. Rather than reverse Thatcherism, the Government should remember that her reforms reversed Labour’s economic decline and reduced our debt. With welfare spending continuing to rise as our population ages, we are passing an ever-larger bill to our children. This is the fundamental contradiction at the heart of the Prime Minister’s programme. He wants a bigger state when we can no longer afford the state we already have. But the Prime Minister has an opportunity to build the pro-business, innovation-led economy he wants. The Chancellor’s recent call for more private investment, more profitable businesses and more wealthy founders is encouraging—but that requires less government, not more; lower taxes, not higher ones; and an economy that rewards enterprise rather than penalising it. Will the Government rein in spending, reform welfare and reverse the most damaging elements of his predecessor’s Employment Rights Act so that Britain can once again be a country where businesses want to start, grow and stay?
Lord Rooker (Lab)
My Lords, I am obviously not alone in enjoying the period I spent on the Economic Affairs Committee under the chairmanship of the noble Lord. I really enjoyed it—and most of his speech. It was one of the most interesting committees I have served on, but I have to say that no Government of any kind paid much attention to our reports. I am very pleased with the appointment of the Chancellor of the Exchequer and have every confidence that he will obtain growth, but there is a need for some reforms of taxation. I will make three little points before two bigger ones. First, council tax should be revalued, extended up the scale and absorbed, with an abolished stamp duty, into a land value tax. Secondly, why should small businesses want to remain small? The VAT threshold must be dealt with, because we want growth. Thirdly, why on earth should working over-65s not pay national insurance? I have a declaration to make in that between 1999 and 2001 I was the Pensions Minister and I was responsible for the 75p pension increase. It was not all bad, as the poorest pensioners on supplementary benefit had an increase of over £3. They do not queue up to the TV cameras to say, “I’m poor and I had £3”. I explained this to the Labour Party conference that year. When I sat down on the platform, Gordon Brown said I should acknowledge the standing ovation. It is how you tell the tale. It was not just 75p—there was more to it than that. Of course, this resulted in the double lock, leading to the triple lock, and it is now unsustainable—I have said so publicly. What is the answer? My answer is a triple average. It is fairer and easier to explain. I have done some calculations and got the Library to calculate it for me: if it had been used in the past three years, the increases would not have been 10.1%, 8.5% and 4.1%; they would have been 6%, 5.9% and 2.8%. The triple average could work after the next election. It is easy to explain and fair. We have to reset the pension—I am not arguing with my noble friend—but the mechanism for changing it could simply be the triple average, which would remove the major public expenditure obstacles we have. My second main point—this is the message to this Government—is the need to avoid attacking the poorest low-income pensioners. This will happen unless the Chancellor changes the personal allowances—the tax threshold. It is no longer a stealth tax, following the work of the late Audrey Wise and Nigel Lawson and me in 1977. The law requires a vote in the Commons for the allowances to be raised by less than inflation. On 2 December last year, Labour MPs voted to freeze the allowances until 2030-31. They voted for a tax increase. The manifesto is completely out of the way. Everybody knows they voted for a tax increase. This Government perpetuated the freezing of the allowances started by Jeremy Hunt and Rishi Sunak, and this policy is now dragging millions of low earners and low-paid pensioners into taxation in the first place and millions more into the higher rates. For anybody interested in the technicalities, these days the 1977 law is set out in Section 35(1) of the Income Tax Act 2007. Taxing the very basic state pension—which is what this Government are going to do unless they change the allowances, because freezing them will cause that to happen—will be very bad news. It will be a lot worse than the abolition of the heating allowance, and it has to be dealt with. It can be avoided, but are they going to avoid it? I understand the pressures, but it is no good saying, “Oh well, everybody’s got to carry the burden”. I do not believe the poorest pensioners have the broadest backs. Why should they not have the basic state pension? It has never happened before, but it will happen unless the Government do something about the threshold. They can do it in a way that does not affect it for everybody else. I do not agree with freezing the threshold in the first place, but the fact is that it cannot be done, as it used to be done, by stealth. You have to knowingly vote for it. I read the debate, and nobody ever told Labour MPs, “By the way, this is a tax increase, and we have to do this because those three people back in 1977 forced us to; it used to be done without that”. It was all about indexing the allowances. Therefore, they used the law—but without telling people what they were doing. I want to tell Labour MPs: you voted for a tax increase and, unless you do something else in the next Budget, you are going to be responsible for taxing the basic state pension. That is not a good idea.
Lord Elliott of Mickle Fell (Con)
My Lords, over the course of this three-hour debate, the national debt will have grown by £45 million. That might not seem like a lot of money compared with some of the figures we discuss in this Chamber, but that is 65p of additional debt for everyone in the nation. Interestingly, when we sat for Questions this morning, with the 21 hours of sitting time over the week, £315 million had been added to the national debt. Sadly for us, Britain’s third-largest taxpayer, Chris Rokos, who gave us £330 million in tax last year, is no longer around to pick up the bill. The growing national debt is not a new problem. In my early 20s, I founded the TaxPayers’ Alliance. In the spring of 2010, we launched a debt clock tour in Parliament Square. A 14-metre Scania truck carried a 1 metre by 7 metre debt clock, which counted up the public borrowing in real time. The truck visited all four countries of the UK on a 1,300-mile tour with the message, “Wake up to the national debt”. In April 2010, the national debt was hovering at just below £1 trillion. Between 2010 and 2020, it grew by another £1 trillion. We are currently at £3 trillion, and it is set to hit £3.5 trillion by 2030. Crucially, according to the latest analysis from the TaxPayers’ Alliance, this year’s real national debt—the figure taking into account the £1.5 trillion of public sector pension liabilities and almost £7 trillion in state pension liabilities—will be £11.7 trillion, or almost four times the size of the UK economy. I agree with other noble Lords that our fiscal position is perilous. We clearly need to address our ballooning spending. I will not attempt to provide a comprehensive spending plan in the few minutes I have, but I would like to briefly touch on two important budget lines: welfare spending and public sector pay. As the Prime Minister told the BBC in July: “We have to get really serious as a country at getting the welfare bill down”— not slowing its increase or freezing it but getting it down. He is absolutely right. According to table 4.6 of the OBR’s report on the Spring Statement, we currently spend £333 billion on welfare, a sum almost as big as the combined GDP of Scotland, Wales and Northern Ireland. It is also a sum that exceeds the £331 billion of income tax that the Treasury hopes to collect in the current financial year. The key to solving this is obvious: we need to help more people transition from welfare into work, because there is no better form of welfare than a good, well-paying job. Sir Charlie Mayfield pointed out in his Keep Britain Working report that a young person out of work costs the state around £1 million, with the same amount of money lost for the young person in lifetime earnings. Alan Milburn also spoke about this powerfully before the summer. He said: “What is shameful … is that … for every £25 that we spend keeping young people on benefits, we spend only £1 helping them get into work through employment support”. I commend the Government for commissioning these reviews and I hope they will be acting on them in the forthcoming Budget. On the question of public sector pay, one statistic that came out during the Summer Recess caught my eye. Last month’s ONS figures show that private sector pay has risen by 2.8% over the past year, compared to a much greater 6.1% rise in public sector pay. Since January, there are now 110,000 fewer private sector jobs, but 42,000 more public sector jobs. Increasing taxes on a shrinking private sector to pay for an expanding public sector is the economics of the madhouse, and we should not fool ourselves that the way to solve the national debt is more tax rises. Since this Government came into office, we have seen 24 tax rises: increasing employers’ national insurance, increasing both the capital gains tax rates, restricting business and agricultural property reliefs, freezing income tax thresholds, increasing the energy profits levy, increasing taxes on flights and plastic packaging and raising the climate change levy. If raising taxes were the answer to our economic challenges, we would be experiencing the highest growth rate in living memory. A different attitude to business is required to get more people into work, enabling us to reduce our spending, increase our revenue and create a society with a more comfortable fiscal outlook. I am reminded of Sir Winston Churchill’s comments on business: “Some regard private enterprise as if it were a predatory tiger to be shot. Others look upon it as a cow that they can milk. Only a handful see it for what it really is: the strong horse that pulls the whole cart”.
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.
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.
Baroness Kramer (LD)
My Lords, this has been an outstanding debate, and I join others in congratulating the noble Lord, Lord Bridges, on obtaining it and opening with a powerful speech. I did not agree with all of it, but it was definitely powerful. I want to slightly change the tone of this debate. I suppose that is strange for a winding speech, but it seemed to me that we had very little attention to the extraordinary strengths that we have as a country. A significant part of our workforce is very highly skilled. Our legal framework is the basis for much of global commerce. We have world-leading sectors in financial services, life sciences, technology and the creative arts—I think the noble Viscount, Lord Chandos, focused on technology—and that is to name but four. We have exceptional universities which breed new opportunities. We have a track record of entrepreneurship, often at the leading edge. We are the place to start a new business. The noble Baroness, Lady Lane-Fox, focused on AI and digital as an extraordinary opportunity to completely reset where we take our economy. Some people look at this only as risk, but I see this as the most extraordinary advantage if we go from being on the back foot and talking just about strategy and step-by-step minor adjustment to seize the chance of change. Thanks to the noble Lord, Lord Pitt-Watson, I and others had a meeting yesterday with Chris Woolard, who is now the wholesale digital markets champion. For once, I was hearing someone within the orbit talking about serious action at speed. That is the lesson that the Government have to take on board. Today we have heard about the appalling headwinds that we face as a country, economy and government. I started trying to write down the names but suddenly realised that everybody was naming those headwinds, whether it is public debt to GDP at 94%, taxes at the highest levels since World War II or gilt issues at the highest interest rates since 1988. The noble Baroness, Lady Morrissey, and somebody else, perhaps the noble Lord, Lord Hill, focused on index linking. I have screamed at the Bank of England so often on that issue, and unfortunately it is coming home to roost. I want to pick up the issue stressed by the noble Lord, Lord Bridges, on demographics and the dependency ratio, because this is something else that I and my colleagues have attempted to stress constantly. That dependency ratio is now at 57.8%. Alarm bells go off when a dependency ratio gets to 50%, and we are well over that point. It is getting worse with our ageing population. We have to address the issue that we have a very small working-age population to sustain our growing elderly population. We dodge that issue. It ties into the immigration debate as well and is so often ignored. We have to thank the noble Lords, Lord Howell and Lord Turnbull, for bringing in climate change, which seemed to be generally overlooked. Other than a quick mention by the noble Baroness, Lady Alexander, nobody talked about Brexit. How extraordinary. There is a 6% to 8% scarring of the economy. The other blows that we have had have been temporary and we have had a chance to recover from them. This is permanent scarring to the economy and ignoring it is extraordinary. I know that is Tory party policy at the moment, because you cannot be blamed for the damage if everybody forgets about it. On these Benches, we do not forget. How can we turn all this around? We need to focus on growth, which was part of the discussion here but only a small part. This House will not be surprised that my first proposal is to negotiate a bespoke arrangement for a customs union and single market with the EU. The supposed freedoms that the public were promised by Brexiteers turned out to be few. In economic terms, any benefits were utterly insignificant while the damage has been huge. Businesses, especially small businesses, have struggled to grow without participating in EU supply chains and getting the benefits of an EU domestic market of an additional 450 million people. That scarring of 6% to 8% is not something that anybody can ignore. It is huge. Ordinary people pay the price daily as Brexit harms push up the cost of living. The noble Baroness, Lady Alexander, and others talked about devolution. If it is done properly then I agree that it can drive growth. Importantly, for it to do so it must be across the country and include disadvantaged areas. The House can therefore imagine my utter frustration when this Government rejected my amendment to the Financial Services and Markets Bill which would have led to a rapid expansion of the available credit to small business to be provided by a growing network of community banks and credit unions qualifying as community development financial institutions. My amendment, which is inspired by the “Fair Banking for All” coalition and campaign, would require the mainstream banks, where they have abandoned local lending, which they have, to fund community development financial institutions. Little businesses are the backbone of our community. Many want to grow a little bit faster than they would organically but cannot get that loan for the next shop, van or worker or for the workshop extension. We always talk about unicorns, but we forget that the backbone of our economy is in those small businesses that are growing just more than organically. It also has that spread into every area and community. I am afraid that, sadly, the Government will not deliver their agenda of good growth in every postcode without my amendment or something very similar. At present, even though the Government make money available for credit to small businesses, the mechanisms are simply not there to deliver the appropriate lending to small firms. As I have said many times, mainstream banks no longer just do not have the branches, but do not even train their staff in the necessary skills base. I also agree that businesses which intend to scale up and be the next unicorn need different financing from that which is currently available, in the form of long-term patient capital that can carry high risk. We all want those companies to stay in Britain. I still have troubles with the Mansion House Accord and the recent pensions legislation. They are just so narrow. They are based on taking the tiny pensions of the lowest paid and least financially aware and putting them into high-risk illiquid investments. Most of those investments will fail. It is a very unattractive strategy. We need a structure that will produce the products that Britons will be willing to invest in. Britons have something like £61 billion in investment savings that could be channelled in large part into these activities. With the end of the defined benefit schemes, we have seen that new products that are attractive to people and meet their risk appetite and return appetite are not being provided by the markets as they are at present, even though there are plenty of willing investors. I suggested that there could be a structure in which the Government encourage risk investment but provide some sort of backstop for the poorest. I thought that no one would take the idea seriously, but the industry is starting to do so and I am now involved in quite a number of conversations around this issue. However, it needs much more imagination. The Government should focus on driving the private sector to produce the kinds of investments that would attract people, because the money essentially is there. I think we could go on, and all of us could produce a significant number of proposals which could stimulate and drive growth, but the Government will have to pull the levers on it. As my very last comment on what I want to see, I agree with all those who are pleading with the Government to be consistent. Having a policy of growth and then a policy—the last person to discuss it was the noble Baroness, Lady Morrissey—of raising employers’ NICs is a complete insanity. There needs to be consistency and direction. The Minister will be well aware that many of the voices that have spoken today have said that: set the strategy, set the goal and then keep to it in every policy decision that is made.
Baroness Neville-Rolfe (Con)
My Lords, I am grateful for the opportunity to contribute to what I agree has been an outstanding debate, and I thank my noble friend Lord Bridges of Headley for setting out the scale of the challenge facing the country in his usual persuasive style. He rightly drew attention to the conclusions of the Economic Affairs Committee two years ago that the UK’s national debt risked becoming unsustainable. This was echoed by my noble friend Lord Howell of Guildford. Our public finances are in a worse state now than two years ago, when Labour took office. The party opposite likes to talk about Liz Truss, but, this morning, 10-year gilt rates were at 5.24%, which was more than in the financial crash of 2008. This is significantly higher than under Liz Truss. My noble friend Lady Morrissey warned us that there is no safety in numbers among bond investors. In some sense, we are “in hock to the bond markets”. We have heard that debt is approaching £3 trillion, borrowing was approximately £130 billion last year, and debt interest costs around £109 billion now and is expected to continue rising. We cannot allow this to happen. At the same time, the tax burden is forecast to rise to 38.5% of GDP by 2030-31, which will be its highest level since records began in 1948. The truth is that our fiscal position is much worse than the public realise, and it will not take anything major to trigger a surge in the bond markets, leading to a crisis. The Chancellor would be wise to study what happened in 1976, when another Healey had to be bailed out by the IMF—and, indeed, the experiences of 1981 and 1993, referred to by the noble Lord, Lord Burns. The international pressures we are experiencing come at a time when the UK is combining historically high levels of taxation and public spending with weak productivity, pressure on our public services and very little margin for error. Unfortunately, the Government do not have a credible plan to restore fiscal resilience, generate stronger economic growth and put the public finances on a sustainable, long-term footing. I will make three further points. The first is that the Government’s fiscal rules cannot be a substitute for an economic strategy capable of delivering genuine growth. The Government’s so-called headroom is already extremely limited, but it is not nearly as important as the wider economic context. Growth is forecast at just 1.1% this year, while the deficit remains some 4% of GDP. This is unsustainable. Over the past two decades, as we have heard, we have experienced a global financial crisis, a pandemic, war in Europe, energy shocks and repeated geopolitical disruption in the Middle East. It would be a reckless Government who constructed fiscal policy on the assumption that there will not be another crisis. We need over £300 million every day simply to service the national debt—and we can all imagine what a difference that would make to our Armed Forces or our services, or, indeed, in tax cuts geared to generating growth. Dr Arthur Laffer, as we have heard, was in London this week, saying that we are taxing ourselves to death and explaining how, in contrast, over the years, tax cuts have increased revenues and fired growth in the United States. My second point is that we cannot tax our way out of a productivity problem. The denominator in almost every fiscal ratio is the size of the economy. Without stronger growth, fiscal consolidation ultimately becomes an impossible choice between higher taxes, poorer public services and still more borrowing. Productivity must therefore sit at the heart of any credible fiscal strategy—it was good to hear from the noble Viscount, Lord Chandos, that it might be edging up. That means creating more of an enterprise culture, as the noble lord, Lord Londesborough, said, and using AI effectively, as we heard from the noble Baroness, Lady Lane-Fox. It is right to think of our strengths, as the noble Baroness, Lady Kramer, said. That includes our very strong network of SMEs in this country. Productivity also requires conditions in which businesses are prepared to invest and innovate, energy is internationally competitive, skills are better matched to the needs of employers, regulation becomes simpler, and, most importantly, people who are able to work, work. The employment rate was estimated at 75.1% in the second quarter, in a soft labour market. At the same time, welfare spending is forecast to increase from about £334 billion to £409 billion by 2030-31. Alan Milburn has rightly condemned the insane sick-note culture as NEET figures reach an all-time high, with £25 spent on benefits for every £1 spent on employment support, as we heard from my noble friend Lord Elliott of Mickle Fell. A CSJ report has laid bare a worrying post-pandemic trend of graduates coming straight from university on to sickness benefits. That is the opposite of how welfare should function. On this side, we are agreed on the damaging effect of the Employment Rights Act on new employment. My third point is that we must become much more willing to confront our spending pressures. I agree with my noble friend Lord Redwood on this. The demands on defence, social care, infrastructure and public services will be substantial, especially if the PM seeks to move utilities into public ownership, as my noble friend Lady Meyer suggested he might. Every major new commitment should therefore be accompanied by a credible timetable, a long-term costing, an identified source of funding and a clear assessment of the consequences for wider public finances. That will be our conservative way under Kemi Badenoch. In politics, we spend a great deal of our time discussing inputs. The Government announce another billion pounds here or another programme there, and present the scale of the expenditure as though it were in itself evidence of success. It is not. We need to know what expenditure actually achieves. The taxpayer is entitled to expect not simply higher spending—an input without an output measure—but better value and better outcomes. Like others, I was particularly struck by the thoughtful contribution from my noble friend Lord Hill of Oareford. We need honesty over the challenge of things such as pensions, and a change to the 24-hour political system buffeted by the demands of different lobby groups. Incidentally, I agree with the noble Lord, Lord Rooker, that the poorest pensioners should not be taxed by stealth. I was also very concerned to hear from my noble friend Lord Elliott that public sector pay had risen by 6.9% compared with 2.8% in the private sector, with public sector numbers going up by 42,000 and numbers in the highly taxed private sector declining by 110,000. This is not right. In a typically trenchant analysis, my noble friend Lady Noakes set out the dilemma facing the Chancellor in his Budget on 28 October—we must have some sympathy for him—and the need to learn from the last Chancellor’s record, which has hit business and entry-level jobs so hard. As my noble friend said, there is no living example of taxing into prosperity. I also look forward to the reply to the rather challenging questions from my noble friends Lord Bridges and Lord Howell. In conclusion, the fiscal outlook is grim. I agree with those who argued that we should tackle that by reducing spending and not by tax rises, which would only reduce growth and risk a downward spiral. Yet today’s leading story is of a visitor levy, which will hit growth, and a TUC request for a bank tax. Is it a surprise that so many high-rate taxpayers are leaving the country?
The Parliamentary Secretary, HM Treasury (Lord Pitt-Watson) (Lab)
My Lords, I thank the noble Lord, Lord Bridges, for securing this debate, and congratulate him on his opening speech. I also thank all noble Lords for their contributions today. It is a pleasure to respond to this debate. In doing so, I must say that I absolutely cannot do justice to the number of comments that have been made and the expertise that has been brought to the debate. But I will try to frame my response around some logic: first, the economic context; secondly, the fiscal rules and OBR; and, finally, the fiscal outlook and long-term challenges. I have to warn that, with the Budget coming up, there are things I cannot talk about because they could be in it, nor can I say anything that could lead to market speculation. But I hope that within the framework I have laid out, I can at least respond well. I frame my remarks around the lead given to us by my noble friend Lady Alexander. I believe there is considerable consensus in this House. This is an Opposition day debate, and I heard a number of speeches that were a bit polemical, which is understandable, and a few Aunt Sallies about Britain being like the Soviet Union—I think that if you had ever visited the Soviet Union, you would not be saying that. There was also the odd speech that sounded a wee bit funereal about our wonderful, resilient country. But there were lots and lots of speeches which expressed a shared overall goal, which is to drive good growth in every postcode and to back investment, innovation and jobs across our economy. That is what the Chancellor set out in his speech earlier this week. I believe the choices that have already been taken since this Government came to office put Britain in a stronger position today to deliver those plans and capitalise on the growth opportunities ahead. I know that one swallow does not make a summer, but in the first half of this year we had the highest growth in the G7 and government borrowing fell to its lowest level in six years. My noble friend Lord Chandos mentioned productivity. We need to be very careful about productivity figures, but last year we saw a greater than 2% increase in productivity, which was the best in 10 years when you adjust for the effect of Covid. The Government are trying to build on our strengths—my noble friend Lord Chandos mentioned our world-class universities, and we have world-leading sectors such as life sciences, defence, technology, creative industries and, as the noble Baroness, Lady Kramer, mentioned, financial services. On the need for growth, which the noble Lord, Lord Londesborough, made absolutely clear, there are a whole set of things, including trade deals and planning reform, that we are trying to do. Nevertheless, as was made clear in the debate, global instability, conflict and trade frictions are continuing, and they drive up inflation and interest rates around the world. Although these shocks are international in nature, their impact is particularly being felt here in the UK, from the cost of the weekly family shop to the cost of government borrowing. But Britain has shown a resilience in the face of these pressures, and I think the country is on the up. In the context of a more uncertain world, we must continue to make responsible choices, and fiscal discipline will underwrite every promise that this Government make. I do not want to dwell on how we got to 100% borrowing or on the moment when Britain ended up having the highest borrowing costs among the G7. We are looking for a coherent policy going forward, which the noble Lord, Lord Hill of Oareford, was pushing us to look for. In the past, we have had so many different fiscal rules. Every time a Government were going to break the fiscal rules, they just changed what the fiscal rule was going to be—that point was made by the noble Lord, Lord Turnbull. Both the Prime Minister and the Chancellor have been unequivocal in committing to meet the fiscal rules in the Budget next month with a buffer for uncertainty. The first fiscal rule, the stability rule, moves the current budget into balance so that day-to-day spending is met by revenues and ensures the Government will only borrow for investment. Previous fiscal rules discouraged investment. The second fiscal rule, the investment rule, ensures that net debt falls as a proportion of GDP, which is what the noble Lord, Lord Burns, was advocating. This keeps debt on a sustainable path while supporting over £120 billion of additional departmental capital spending in housing, energy, transport, and other growth-driving infrastructure—also in some pump-priming, which the noble Lord, Lord Howell, was encouraging us to think about. Taking this approach is responsible: it means the Government will balance the books with a buffer to protect against uncertainty, will control borrowing, and will reduce long-term pressures on our public finances. As the Chancellor said, there is nothing progressive about spending £1 in every £10 on debt interest. I thought the speech by the noble Baroness, Lady Morrissey, was a classic speech from the House of Lords of such insight and expertise about how the bond market works. I will not try to respond to it in this talk. Beyond the fiscal rules, the Government have also taken a number of steps to strengthen the wider fiscal framework, including holding regular multi-year spending reviews so that departments have certainty on what their funding will be and protecting and respecting the independence of the OBR. The Office for Budget Responsibility will produce an updated review of the economic and fiscal outlook alongside the Budget on 28 October. As I said at the outset, our economy is beginning to turn a corner; at least I hope it is. It is an uncertain world, and Britain has shown such resilience in the face of global pressures. We see this in the uptick of confidence among many businesspeople, including the successor to the noble Baroness, Lady Lane-Fox, at the British Chamber of Commerce. But clearly there remain challenges to the fiscal outlook. The war in Iran has pushed up energy costs and inflation, which in turn raised the cost of borrowing in all major economies, including in the UK. That is why the Chancellor has committed to reduce borrowing and get debt down, because that is the route to lower inflation, lower interest rates and higher economic growth. The central point is to get debt under control, as the noble Lord, Lord Bridges of Headley, reminded us. As a result of the action the Government have already taken, borrowing fell last year from 5.2% to 4.2% of GDP. Okay, there is still borrowing, but the lowest in six years, and according to the IMF, for the first time since 2004 we are forecast to be borrowing less this year than the rest of the G7 on average. But this problem, which arose over half a generation ago, will take time to solve. It will take careful thought and clear discipline. In the longer term, the OBR’s recent Fiscal Risk s and Sustainability report confirms the need to boost growth and maintain sustainable public finances, and that is what the Government intend to do. People have raised questions about tax, particularly business tax. I spoke in the House about this only last week. It is true that businesses have been paying more tax, but it is also true that businesses have been responsible for that productivity increase and growth. The noble Baroness, Lady Neville-Rolfe, made a point about the Government stopping going on about inputs and starting to think about outputs. I agree that that is fundamental. There were lots of questions about pensions and where pensions are invested. The Government are taking action on this by—let me acknowledge it—picking up a baton from the previous Government about the asset allocation of pension funds not being as good as it could be. We had questions about employment and training. I say to the noble Lord, Lord Londesborough, that a 1% increase in productivity for every business would solve many problems. One statistic strikes me when we talk about people not in work: in the past 150 years there were only two peacetime years when the average annual employment rate was higher than in 2025. Great things are there for us to do. The corporation tax rate for businesses is the lowest in the G7. The effective tax rate for a single individual with no children on average earnings is the lowest in the G7. The tax paid by a worker on a low or average income is at a historically low level. Lots of good stuff is going on. For me, the standout speech of this debate was by the noble Baroness, Lady Lane-Fox, about productivity, creativity and imagination. They are in no way the exclusive preserve of Parliament or government. They belong to the British people and British businesses. Fiscal credibility is the bedrock for economic stability and national security, because without sound public finances we cannot give businesses and families the breathing space and stability that they need for the future. The ultimate goal, as the noble Baroness, Lady Kramer, reminded us—we have both congratulated the noble Baroness, Lady Lane-Fox—is growth: good growth in every postcode. It will be delivered not by the Government alone but by the people and businesses of Britain, the strong horse that pulls the whole cart. The foundation for that is a sensible, well-financed Government with real fiscal discipline, and that is what I think this Government are offering to the country.
Lord Bridges of Headley (Con)
My Lords, this has been an excellent debate. Let me start by apologising to the noble Lord, Lord Pitt-Watson, for not welcoming him to his place; this is the first time I have debated against him. I very much applaud his emollient and reasonable style. I think those of us on this side of the House think it is a welcome change from what we had before. We can have a proper debate about the issues before us. I also thank all noble Lords who have spoken from all sides of the House and made such incredibly thoughtful contributions, in particular—forgive me for singling them out—those members of the Economic Affairs Committee who served under me. This is rather like the reunion of a pop group: we are playing our golden oldies. I will speak very briefly. There was so much to cover that I hope noble Lords will forgive me as I am not going to go into depth and detail on all the points that were raised. At the start of the debate, I listed the Ds that we and other nations face: defence; demographics and the ageing population, which the noble Lords, Lord Rooker and Lord Davies, the noble Baronesses, Lady Alexander, and my noble friend Lord Hill picked up; welfare dependency, which others including the noble Lord, Lord Elliott, picked up; and decarbonisation and the green transition, which the noble Lord, Lord Howell, spoke about. I missed two Ds. The first D is depressing. This debate can be incredibly depressing. But that said—and the noble Baroness, Lady Kramer, makes a good point, as does the Minister—we do have strengths. We absolutely have strengths as a nation, and it is very important that we do not play them down. I do not for a moment want to suggest that this country does not have massive potential but, if we are to unleash that, we have to be honest about the challenges we face. The Minister said, and I wrote it down, that he thinks this country is on the up. I would love to think so. I hear him, and he obviously makes a very valid point about statistics that have come out suggesting that productivity might be turning the corner. He hopes it is—I noticed that little tweak on the Chancellor saying that it is turning a corner. When I think of a country on the up, very sadly, the things I see going up are our taxes, our debt and our debt interest. Unless we are honest about this, we will not be able to bring the public with us in taking the tough decisions that need to be taken. The second D I missed is digitalisation and AI. I agree with the Minister that the noble Baroness, Lady Lane-Fox, is absolutely right to talk about this. AI is the revolution sweeping the world, transforming business models and entire economies. It offers immense potential and massive opportunities, but we also have to confront the challenges and risks it poses. One of the risks that we face right now as regards the fiscal outlook—the noble Baroness, Lady Morrissey, will know all about this—is the immense amount of debt that tech companies are issuing around the world. This relies on productivity, profits and this revolution continuing to gather momentum. That in itself poses a risk, and the noble Baroness is absolutely right to highlight it. This debate, though, confronts a very simple point, which my noble friend Lord Hill and others made. We have to have honesty about the challenges we face. We are in this position because, over the best part of a generation, as a political class we have not had the courage to confront the public with the consequences of the decisions we were taking, not just in the next year but in the year after that and the decade after that. The noble Lord, Lord Burns, alluded to this. During Covid and the energy shock we ran up enormous bills and enormous debts. We were not honest about that. We now need that honesty; we need to be honest about our solutions based on clear conviction and clear belief. Above all, we have to be honest about the trade-offs that need to be made in response to the challenges we face. As my noble friend Lord Hill said, we cannot try to tell everyone that we can have our cake and eat it; I am very sorry to say that these decisions are going to be painful. But the British public are not stupid. They know that we as a nation are now living beyond our means. They will reward the politicians from whatever side of the House who speak to them with this honesty and have a credible, coherent plan to get us out of the mess we are in. Choices will have to be made. We all know that a country can spend beyond its means for a time. It can borrow, it can tax more and it can hope that growth will come to its rescue, but we know from our history that if Governments wait too long, they risk losing the freedom to make those choices themselves. I want to end by thinking about the Budget, which a number of noble Lords have referred to. I think that the Budget will be a battle between two cities: the City of London and the City of Westminster. The noble Baroness, Lady Morrissey, made a point very clearly. There, in the City of London down the road, they are looking at nearly £3 trillion of our national debt, our rising debt interest and our shrinking fiscal buffer, and asking whether we as a nation have a credible plan to live within our means. Here, down the Corridor in the other place, in the City of Westminster, are 403 Labour MPs, many demanding that the Government spend more, tax more, borrow more or, at the very least, do not spend less. Many of those MPs understandably argue that: indeed, it is what brought them into politics. Plaudits to them; they are standing up for their convictions and beliefs. They believe, quite possibly like the Prime Minister, who holds passionate beliefs, that we took the wrong turn in the 1980s. I end with this thought: we ended up making very tough decisions in the 1980s because, during the 1970s, we ducked them. We consistently pushed things down the road. The circumstances today are no doubt very different, but the lesson is not. We still have the freedom to choose and we should use it, because if we do not take the tough decisions now ourselves, eventually others will make them for us.
Motion agreed.
Source: UK Parliament Hansard API. Debate ID: 5404699.