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Fiscal Outlook

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?

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