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Fiscal Outlook

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 Risks 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.

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