Grand Committee
Arrangement of Business
The Deputy Chairman of Committees (Baroness Laing of Elderslie) (Con)
My Lords, I remind your Lordships that if there is a Division in the Chamber while we are sitting, the Committee will adjourn as soon as the Division Bells are rung and resume after 10 minutes.
Time is Money: How Regulators Can Support Growth (Industry and Regulators Committee Report)
(1 day, 18 hours ago)
Grand CommitteeRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Baroness Hayter of Kentish Town
That the Grand Committee takes note of the Report from the Industry and Regulators Committee Time is Money: How Regulators can Support Growth (3rd Report, HL Paper 301, Session 2024–26).
Baroness Hayter of Kentish Town (Lab)
My Lords, in addressing our report I pay tribute to our committee staff, Rhiannon Williams and Dominic Cooper, together with invaluable support from an NAO secondment, Sarah Pearcey, and committee members, including the noble Baronesses, Lady Harding and Lady Valentine, and the noble Lords, Lord Fuller and Lord Udny-Lister, from whom your Lordships will hear today, along with my noble friend Lady Carberry and the noble Lord, Lord Camoys, who are also on the committee and from whom we might hear today. We will also hear from my noble friend Lord Chandos, who was in at the start of the process, although he then escaped for good behaviour.
I start with an apology to my noble friend Lord Smith of Ranmoor for misnaming his former organisation, the FSA—obviously it is the agency, not the authority—in the table on page 11. I have to confess that it was he who spotted that, not me.
I also thank the then relevant Ministers, my noble friend Lord Livermore and Blair McDougall MP— notably and significantly from both the Treasury and the Business Department—for appearing in front of the committee, as did the noble Lord, Lord Willetts, who was of enormous assistance to our work.
The report examines the Government’s attempt to help boost their growth objective via their action plan for regulators—an objective that I am sure the Committee shares. Writing in the Times on Saturday, however, the Chancellor admitted that
“growth cannot be commanded from Whitehall”,
but that it could be helped by removing the barriers that hold back investment and by bringing down costs and bureaucracy, which Ministers judge includes regulation. That led to the question that we asked as to the impact that regulation can have in encouraging or facilitating growth and whether the Government’s action plan will help regulators to achieve this objective.
Done well, regulation can boost consumer confidence, can provide a level playing field that helps competition and can help provide certainty to businesses and investors, whether from here or abroad. Done badly, particularly if it is slow, regulation can cause uncertainty, costs and delays to new products, services and infrastructure and it can harm the economy and disadvantage consumers by denying them cheaper, improved or new products.
While our committee welcomed the intention of the Government’s action plan, it was not always apparent what this meant for individual regulators, whose responsibilities can differ greatly. The Food Standards Agency, for example, wants there to be more nimble and accessible new technologies, but could that conflict with improved agricultural trade with the EU? Other regulators have vital objectives for safety, health and the environment, as well as for consumer protection, so they need to weigh up whether any relaxation on their focus on those important issues could leave workers, shoppers or road users more exposed and carrying more risk themselves. We therefore ask Ministers to provide individual regulators with a more granular picture of what their growth agenda actually meant in practice.
The Government’s response was that they had issued more specific goals to key regulators, although these largely related to specific activities, rather than clarifying how a focus on growth should be balanced with their core objectives. However, just as the Government need to be clearer about their expectation of regulators, so regulators should be clearer as to how businesses should comply with their various demands. We heard from witnesses that too often a lack of early engagement and dialogue and an absence of guidance led to duplication and delay of approvals, which brings us to the question of speed—or pace, as seems to be the in word these days.
Our recommendations here are important for the Government’s agenda but have a resonance beyond this. All regulators should work quicker and smarter than they often do. They are dealing with services and manufacturers, developers, entrepreneurs or innovators in the real world. As the title of our report suggests, time is money. Time can sometimes save lives, when new safety devices, drugs or health breakthroughs could be approved with due checks but without unnecessary red tape. It seems that red tape is indeed the issue sometimes.
Regulators have two tasks: to enforce their actual regulation but also to run an assurance scheme that checks on compliance. We had one question: is the Government’s 25% desired cut on admin the most important measure, or is it the cost to manufacturers of making the adjustment in what they are producing to comply with the rules? The example that we heard was whether it was more expensive for a fridge manufacturer to make sure that the fridge was built to comply with rules or whether it was the paperwork to show the regulator that they had complied with the rules. The Government replied that they had identified £2 billion in admin costs, a third of the £5.6 billion target, although they said that they would also address broader regulation costs to ensure that businesses benefit from reforms. We urge the Government to focus on the wider issue of regulatory compliance, not just red tape, especially as this has lessons for the future.
In this House, as those who have been here a long time will know, we often jib at allowing ministers too much power under secondary legislation, which Parliament therefore cannot influence. But in this report we found that sometimes over-prescriptive rules in primary legislation mean that outdated requirements cannot be quickly altered, even when a regulator wants to do that—so there are lessons for future legislation. Indeed, since this report, our committee has now heard particular examples of legal regulations. The example that we give, looking at the defence industry, is the requirement in law for life jackets on boats. That requirement becomes a little bit meaningless when we are talking about uncrewed vehicles. The regulation cannot be dumped because it is in primary legislation, yet the whole nature of warfare changes as we use autonomous vehicles. That is a lesson for future legislation.
There is another aspect of regulators’ behaviour that is alleged to get in the way, the tendency to risk aversion—and that is easy to understand. When they do something right, nobody notices that the regulators even exist, but one fault, one accident or serious injury, or damage, and the press and Parliament are down on them like a ton of bricks. If the Government want regulators to be bolder in decision-making and less risk-averse, and allow them to see the upsides as well as downsides of new developments, the Government are going to have to provide some political cover for regulators. Each sponsoring Secretary of State must make it clear to their particular regulator that they will honour that.
Indeed, the leadership of regulators is vital in mitigating, rather than avoiding, risk. The appointment of the chair, and often the board, is in the hands of Ministers, as are discussions on their annual reports. Ministers must make their expectations clear and their own tolerance for risk understandable to the regulators, along with the degree to which they are willing to allow consumers to bear any resulting risk if exact regulations are not nailed down and enforced. Ministers are calling for a culture change among regulators, but it will be achieved only if they understand that the level of acceptable risk is a political decision and should be decided by Government, and that they must set out their own risk appetite for regulators and give a clear steer as to when that could be sacrificed to help promote, or at least not stifle, growth. The Government are going to strengthen the growth duty in the regulation for growth Bill and issue steers to guide regulators in applying the new duty, so can my noble friend the Minister let us know when we might expect the Bill?
There is clearly significant room for regulators to improve how they work, especially on the pace of decision-making. Delays increase the cost of borrowing and can make the UK less attractive for investment. Time is money, and speed was the main ask we heard from businesses. While the action plan floated the idea of paid-for fast lanes for approvals, we concluded that allowing some companies to pay for quicker decisions could reduce public trust, disadvantage small or innovative new entrants and remove the incentive for the regulator to speed up all of its processes. All companies need speed, not just the rich ones.
The issue of pace came through strongly, and therefore while we acknowledge the idea of looking for paid-for regulators, it seemed to us that there were other ways to improve things, whether by digitisation, AI, regular and earlier dialogue or a more proportional approach. There are some areas in which companies have to deal with more than one regulator, leading to a government pilot which we welcomed, with a lead environmental regulator. However, that initiative applies only to regulators within the same department, whereas many companies have to deal with more than one department. It also does not allow decision-making to move to the lead body. Can the Minister update us on the work and thinking in that regard?
The committee agrees that the Government are right to turn their attention to the role of regulators, which could make a useful, though not decisive, contribution to the growth objective. Regulators can deter but not actually create growth, but they can certainly facilitate it. However, the Government must take some strategic decisions to fill their scope in this regard. Ministers will have to provide political cover if they want regulators to be less risk-averse, and they must use their role as sponsoring Ministers to ensure regulators up their game in their processes, speed of decision-making and openness to dialogue with the regulated community. Every regulator must maintain a solid focus on their core function, whether that is financial stability, health and safety, consumer protection or fair competition. I commend the Government for their work in this area, and I look forward to seeing the outcome of their action plan in due course. I beg to move.
Lord Willetts (Con)
My Lords, I congratulate the noble Baroness, Lady Hayter, on chairing the committee, which has produced this excellent report, giving a lot of practical advice on how we can ensure that the regulatory regime is improved. I declare an interest: I chair the Regulatory Innovation Office, in which capacity I gave evidence to the committee. Our task is to ensure that regulation does not stand in the way of desirable innovation and new technologies, and we operate under the scrutiny of the noble Baroness, Lady Lloyd of Effra.
I want to pick up on three points from the report. First, there is the growth duty, what it means and how one can promote growth. My view is that it is absolutely right to try to be as explicit as possible about the growth duty, and it is also then legitimate for Ministers, within that legal framework, to specify in letters and communications to regulators how they think the regulators can promote growth within their overall statutory responsibilities. All too often, under successive Governments, we have seen communications from government to regulators which are long lists of desirable things but do not give a sense of priority and are not sufficiently granular to provide action or “political cover”, as the noble Baroness called it, for officials in those regulators. So the more specific those guidelines and letters drawing on the growth duty are, the better. As an example, they should clearly focus on timeliness. Pace is indeed an issue, especially if you are a start-up. If you are trying to do something different and have limited resource or an impatient venture capital fund behind you, you need to get on with things, while the big, moneyed incumbents are much less focused on getting things done quickly. So dealing with things quickly helps new entrants. That is one area that can be looked at.
Regulators inevitably tend to focus on the “day job” and on what they are already familiar with. Getting them to think to about the innovative people coming in from the side who have thought of a different way of doing things and have the staff to engage with them is important. One thing we tried to do at RIO was shift the priorities in a regulator to ensure that innovative technologies coming over the horizon are properly understood and the companies delivering them are engaged with. That is another thing that is clearly pro-growth. There is then the frustration that companies have of concluding with one regulator to be told finally, “And now we’re passing you on to the next regulator”. The more that these processes can be simultaneous and parallel rather than sequential, the better.
Another area where RIO, working with Ministers, tries to make process is in convening groups of regulators to confront them as a group with some new technology, just to work out exactly who is responsible for what and how that can be communicated to innovative companies and the technology community. So there are practical things that can be done on growth.
The second point is on risk aversion. Speaking as a former Member of Parliament who used to face real constituents, I can understand the difficulties of standing in front of one’s voters and saying, “We’ve got this great idea: you’re going to take more risk”. It is not always a palatable message. My view is that we can make a lot of progress by looking at what we mean by risk. Often, the real problem is that the definition of risk is very narrow; it is what encompasses the specific responsibilities of the regulation, and it means that wider benefits are not taken into account. I shall give an example—which is not invidious and it is slightly simplified. There are lots of uses of drones. The CAA, with which we have a good, constructive dialogue, is worried about drones flying beyond line of sight and carrying heavy equipment, particularly electrical equipment, so its instinct is to say, “Our job is airspace and protecting airspace, and these types of drones are potentially risky”.
However, there are wider benefits. If the electrical equipment that the drone is carrying is a defibrillator—this issue was raised by the Welsh Ambulance Service—drones flying defibrillators to help people with heart attacks, which is what happens in Switzerland, is a good overall reduction in risk for British citizens. So we are not saying to British citizens, “You have to take more risks because we’re going to going to regulate drones more lightly”. We are actually saying, “When you’re looking at the risks of that bit of electrical equipment landing on someone because a drone crashes, also bear in mind the wider angle of it being used for a medical purpose”. Often, that wider perspective is not one in the minds of the regulators, but we can put it in the minds of the regulators. In other words, benefit aversion is the problem, not risk aversion.
My third and final point is that there is an important section of the report on the difficulties of overspecific regulation. We see that all the time. There is a great example in the report of the FSA requiring chilled foods to be chilled in storage, not allowing for the fact that the transport itself can be chilling now. There is an awful lot of that. The more we can have broad regulation and then use standards and trusted bodies such as the BSI, the better. Let us face it: this House is sometimes one of the worst culprits in adding detail to regulation. If one message that went out from our debate today to our colleagues was, “Lay off a bit”, that itself would be significant progress.
Baroness Valentine (CB)
I am delighted to follow the noble Lord, Lord Willetts. We did indeed hear some interesting examples about successful sandboxes in our evidence. However, the lessons from those sandboxes did not seem to spread into the wider regulator and its behaviour.
I shall declare some interests. I work as director of place for Business in the Community in cities such as Blackpool, Bradford and Sheffield, and I am chair of Heathrow Southern Railway, which plans to build a railway south from Heathrow to connect with lines to Woking and Waterloo. In both those capacities, the interface with government is fundamental to growth. For instance, Blackpool has just been shortlisted for City of Culture, which would turbocharge its tourism industry, and, post HS2’s northern demise, Bradford needs better rail connectivity to Manchester.
In all the places where I work, youth unemployment is endemic. The Department for Education, the DWP, the business department, local authorities and the Careers & Enterprise Company all have a role, which too often leads to confusion and inaction. For Heathrow Southern Railway, imagine having to make sense of the different ambitions and boundary conditions involving the politics, policy and regulations around the expansion of Heathrow. You have the CAA, as was referred to earlier, the ORR, the DfT, GBR, the Transport Select Committee and the Treasury, to name but a few.
I was delighted to contribute to the committee’s Time is Money report, and I shall focus my remarks today on a few practical examples. Let me start with overlapping regulatory responsibilities. I mentioned the difficulty of getting good careers advice to the young unemployed. Sheffield, however, has created a one-stop shop called See It Be It for schools and businesses involving all the relevant intermediaries, with the result that there are tens of thousands of helpful interventions. One-stop shops are simply a matter of will and good practice. Unfortunately, in our evidence sessions, we heard examples of departments and regulators asking for overlapping but different information or providing conflicting policy advice. Anglian Water told us that in one year it had provided 30 reports on storm overflows to Ofwat, the department for the environment and the Drinking Water Inspectorate. The department for the environment is trialling having a lead regulator, but it does not go as far as sorting out agreed policy and it does not work across to other departments’ regulators. Another positive example is the department for business’s provision of dedicated concierge and front door services for financial services inward investors.
The plethora of regulators and departments around Thames Tideway offers a parallel to Heathrow Southern Railway. The super-sewer was designed to prevent London reaching European pollution limits. The department for the environment and Ofwat were concerned to minimise costs to the consumer, and there was the usual toing and froing about whether this would be on or off the balance sheet. The eventual breakthrough was a senior reference group involving all relevant government parties which established a clear investable pathway and the long-term certainty that investors needed to commit capital. Now that the tunnel is open, I am delighted to say that the Thames has improved from being biologically dead in 1957 to harbouring millions of fish and 4,000 seals.
But this example throws up two common challenges. The first is the tension between keeping prices down for today’s consumer versus investing in the future, and the second is the Treasury. In the 1990s, I had regular conversations about funding London’s transport with three bright young things in the Treasury, namely Ed Balls, Ed Miliband and Shriti Vadera—now the noble Baroness, Lady Vadera. Their view about being on or off balance sheet was that the primary concern was whether the investment was good for UK plc and whether the Government made a good return on any contribution that they made. The simplicity of this view gets lost in worries about ONS classification. Looked at from the perspective of a lowly regulator, on the one hand one has the Treasury saying, “Be less risk averse and more open to innovation”, but on the other, if your project is novel and contentious, the Treasury’s approach will be scepticism and mistrust. These seem like mixed messages.
Where I have less sympathy with the regulators is on efficiency. It should be a given that all regulators are continuously improving their processes and their transparency about timeframes and stages of decision-making. I am delighted that in two of our investigations, into the Building Safety Regulator and the defence industry, timeframes for decision and procurement respectively are being improved, in each case with new leadership. As the title of the report says, time is money.
I finish with two pleas. First, set every regulator a key performance metric on efficiency as one of a small number of priorities. Secondly, advocate “one-stop shop” arrangements to improve user-friendliness and provide clear investable pathways for investors.
Viscount Chandos (Lab)
I am very grateful to my noble friend Lady Hayter of Kentish Town for her incisive introduction to today’s debate and for her leadership of the Industry and Regulators Committee, which has produced this excellent report. As she said, I was a member of the committee for the first few weeks of its inquiry and much regret not overlapping with my noble friend, who has brought a lifetime of focus on consumer interests to her new role. I declare my interests as disclosed in the register, as the director of RSMB, the Theseus Agency and Digbeth Loc. Studios, and as an adviser to the family office, WFO Services.
I welcome and endorse the analysis and conclusions of the report, which shines a light into what it correctly describes as the “mixed picture” of regulators’ roles in encouraging and stimulating economic growth. Successive recent Governments have placed great emphasis on regulators ensuring that they take proper account of growth as an objective. At the risk of being pedantic, I do not think it is right for regulators baldly to “prioritise growth”, which risks a mistaken direction of the industry or the products and services concerned, as well as raising unrealistic expectations for what the regulator can achieve. Language matters.
I wholeheartedly support a direction to regulators to seek, particularly in the light of the rapid innovation which the noble Lord, Lord Willetts, oversees, a better balance between consumer protection and the promotion of growth on the part of the producers of the goods and services being regulated, and hence of the economy as a whole. But that is very different from the rhetoric of prioritising growth. The report accurately identifies the complexity of this issue and the need to make trade-offs between fostering growth and other factors, such as consumer protection and environmental standards. I am not convinced by the Government’s response, shortly before the change of Prime Minister, that the proposed regulating for growth Bill will bring the strategic clarity that is needed to enable widely differing regulators to balance the conflicting objectives that they are having to juggle. I join my noble friend Lady Hayter in asking my noble friend the Minister to indicate the timing of the Bill’s introduction and her current thinking about how to define the judgments and trade-offs that are needed.
The challenges in each regulated industry or sector vary significantly: in financial services, overseen by the Industry and Regulators Committee’s sister committee, there is clear evidence of clumsy and onerous regulation holding back growth in this vital and world-leading service sector without commensurate improvement in consumer protection. In the water industry, under the Conservative Government, short-term and politically influenced focus on holding down consumer prices and lax supervision of corporate behaviour led to serious detriment to the long-term interest of consumers, as well as the undermining of the industry’s financial resilience. The legal services industry is undergoing fundamental changes in ownership and operation as outside capital is introduced through private equity in the stock market, akin to the “big bang” in financial services 40 years ago. The regulation of legal services is currently diffuse, incestuous—dare I say it—and questionably fit for purpose, as these developments change the motivation and behaviour of firms. Can my noble friend the Minister say whether she believes that the regulation of legal services provision strikes the right balance between independence, growth and consumer protection?
The report makes only passing reference to generative AI and AGI, as the committee’s remit was very much focused on existing regulators, but this area poses the starkest challenge in balancing growth and consumer— and, indeed, human—protection at a time when leading companies in this field acknowledge in their initial public offering documentation the non-trivial possibility of devastating systemic harm to mankind. Can my noble friend provide any update on the Government’s intentions for the overarching regulation of AI?
I will end by unashamedly asserting the primacy of consumer protection in regulation, reflecting the asymmetry in power in most cases between consumers and producers and providers. As the report argues, stable, fair consumer protection is a necessary condition for producers and providers’ growth anyway. The most efficient and streamlined application of well-designed regulation is a complementary factor in stimulating that growth. This report gives a compelling summary of the challenges facing the Government in achieving this balance and therefore deserves the closest possible attention and action.
Lord Ashcombe (Con)
My Lords, I declare my interest as an employee of Marsh. I warmly welcome this report and congratulate the noble Baroness, Lady Hayter, and her committee on what is an extremely useful piece of work looking at the cost of regulation. It gets to the heart of the debate we have returned to many times in this House and does so with commendable clarity. This debate has been running for some time. I want to suggest that a clear consensus is emerging around three core pillars. What strikes me about the committee’s report is how powerfully it supports that framework.
The first pillar is sophistication in design and efficiency in implementation. Regulation that is blunt, where it should be precise, or rigid where it should be adaptive, does not merely inconvenience firms; it actively distorts markets and harms the very consumers and stakeholders it was designed to protect. Good regulation is not light regulation but intelligent regulation. The two are not the same, and we should resist any conflation of them. The committee is right to call for regulators to provide clear guidance early and ensure their requirements are unambiguous from the outset. That is not a procedural nicety; it is a prerequisite for any regime that wishes to be taken seriously.
The second pillar is the recognition and removal of fragmentation. The committee identifies directly that additional complications arise from companies where their projects are overseen by multiple regulators. This is, in my view, one of the most underappreciated structural failures in our current regime. When multiple regulators operate across overlapping domains without adequate co-ordination, the result is not merely duplication; it is the creation of blind spots. Firms fall between the gaps, risks go unmonitored and the cumulative compliance burden on those caught across multiple regimes becomes, in practice, prohibitive. I hope that the Government will treat this not as a long-term aspiration but as an immediate operational priority.
The third pillar is transparent decision-making. This is where I really want to linger, because I think that it is the main point; the committee’s call for clear guidance connects directly to it. If regulators must provide clarity early, the logical consequence is that they must also be transparent about how they will respond when things are unclear, contested or novel. Industry can absorb almost anything if it can plan for it; what it cannot absorb is uncertainty and the inability to anticipate how a regulator will behave. When firms face uncertainty, they do not take risks. They over-comply, over-report and over-resource.
The waste embedded in that precautionary behaviour is vast and almost entirely invisible to those who design the system, but—this is the point I do not want us to lose sight of—transparent decision-making cannot be achieved by regulators alone. It requires government to do its part. Regulators cannot be transparent about how they will resolve conflicts between objectives if government has never told them how those conflicts should be prioritised. That is a political responsibility. The strategic guidance and political cover that government provides, or fails to provide, is the foundation on which regulatory transparency either stands or collapses. The committee calls on the Government to play that role, and I believe that that call deserves to be heard very clearly.
I also commend the committee on drawing a distinction that previous reforms have consistently missed: the difference between the cost of paperwork and the cost of compliance. Reducing the administrative burden of form-filling is welcome, but it is a fraction of the real cost that firms bear when the system changes, with the structural adaptations and ongoing operational adjustments that regulation demands. If we focus on paperwork, we are, to use a familiar phrase, looking for our keys under the lamp-post. The committee has pointed us towards where the keys actually are.
I look forward with great interest to hearing from the Minister about how the Government intend to respond. The committee has done its work with rigour and purpose; I commend it on that again. The question now is whether the response will match the ambition of the diagnosis.
Baroness Gill (Lab)
My Lords, I, too, warmly congratulate the noble Baroness, Lady Hayter, and her committee on this exceptional report. Having worked across the public, private, corporate and not-for-profit sectors, I entirely concur with its central premise: time is money. In my experience, unlocking growth is not about a lawless race to the bottom or having less regulation; it is about achieving consistency, interoperability and efficiency, with a confident, not defensive, approach from the regulators. Global investors look for speed and predictability, but, right now, bureaucratic silos and delays are costing the UK lost opportunities.
For me, two specific proposals in the committee’s report highly resonate. The first is the call for a single front door for multiregulator projects. Breakthroughs such as AI medical tools or autonomous delivery drones do not fit into historical boxes. A single portal for concurrent assessment would instantly slash time to the market. The second is the focus on improving the pace of decision-making via fast lanes. If a business has already cleared rigorous regulatory hurdles in a trusted jurisdiction, such as Japan or the European Union, we should offer passported compliance. Reinventing the wheel simply drives innovators overseas. I therefore welcome the draft proposals being discussed presently between the European Union and the UK on agriproducts, which will eliminate lengthy checks at ports. Trade and growth are not just about tariffs but trust and speedy flow of goods. That will lead to growth.
However, to truly support growth in a fast-moving economy, we must also address the compounding weight of legacy rules. I recognise that automated sunset clauses are politically controversial, but I am absolutely not suggesting a blanket eradication of laws. Instead, we should tie sunset clauses directly to digitalisation. As technology evolves, the administrative processes used to enforce regulation become rapidly obsolete. The Government should mandate that digital compliance frameworks and administrative reporting requirements placed on businesses automatically expire after a certain time—maybe five years. This would force the regulators continually to modernise their systems, strip away analogue red tape and transition to leaner, data-driven oversight.
Finally, we must also recognise that opening up digital markets is itself a powerful pro-growth policy. When we properly resource units, such as the CMA’s digital markets unit, to curb the market power of tech monopolies, we create the predictable level playing field that some smaller domestic innovators desperately need to scale up.
I conclude by asking the Minister an overarching question. Given that the IPPR found that 79% of digital-intensive UK firms view big tech dominance as a primary constraint on growth, will the Government commit to a modernised, enforced strategy that pairs aggressive digital market competition with targeted sunset clauses on legacy administrative reporting, ensuring that our regulatory state moves at the same speed as technological innovation?
Lord Black of Brentwood (Con)
My Lords, like others, I warmly welcome this report from the Industry and Regulators Committee. I pay special tribute to the noble Baroness, Lady Hayter, for her exemplary leadership in this area. As I know from other issues on which she and I work, she is a doughty campaigner and we are lucky that she has brought her skills to bear in this vital area of regulation.
The title of the committee’s report, Time is Money, is spot on. Nowhere is this truer than in digital markets, which the noble Baroness just mentioned, where delay and inaction are not neutral. Every day that the unaccountable big tech platforms go unchecked is another day in which they entrench their monopolies further and, frankly, pile up profits on the back of other people’s labours.
The recent issue surrounding Meta, which was raised in our Oral Questions last week, is an excellent case in point. Last month, it told every business with a Facebook or Instagram account that its new terms and conditions would allow it to scrape their websites with impunity. That was a huge threat to news publishers; it was almost existential—I declare my interest as deputy chairman of the Telegraph Media Group. Its message was: “You pay to produce the news, and we’ll harvest it for free”. The CMA deserves real credit for opening an investigation into this under the Competition Act 1998, but the truth is that it should not have to resort to a tool that can take many months to extract binding commitments or—if Meta does not accept that it is in the wrong and offer solutions—years to reach a remedy. As the report says and the noble Baroness powerfully underlined, speed is essential for effective regulation.
The CMA has called Meta a potential candidate for strategic market status designation under the Digital Markets, Competition and Consumers Act, which would allow it to publish tailored, focused, ex ante requirements. However, “potential” is the problem word there. As far back as 2020, the CMA itself concluded that Facebook’s market power warranted this regime, yet Meta is still not designated. Had it been, I doubt it would have attempted anything so brazen as it did last month.
The legislation, if applied, really does work. Because Google was designated under the regime as having strategic market status, publishers can now withhold content from AI overviews without vanishing from search results. That is the DMCC Act at its best: flexible, targeted remedies, built firm by firm on the evidence. I believe this is far preferable to the blunt instrument of news prominence proposed in the Government’s media Green Paper. What use is prominence if publishers have to withdraw their content because the price of admission to a platform is having their content used as AI training material for free? That way lies commercial perdition—and, indeed, the end of a free press, which my noble friend Lord Hunt of Wirral believes so strongly in.
Also relevant to this excellent report, we need to ask why the CMA has not designated Meta or other big tech services that extract excess profits from consumers and crowd out UK start-ups. I do not think the fault lies with the CMA itself, which has done really good work under difficult circumstances; I fear the culprit is the Government’s 2025 strategic steer to put inward investment front and centre. The IPPR report, Bottleneck Britain, found that digital-intensive UK businesses rank big tech’s market power as the second biggest constraint on growth, ahead of finance and talent. The Government’s steer has the priorities backwards, and they should urgently change their direction by expressly backing the CMA to use the powers that we in Parliament gave it and resource it to match. A regulator facing the world’s most valuable companies cannot do the job on a shoestring.
The same question matters for the regulating for growth Bill, which the noble Viscount, Lord Chandos raised. What type of growth will it mandate? I hope it will not be the sugar rush of inward investment announcements of the sort that lets big tech off the hook. It should be growth felt by British businesses and citizens, powered by firms that scale and stay here. The growth duty must never override regulators’ core functions. There is little point in a £500 million sovereign AI fund if the CMA cannot regulate monopolists who swallow up potential UK tech champions. That Bill also risks being lopsided. Ministers propose AI growth labs to exempt AI firms from regulation, potentially with sweeping Henry VIII powers to make those relaxations permanent. Yet where a light-touch rule would unlock massive growth for UK firms, they hold back. AI crawlers harvest content anonymously and ignore the wishes of content creators. The Government should put bot transparency provisions into the regulating for growth Bill.
I would like to press the Minister on a number of points. First, will the Government urgently issue a new strategic steer that backs the CMA to take on big tech with the resources that it needs? Secondly, will they ensure that the regulating for growth Bill focuses on growth that will be felt by UK citizens and businesses? Thirdly, will they put bot transparency provisions into the same legislation? Time is indeed money, and British firms, including our world-class content creators, are paying for every day of delay.
Lord Nagaraju (Lab)
My Lords, I thank the noble Baroness, Lady Hayter of Kentish Town, and the members of the Industry and Regulators Committee for its report. I declare my interests as the director of AI and AI policy companies.
The report makes a compelling point: good regulation can encourage investment and innovation, but unnecessary complexity, uncertainty and delay can hold back economic growth. I want to focus particularly on artificial intelligence, because the committee heard direct evidence of how regulatory barriers can affect innovation in this sector. The committee heard from MyCardium AI, a company developing AI technology to improve heart scans. Its representative explained that the company’s pilots were taking place overseas because establishing an initial pilot or equivalent regulatory sandbox was more difficult in the UK. Importantly, the same company emphasised that clinical safety must remain paramount and welcomed rigorous regulatory scrutiny. This example captures the challenge before us. We should not have to choose between innovation and public protection; we need a regulatory system that delivers both.
Britain has world-class research and considerable technological talent, but scientific breakthroughs must be translated into products and services that improve people’s lives and contribute to economic growth. The committee rightly recommends clearer regulatory guidance, faster decision-making, early engagement with businesses and greater use of regulatory sandboxes. These recommendations are particularly relevant to AI, where technology can develop faster than traditional regulatory processes. The committee also recognises the values of principles-based and outcomes-focused regulation, which can provide certainty while allowing flexibility for innovation. I welcome the Government’s proposal to introduce statutory sandbox powers through the forthcoming regulating for growth Bill, but sandboxes must provide practical results and not simply opportunities for experimentation. They should help regulators to understand new technologies and give businesses clear guidance about the requirements they must meet.
We must also ensure that smaller companies benefit. The committee rightly cautions that paid-for fast lanes could disadvantage businesses unable to afford them. Faster and more predictable regulatory decisions should benefit all applicants. I therefore ask my noble friend the Minister two questions. First, how will the Government ensure that smaller AI innovators can access early regulatory guidance and appropriate sandbox opportunities without compromising safety? Secondly, will the Government establish clear, measurable expectations for regulatory decision-making times so that businesses can invest and plan with greater confidence?
Britain’s challenge is not simply to develop the technologies of tomorrow but to ensure that innovations developed here can be tested, adopted and scaled here. Effective regulation should protect the public while giving responsible innovators the certainty and confidence to succeed. That is how regulation can become an enabler of economic growth.
Baroness Harding of Winscombe (Con)
My Lords, I begin by thanking our chair, the noble Baroness, Lady Hayter, for her excellent introduction. I declare my interest as a member of the committee and my interests in various organisations, which are all regulated, as set out in the register.
The challenge with this topic is that, first, there are multiple types of regulator—at least four different types, as we heard in the inquiry: economic, such as Ofcom; market, such as the CMA; technical health and safety, such as the Building Safety Regulator; and systemic prudential risk regulators, like the PRA. So there are at least four types of regulator and there are multiple types of growth. Are we interested in short-term growth or long-term growth—growth in GDP or growth in personal disposable income?
I am in danger of descending into a sort of Oxbridge exam question rather than a five-minute speech in your Lordships’ Grand Committee. It is very hard to generalise, because when we talk about the relationship between regulators and growth, we have too many of both things that we are trying to match together.
However, I will make one general point—others have alluded to this. With the honourable exception of competition regulators, regulators do not drive growth. Generally, they constrain growth. That does not mean that I am against regulators. It is absolutely clear through history that the absence of all regulation is extremely bad for humanity. Think child labour or the thalidomide crisis; it is not difficult to see why we need regulatory guardrails in every market. But generally, too much regulation leads to lower growth, and the challenge is that well-meaning people—the noble Viscount, Lord Chandos, is absolutely right that we are those people—add complexity and cost in regulation if they are not very careful.
I am extremely supportive of the Government’s 25% reduction in administrative costs, but like other noble Lords, I think that that is the cherry on the cake rather than the cake itself in terms of reducing the costs. I refer noble Lords to one of our witnesses, John Fingleton, who led the review into the costs of our nuclear programme. He said to us that not only are we the most expensive country in the world to build a nuclear power plant but we are the most expensive country in the world to build one mile of road, one mile of rail, one tunnel or one bridge. That is not because of the admin costs. The bat tunnel and the fish disco are not encumbered by admin; it is the fundamental building of them that is the problem. I therefore ask the Minister, as I am sure she will update us on progress on the 25% reduction in admin costs: what is the Government’s target to reduce the overall cost of regulatory compliance? Unless we measure that and then target a reduction in it, I am afraid that, inevitably, regulation is hampering growth and not driving it.
The second point I want to make, which other noble Lords have also explored, is on the overlapping regulation problem. As the noble Lord, Lord Willetts, knows well, most scientific discoveries these days come at the intersection of different branches of science. I think the same is true of truly innovative businesses. They come at the intersection of different sectors and, inevitably, overlapping regulators. We have to find a solution to the multiple regulatory problem, which we heard about in this inquiry. It is encouraging to know that Defra is running a pilot to do that, but I am afraid I have become very old and suspicious. A pilot can go on for a very long time and never turn into something that scales. I would love to hear from the Minister how the Defra pilot is going on, when it will extend to other departments, and when it will extend to regulators from multiple departments, which is the real problem.
The final point I will focus on is the one regulator that does drive growth: competition regulators, which my noble friend Lord Black and the noble Baroness, Lady Gill, commented on. Done well, competition regulation creates the conditions for innovation and for growth. I have absolutely no doubt that the regulation of large, dominant tech firms can unlock growth opportunities for British firms. It can increase choice and can reduce prices for millions of consumers. The problem is, as my noble friend Lord Black said, that the CMA’s strategic steer charges the CMA with prioritising pro-investment alongside pro-growth. I think we have to be quite suspicious of international tech companies promising inward investment in exchange for the absence of regulation. History shows that that does not drive growth; it just entrenches monopolies. Like other noble Lords, I want to ask the Minister when the CMA’s strategic steer will be updated and whether it will be updated to focus more on measures of growth as they affect actual British businesses and British consumers than on announcements of inward investment.
I cannot finish without 30 seconds on AI. I also add my voice to ask the Minister when we will hear from this Government on how they intend to regulate AI. As a general purpose, AI technology touches all four different types of regulation. There is undoubtedly long-tail systemic prudential risk with AI. There is definitely health and safety risk and market competitive risk. Yet we keep being told that it is too early to regulate, which I really challenge. I look forward to hearing the Minister’s answer.
Lord Sikka (Lab)
My Lords, I thank the committee for its report, which is a response to the Government’s deregulation agenda. It lowers the guard-rails on public protection, and even protecting capitalists from themselves, in the chase for economic growth. This project is full of contradictions. The committee is right when it states that:
“Done well, regulation can boost consumer confidence and provide certainty for businesses to invest and innovate”.
The banking crash, Grenfell, the Post Office and numerous other scandals have shown that regulation has not been done well. Instead, the regulators are now hobbled with a growth objective.
The report amplifies the Government’s claim that they want to cut financial costs, but we also need to consider the social cost of not doing proper regulation. Consider the case of HBOS frauds, which date back to 2002-07. Despite overwhelming evidence, the Serious Fraud Office, the Financial Services Authority, the Financial Conduct Authority and the City of London Police refused to investigate. Eventually, the Thames Valley Police and crime commissioner decided to bring a case. In 2017, two former senior bankers and four corporate turnaround specialists were convicted of fraud and received 47 years of prison sentence. That did not prompt regulators to investigate or secure compensation for the victims. Successive Ministers passed the buck to HBOS owner Lloyds Bank. In 2017, Lloyds appointed Dame Linda Dobbs to investigate and prepare a report on the £1 billion-worth of frauds. To this day, there has been no report, despite the promise that it would be published in 2018, and despite numerous questions in this House, Ministers—who are the ultimate regulators—will not give answers. The victims continue to suffer.
There is little empirical evidence to show that regulators can combine public protection and the growth objective. England’s water regulators announce fines for illegal and anti-social practices, and then, to show obedience to the growth objective, they quietly defer or waive the payment. Executives gaining from anti-social practices are neither fined nor prosecuted. This has neither engendered trust nor secured the required investment.
The dash for growth has turned town centres into economic deserts. Private equity has destroyed city centres. Some 30,000 jobs at Poundland and its suppliers could vanish because regulators simply wave through takeovers by private equity; they do not really want to stop them. Big accounting firms routinely deliver dud audits after public exposure and pass the costs to clients in higher fees. The regulator, the Financial Reporting Council, in pursuit of the Government’s growth objective, is now reducing the number of audit-quality inspections and will instead rely on self-certification of audit quality, a model that has been so successful in the water industry. Numerous leaks show that big accounting firms are key nodes in the global flow of illicit finances. Nothing happens to them. Recently, BBC’s “Panorama” programme looked at how Russian billionaire Roman Abramovich dodged taxes and moved his wealth to the British Virgin Islands. I was asked to examine those documents, and they show that Deloitte knowingly helped to falsify documents to hide Abramovich’s wealth and help him evade taxes.
One thing is certain: no UK Government will do anything to any big accounting firm. In the absence of effective regulation, corruption, fraud and illicit financial flows will grow exponentially and harm the legitimate economy. The report raises the question of accountability, but it does not make recommendations that could improve public confidence, such as having consumer-elected directors on the boards of regulatory bodies or giving consumers the right to vote on the pay of directors of regulatory bodies—that would concentrate a few minds, would it not? Currently, we have regulators who are outside the freedom of information net. Regulators of insolvency and auditing are not subject to freedom of information laws. Why is that, Minister? I hope to get some comment on that.
We are now light years away from Cadbury’s Quaker capitalism. In the era of predatory capitalism, too many are willing to make a fast buck without facing any of the consequences. We need robust regulators to promote public confidence, and that should be their only objective. Promoting business growth is a matter for Ministers.
Lord Fuller (Con)
My Lords, it was a great pleasure to serve under the chairmanship of the noble Baroness, Lady Hayter—nearly as much as the displeasure expressed by the noble Lord, Lord Sikka, for financial regulation and regulators.
First, I sat on this committee. I had not previously appreciated the full complexity of our regulatory system, with at least 200 regulators—possibly more—and more being added every week. We heard that, of those, around 61 had a real focus on, or responsibilities relating to, growth, while 20 of them had a real impact on getting the economy moving. Yet around one third of the 61 had not even discussed their shared responsibility to increase the national income at a board level. That shocked me, because it is our role today to remind them of our—and their—shared endeavour: to make the nation richer.
It just so happens that we are not the only ones who think that action is needed. Over the weekend, the Times reported that No. 10 wants to improve regulatory oversight and boost local accountability to tackle “out of control” arm’s-length regulators; they are all “in the firing line”, we hear.
As I listened to the evidence, what struck me was how fragile a regulator’s commitment to growth can be. So much depends on the chief executive or chairman, their connections within government, and how effectively that commitment filters down to the case officers who apply the regulations of the organisation. Warm words at Downing Street growth summits count for nothing if the message does not filter down to the front line. When the leaders are gone, the economic drive from the regulator can perish. It is fragile; that is a problem.
As my noble friend said, we heard about several different types of regulation: economy; market; professional, including for doctors and accountants; the safety ones; the environmental and pollution ones; and social regulations for the caring and educational sectors. It is a broad church. However, in one memorable exchange, a Civil Service witness said that Trinity House was a regulator but had no impact on growth. We are an island nation. All of our trade in goods and services often travels by sea. Safe, navigable waterways are crucial to growth. Every regulator has a part to play, even when its core purpose does not appear to be one for the economy. The football regulator is a case in point: it is on the front line in more ways than one as well.
We spent considerable time discussing how to speed up regulation, not just for speed’s sake but to improve predictability and certainty; those things are probably more important. We heard about the sandboxes, fast lanes, pilots, experiments, distended timescales and unpredictable decisions that increase risk and make projects hard to start, let alone finish. Rather than laying these shortcuts over the system, could we not just give everybody access to a good standard of service? Is that too much to ask?
I regret that we could not examine foreign regulators more closely and compare our approach with those of our competitor nations, but we heard of prospective foreign investors who gave up because, as foreign nationals, they could not open a UK bank account. That is a regulatory failure—good intentions producing harmful results. Once they are introduced for the best of intentions, there is little incentive to prune the regulatory bloat.
I felt that the noble Lord, Lord Willetts, who is in his place, gave huge grounds for optimism, describing the efforts to enable delivery robots, which if I recall correctly were subject to 19th-century horseless carriage regulations that needed to be superseded. His example showed how regulators could harness and enable new technology, including AI, which offers a tantalising prospect of turning a laggard into a leader. However, his example showed why political leadership matters to cut through the obstacles. Delivery robots are just one example of how regulations for a past age need updating. Perhaps universal sunset clauses—mentioned by the noble Baroness, Lady Gill, who is not in her place—might be a useful innovation here so that we always look forward and are not always stuck in the past.
That brings us back to risk, especially political risk. We cannot expect regulators, and case officers in particular, to be flexible or embrace new methods and technology without backing from Whitehall. It is the case officer’s livelihood and pension that are on the line. If Ministers want growth, they must give the regulators the air cover to do things differently. For all the warm words, I did not get the sense that it was a high priority for the Government, yet that is what our nation needs. I was not convinced that the message has sunk in when we listened to the Minister; I saw little drive from the highest levels of government to ensure that the 61 bodies that are referred to as being responsible for growth needed to discuss it at board level, let alone in that wider landscape of over 200 other regulators. It seems to me that it takes more than a No. 10 summit to turn around that “computer says no” culture.
To put it into focus, we all sympathised with our Chair when she had her bank account frozen by a misapplication of PEP rules, which assume that everyone is a criminal. That is no way to build an economy. Of course, I am not saying that the noble Baroness has been exposed to criminal activity, but it is that approach that everyone needs to demonstrate their innocence rather than the presumption the other way around. I am on sticky ground so I am going to move quickly.
We are in the slow lane of the global race. Clear timelines and predictable decisions combined with realism and focus will unlock investment and get the economy moving, and that is going to generate savings, employment and taxes. Let us stop the imposition of new layers that undermine viability so that we do not feel like we are wading through treacle. If our regulators make everything too difficult then too many others will conclude that the safest way to avoid mistakes is to do nothing, and that is going to leave us all poorer.
Lord Bilimoria (CB)
My Lords, the Government have stated that their number one mission is economic growth. Regulation can provide the stability that businesses and the economy need to thrive or it can be a source of roadblocks that inhibit growth. The reality is that current regulation is confusing, time consuming and costly to business. Some 47% of businesses reported in 2024 that regulation was an obstacle to their success, an increase from 45% in 2022. Two in five businesses felt that new post-Brexit regulatory arrangements were more challenging, 93% of businesses use some form of external support to assist in complying with regulation, and the mean amount that business spent on support was £10,745 compared to £6,100 in 2022.
A regulatory system needs to be transparent, consistent and easy to understand. Over time, unnecessary regulatory costs have contributed to a less competitive and less attractive British economy for new investment. This country used to be a magnet for inward investment. Some studies suggest that the impact of red-tape regulatory costs could be as high as 3% to 4% of GDP—we are talking about over £70 billion. A regulatory system needs to encourage new investment and regulate only where necessary and acceptable to keep pace with innovation.
Despite campaigning Brexit as an opportunity to deregulate in the name of freedom and growth, the UK has done relatively little to diverge from EU regulations since. The main reasons are that it would become more difficult to trade with the EU, with a lack of clear strategy of how and when to diverge and the priority of other competing post-Brexit responsibilities. However, there are some exceptions: the banning of live animal exports, establishing new freeports and repealing the bankers’ bonus cap.
In March 2025, the Department for Business and Trade published the regulation action plan, which many noble Lords have spoken about, aiming to overhaul the regulatory system to increase economic growth and cut administrative costs of regulation by 25% by the end of the Parliament. It includes plans to merge or remove regulatory bodies, reform registration and require regulators to increase transparency. Its three main goals are to tackle complexity and burden of regulation; reduce uncertainty across the regulatory system; and challenge excessive risk aversion.
In May 2026, the Industry and Regulators Committee published the report that we are debating, Time is money: How regulators can support growth, in relation to the Government’s action plan. I congratulate the noble Baroness, Lady Hayter, and the members of the committee on the hard work they put into this excellent report. I reiterate, very quickly, the main conclusion of the report that the main contribution for regulators to make in supporting investment and growth is to carry on their duties more efficiently. It is unclear what the broad aim of supporting growth means for individual regulators. The Government have not said whether they want regulators to tolerate more risk or just be more open to innovation. It is the Government’s responsibility—I hope the Minister would agree—to provide strategic guidance with an explicit risk appetite for each regulator, with political cover when government wants a regulator to be more open to risk. Does the Minister agree? It is likely that, to prioritise economic growth, regulators will make trade-offs with other responsibilities, such as consumer, competition or environmental protection. The Government need to clarify the extent to which growth is prioritised, not leave this decision up to the regulators.
The Government may be focusing on the smaller cost of paperwork rather than the larger cost of complying with self-regulation. Cutting administrative costs by 25% could be hit without businesses feeling any change. The committee rightly asked for estimates for the reduction of actual cost compliance.
I am chair of the International Chamber of Commerce in the UK and regional co-ordinator for the ICC in Europe—35 countries. We in the UK and the ICC have been leading the charge on promoting digital trade. Most people do not realise that most trade today is paper-based. If that paper-based trade can be moved to digital, it means that what takes three months takes minutes, and saves billions of dollars or pounds. This is where regulations are coming to help promote this, with the UK as a role model for the rest of the world—does the Minister agree?
Of course, there are different perspectives on regulation. To give an example, the Government are talking about bringing down the costs; the Lib Dems support cutting and consolidating regulation, particularly promoting trade with Europe; and the Conservatives talk about deregulation to encourage growth and repealing regulations surrounding net zero, diversity and inclusion and the Employment Rights Act 2025, which has brought extra regulation. The regulatory culture is far too cautious, according to the Conservatives. The International Chamber of Commerce supports business self-regulation to build trust between businesses, consumers and the public. The CBI—the Confederation of British Industry—of which I was president, supports the recommendations of the small business taskforce on corporate reporting reform, noting
“the test now is delivery … business will want to see that ambition translated quickly into meaningful reductions in the burden they face”.
The CBI recommends an outcomes-based, principle-led approach.
The report has also said, as very well put by the Advertising Standards Authority, that regulation needs to create stable, predictable frameworks that enable businesses to invest and innovate while protecting legitimate public interest. Octopus Energy says very clearly that it is regulation that allowed it, as a new company, to come in not just to gain top market share but to do so by bringing quite a lot of innovative products.
I conclude that the pace of regulation is often a problem, and we need to work on making it faster. Does the Minister agree that this is a primary challenge? AI, which has been brought up, needs to be addressed as well. The only certainty in today’s world is uncertainty. Encouraging investment, innovation and growth is a key part of the vision of the Government’s plan. Most witnesses cited in the report said that regulators need to provide long-term stability and predictability to encourage investment and enable companies to plan ahead.
Lord Udny-Lister (Con)
My Lords, like every other speaker this afternoon, I welcome this debate and thank the noble Baroness, Lady Hayter, for chairing the committee.
Nobody here disputes the need for strong and effective regulation. It is through good regulation that we gain confidence, protect the public and nurture the conditions needed for business to invest and grow. That said, however, what became increasingly apparent throughout the process of our inquiry was the apparent lack of urgency in some regulatory processes and the insufficient appreciation of the very real fiscal consequences that come with delay.
I will deal first with the certainty and timeliness issue. We know, as our chair said, that time is money and that delays cause real economic costs. I therefore suggest that the single most important thing that businesses need from regulators is certainty, and they need it to be delivered in a reasonable and predictable timeframe. We know that up and down the UK, companies are facing lengthy approval processes, as we have heard. That uncertainty and delay are making it near impossible for businesses to commit investment, raise finance and plan expansion, including the recruitment of new staff, when they do not know when, or even if, they will get regulatory approval and, if so, when it will arise. That becomes a critical concern when considering major infrastructure projects, where delays of even the smallest amount can translate into substantial additional financing costs.
I draw the Committee’s attention to the evidence from Hoxton Farms. I find it particularly concerning that a British company indicated that it was likely to launch its products in Singapore or the United States well before the United Kingdom. In part, that is because of a much clearer regulatory timeline abroad. We heard about how Hoxton Farms was kept informed all the time of where its application was, so it knew every day where it was going. The situation here is simply not good enough. The United States and Singapore are well-regulated countries; why, then, are we so inferior in dealing with clarity and pace?
I put it to your Lordships that businesses do not demand immediate or even favourable answers; what they need is a clear process, confidence, and for the timetable to be honoured. I hope that Ministers will take action, given the grave consequences that this is having on holding back much-needed investment and growth.
Our regulatory processes must allow for greater flexibility. Although I appreciate that regulation should and must uphold standards and safeguards, I fear that there is a real danger that we are creating a process that is now so prescriptive that we are becoming void of having sufficient room for sensible human judgments. Times are changing, and in the time of innovation and technical advancement, we must accept that not every business or proposal will fit neatly into an established category. I think back to the evidence that we heard in support of a principles-based approach, in which standards are protected but businesses are given the flexibility to determine how these outcomes are achieved. That is something I fully support. Surely, the question must be about how a proposal meets the necessary standards rather than whether it can follow precisely the same path as everything that has gone before. I would therefore be pleased to hear from the Minister whether the Government are committed to achieve the greater proportionality and pragmatism that business requires.
Turning briefly to innovation, I am concerned that our regulatory structures are lacking the forwardness and resources to keep up with the remarkable pace of change that we are going through. As we have already heard, with AI, emerging industries and advanced tech are creating entirely new business models, and they are developing far faster than our regulatory framework. It was clear from the evidence that regulators have a profound difficulty in dealing with something that is unfamiliar or which does not fit into a previously prescribed process.
Does the Minister agree that innovation, by its very definition, involves something different? If so, how can we ensure that our regulators have the freedom to adapt? My fear is that, if our regulators cannot keep pace with innovation, there is a genuine risk that the investment, and thus the jobs that come with it, will go elsewhere. I am keen to hear how the Government plan to ensure that regulators can keep pace with the speedy and innovative times in which we live.
I conclude by asking the Government to take serious note of the concerns raised by businesses throughout this process and to recognise that we urgently need a culture in which regulatory delay is recognised as a serious economic consequence and a barrier to natural growth, as opposed to simply being an unavoidable feature of rather dated administration.
Lord Smith of Ranmoor (Lab)
I thank my noble friend Lady Hayter for securing this debate and for leading the committee with distinction. I declare my interests as a chairman of Cranswick plc and as a director of Pret. The committee’s report pre-dates my introduction into your Lordships’ House by some months but I hope that my past experience will be useful to your Lordships’ deliberations, now and in the future.
Good regulation can enable growth. The challenge is not to suppose that we have to choose between effective regulation and economic growth; that is a false dichotomy. Regulators need to explicitly incorporate growth into their long-term and medium-term plans. For some, that might mean that the legal framework that established them and set their terms of reference needs to be altered to include that purpose. Regulators often hide their lack of enthusiasm for this topic behind prescriptive legislation. Are some of those pieces of legislation now so out of step with our objectives that they need a fresh look?
How many regulators have publicly reset their strategy since the Government challenged them with the objective of prioritising growth? In that new look at strategy, I suggest that a partnership with the sector being regulated could provide some fresh, innovative ideas—always remembering the regulator’s core purpose. The strategy should be simple, outcomes-based and follow some core principles.
As an ex-regulator, I know that a well-publicised strategic shift will be an empty promise unless followed by a change in the allocation of resources to meet that new objective. The evidence of that would come in revised organisational structures, with realistic budgets to match their aims. Being clear about what will and will not be done would be a bonus. Some regulators would work better, and with the grain of growth and their core purpose, if those organisations contained some or more people with experience in the sector being regulated, working alongside career civil servants.
The delivery of those strategic growth objectives has to be strictly measured and the results reported with a timely, transparent method. Of course, this accountability should include calculations of any consequent new admin burden and, more importantly, of the impact—growth, I hope—on the sector being regulated. This is often nuanced and properly risk-based, but it is the absence of data that frustrates many of those being regulated. Each regulator should be required to provide measures of the growth it has facilitated in a “comply or explain” mandatory framework.
I will say a word or two about pace. Delays are not harmless. One of the phrases that business grows weary of hearing from regulators is, “It takes as long as it takes”. In the time taken for a regulator to review an innovation in this country, an international business has likely exported those jobs and investment elsewhere. Those of us with global business experience will be able to cite other nations that are able to fast-track innovation and investment by taking a proportionate, risk-based approach. An SME in the same situation might simply run out cash.
There are bound to be trade-offs in conflicts between growth and other objectives; I am clear that the regulator is not best placed to resolve them. They need clear political direction. The Government need to set clear priorities, regulators must make timely and proportionate decisions—my shorthand here is: not light touch but right touch—and businesses must have the clarity and confidence to invest and innovate. I look forward positively in the expectation that this work continues to generate change in the attitudes and behaviours of all those involved.
Lord Camoys (Con)
My Lords, I congratulate the noble Baroness, Lady Hayter, and her committee on this excellent and important report. I joined the committee after the report was written, so I cannot claim any credit for it, but I have spent the past few years on the receiving end of the system it describes. I declare my interests as set out in the register, particularly as a founder of Marlow Film Studios.
I am speaking towards the end of this debate, so most of the substantive points have already been made, but I want to mention three things from my own experience of engaging with regulators on the planning system over the past few years. The first is the lack of accountability for delays. My experience has been that deadlines are set, missed and then missed again. As far as I could tell, nothing happened as a result. If a business misses a regulator’s deadline, there are consequences but, when a regulator misses its own, there seem to be none. The Government’s response promises clearer approval targets and ministerial performance reviews, which I welcome, but I am not convinced that publishing targets alone will change very much. What happens when those targets are repeatedly missed? I would be grateful if the Minister could explain how that accountability will work in practice.
The second is the problem of regulators overlapping with one another. I have seen how National Highways, the Environment Agency and Natural England, among others, can each operate to its own timetable and ask its own questions without anyone having the authority to bring them together and get things moving. The Government have seven lead environmental regulator pilots under way, but these remain within Defra’s remit, and the lead regulator can co-ordinate but cannot decide. Will the Government extend this approach beyond Defra, and will the lead regulator actually have the authority to resolve disagreements? A single front door is a fine idea, provided there is somebody behind it with the authority to say yes.
My third point concerns risk. Robert Colvile told the committee that nobody is promoted for approving a company that succeeds and that, if something goes wrong, they may find themselves hauled before a Select Committee. I do not believe that the officials with whom I dealt were deliberately obstructive; they were simply working within the system as it currently operates. Regulators must of course protect the public and the environment, among other things but, as others have said, surely it is for Ministers, rather than individual officials, to decide how those responsibilities should be balanced against economic growth. The Government propose a stronger growth duty and statutory ministerial steers, but will Ministers make clear what level of risk they are prepared to accept and stand behind officials when a decision proves controversial?
The committee has done a valuable job in identifying these problems. The Government have accepted much of what it recommends. What matters now is whether that translates into real change; I hope that the Minister can assure us that it will.
Lord Hunt of Wirral (Con)
My Lords, I start by declaring my interests as a practising solicitor in the City of London and a partner for the past 50 years in the commercial law firm DAC Beachcroft. I join all other Members in congratulating the noble Baroness, Lady Hayter, and thanking her for moving this debate. Few, if any, Members of the House can match her first-hand experience of the world of regulation; that experience is very evident in this excellent report. I also thank her fellow members of the Industry and Regulators Committee, who together crafted a report that is certainly timely, even if it makes uncomfortable reading for His Majesty’s Government.
We have benefited in particular from those members of the committee who have come not only for support but to make their own contributions. The noble Baroness, Lady Valentine, and the noble Viscount, Lord Chandos—although on the committee for just a short period of this inquiry—raised some very important issues affecting AI, to which we will return. My noble friends Lady Harding of Winscombe, Lord Fuller and Lord Udny-Lister not only participated in producing this report but have added to it today. I am pleased to follow my noble friend Lord Camoys, who rightly summarised in the gap the problems that many people have identified, with delays, targets repeatedly being missed and overlapping regulation.
I will not speak for long, because the Minister has so many questions to answer that we have to give her the maximum time. Still, Time is Money is a great title. I do not know who thought it up but it is brilliant because this Government have now had more than two years to deliver the growth that they promised would be their first and overriding message. They spent that time freely but they have delivered remarkably little money in return. The committee’s most striking finding is not merely that regulators have failed to support growth; it is that the Government—and previous Administrations have been guilty of this too—continue to send mixed, confusing and ambiguous signals to regulators about how a commitment to growth is to be balanced against all those other duties.
It is a strange kind of mission whose commanders cannot describe the objective, as the noble Lord, Lord Bilimoria, set out quite well. What is the objective? Ministers may now tell us that the answer is a new, clarified and strengthened growth duty under which designated regulators would actively promote economic growth, but history tells us that economic development—and social development too, for that matter—will require, above all else, innovation.
In the introduction to the report, the committee observes that:
“Done well, regulation can boost consumer confidence and provide certainty for businesses to invest and innovate”.
That is certainly the case, but it is rarely, if ever, in the nature of a regulator actively to promote innovation. As the report notes, the primary statutory duties of regulators are generally linked to safety or consumer protection. I suppose that is inherently risk averse, but the key question is: what is risk? I suppose that, in many ways, as a solicitor specialising in insurance and reinsurance, my whole life has been to identify and deal with risk, but what is it if it is not, as the noble Baroness put it, benefit aversion?
There is a real and present danger that poorly targeted, overzealous or simply inappropriate regulation can serve to dampen, discourage or even stifle vital innovation. As my noble friend Lord Willetts put it—he chairs the Regulatory Innovation Office, so he should know—innovation is very difficult to promote when faced with detailed, overlapping regulation. As my noble friend Lord Udny-Lister put it, we are competing in a world where other jurisdictions are readily embracing our competitors and giving them answers to the questions for which they still await answers from our own regulators. All too often innovation, investment and growth are fostered and encouraged not by regulatory intervention but by its absence. As the report notes,
“it is not clear whether the Government wants regulators to allow greater risks to be borne by consumers and businesses, or merely to be more open-minded about new innovations”.
Many regulators already operate under the growth duty in Section 108 of the Deregulation Act 2015, which requires them to
“have regard to the desirability of promoting economic growth”.
Others, such as the FCA and the PRA—both of which oversee an area of the economy that is vital our economic well-being and place in the world—have growth as a secondary objective, subordinate to concerns around consumer protection. My noble friend Lord Ashcombe made a series of key points about how the situation could be improved by what he described as “intelligent” regulation. Let us hope that the Minister has a clear commitment in that direction.
However, as the report points out, the regulator of regulators, the Competition and Markets Authority, has no formal growth duty. Again, the report says:
“If it wishes to have a more meaningful impact, the Government must provide strategic guidance to regulators that addresses how conflicts between objectives should be prioritised and must provide political cover where the Government wants a regulator to be more open to risk”.
That is spot on; there, in a nutshell, is what we require of the Government. I join my noble friend Lord Black of Brentwood in asking key questions about the Government’s proposed legislation. Is it coming our way? As we will no doubt hear from the Minister, it is apparently called the regulating for growth Bill. It rests on the implicit presumption that growth can be regulated into existence, when the lesson of recent decades is quite the opposite—namely, that innovation and growth can all too easily be regulated out of existence.
What the country needs—this has come through in many of the speeches we have heard—is not more energetic regulation but a serious programme for how to make regulation genuinely proportionate. In stressing, as we all do, the importance of free speech and free content, my noble friend Lord Black made the point that the Competition and Markets Authority has erred in the past by failing to protect those small businesses and start-ups that could grow, expand and become jewels in the crown of this great country but have been swallowed up quickly by large, mainly American, conglomerates. Where is the competition when these very large entities take over the market?
The other key question that has come through in the debate concerns testing the Government’s commitment to reducing the administrative burden of regulation by 25%. My noble friend Lady Harding of Winscombe talked openly about how that target must be reached. First, it must never be forgotten that the administrative burden is by no means the only, or even the greatest, burden that regulators impose on wealth creators. It is important, and reducing it is also important, but regulation goes far beyond the simple costs of ticking boxes and returning forms.
Let us try to look into the future and find a way of attracting the inward investment to which so many speakers referred—but never at the expense of allowing us, in this country, to take advantage of the brilliant brains that we have. I saw those for myself when I was the Cabinet Minister for Science, when a young, 18 year-old undergraduate from Cambridge on the CERN project thought up the world wide web because he had to match and index all the material coming from the Large Hadron Collider.
Let us not forget that we have won more Nobel prizes in this country than the whole of the rest of Europe put together. Let us trust our innovators and set them free from burdensome regulation. I join my noble friend Lord Udny-Lister in saying that we need certainty, clarity and pace; the noble Baroness, Lad Hayter, used that word right at the start of this debate. We want pace, and we need answers—so it is over to you, Minister, to provide those answers now.
The Parliamentary Under-Secretary of State, Department for Business, Innovation, Science and Trade (Baroness Lloyd of Effra) (Lab)
My Lords, I am pleased to respond for the Government. I join others in thanking my noble friend Lady Hayter of Kentish Town for securing today’s debate and for her leadership of the Industry and Regulators Committee’s inquiry. I also thank all of the noble Lords who contributed to the report, as well as all noble Lords who have made contributions today; they have brought the combined expertise of so many here today.
The committee’s report, Time is Money: How Regulators Can Support Growth, provides a thoughtful and constructive examination of how regulation can better support investment, innovation and productivity. We agree with its central message that effective regulation is essential to a strong economy but unnecessary delay, duplication, complexity and uncertainty can deter investment and slow innovation.
As we have heard today, regulation is not inherently a burden. Well-designed regulation protects consumers, workers, communities and the environment. It creates fair markets, builds public confidence and gives businesses the certainty they need to make long-term investments. Therefore, our objective is not simply less regulation but better regulation: regulation that is proportionate, predictable and effective; regulation that keeps pace with technological and economic change; and regulation that supports growth while maintaining essential protections.
The noble Lord, Lord Ashcombe, asked what action we are taking to reflect on the report. The committee rightly called for greater clarity on what supporting growth means for individual regulators. We have acted on that recommendation. We have agreed 54 outcome-focused growth goals with 12 key regulators. These translate the Government’s wider growth mission and industrial strategy into practical priorities that are tailored to each regulator’s remit. The goals are supported by measurable, time-bound results, as well as an explanation of how their delivery is expected to support economic growth.
Growth goals are currently published on the regulator performance dashboard to improve transparency. The goals do not direct individual regulatory decisions or undermine operational independence. The Government set the strategic direction and regulators remain responsible for applying it independently, in accordance with the law and their statutory duties. Through the regulation action plan and the regulator effectiveness and reform programme, we are also tackling delays, duplication, fragmented processes and unclear guidance. We are working to improve digital services and enable businesses to provide information once, rather than repeatedly, to public bodies.
As the noble Lord, Lord Bilimoria, and others have stressed, timeliness is key. The Government and regulators have already made significant progress in speeding up regulatory processes. The Environment Agency has made its permitting service more efficient and transparent. It has cut its permitting queue by 1,000 permits, cleared backlogs in several categories and introduced a tracked service that now supports more than 60 projects. It also hit its target of responding to 95% of planning consultations 21 days ahead of schedule, and has met it consistently since. However, that is clearly not enough, and we need to do more.
Several noble Lords have, understandably, raised the balance between growth and vital protections; my noble friend Lord Chandos put that very clearly. Let me be clear: supporting growth does not mean lowering standards or accepting unacceptable risks to the public. Growth and high standards are not alternatives. Regulators must continue to fulfil their statutory responsibilities, while ensuring that those objectives are delivered proportionately and without unnecessary barriers to investment and innovation.
The forthcoming regulating for growth Bill will strengthen the growth duty for key regulators. This will be supported by statutory ministerial economic growth steers, tailored to different sectors—reflective of the points made today that different sectors regulate very different industries—and reporting requirements to strengthen accountability. This responds to the call by my noble friend Lady Hayter and many others, such as the noble Lord, Lord Bilimoria, and my noble friend Lord Smith of Ranmoor, for us to be clear on the Government’s priorities and risk appetite to allow regulators to make confident decisions, in particular in areas of innovation.
Many noble Lords focused, crucially, on the importance of innovation and on creating a regulatory framework that supports our innovative UK businesses. The Bill will also introduce cross-economy sandbox powers, allowing innovative products, technologies and services to be tested safely where existing legislation creates a barrier. The Regulatory Innovation Office, led so well by the noble Lord, Lord Willetts, has led to many advances in equipping regulators and having discussions with them on how to regulate in this innovative space, and it has provided practical examples which can be taken forward in these formal sandboxes when we are able to legislate for them. The modern world is changing rapidly, and our legislative framework must be able to keep pace with innovation and technological advances, so I agree very much with those noble Lords, for example the noble Lord, Lord Udny-Lister, who exhorted us to update our laws to take account of this. The Bill will provide greater scope to test innovative approaches, using real-world evidence to inform how successful approaches should be implemented more widely.
My noble friends Lady Hayter and Lord Chandos asked about the timing of the Bill. It is set to be introduced in the current Session of Parliament, when parliamentary time allows. At present, when regulators and businesses identify a better approach, existing legislation does not provide the ability to test this in practice. My noble friend Lady Hayter put her finger on this: primary legislation remains the appropriate route for many changes, but it does not offer the flexibility to test and respond at pace.
On the question from the noble Lord, Lord Black, this is a cross-cutting framework Bill, so it will not include any specific technologies or sector regulation. Overall, this is not deregulation by another name: testing will take place under controlled conditions with appropriate safeguard mechanisms, we will suspend or end testing where necessary, and any lasting change will be subject to appropriate scrutiny.
On my noble friend Lord Nagaraju’s observation, we are acutely aware of the needs of smaller innovative AI businesses to access these. That is part of the discussions we have been having with the Regulatory Innovation Office to date, and we will continue to bear it at the front of our mind.
The committee was also right to emphasise that time matters. Low or uncertain regulatory decisions impose real costs: they can delay investment, prevent products from reaching the market and make the United Kingdom a less attractive place in which to do business. We are increasing transparency through the regulator performance dashboard, which brings together performance information for 16 key regulators and is being expanded to cover regulatory approvals.
The noble Baroness, Lady Valentine, asked about KPIs. We are also working with regulators to improve KPIs so that they measure genuine performance, including timeliness, quality, certainty and outcomes, rather than activity alone. We recognise that poorly designed KPIs can give the appearance of progress when there is not.
Many noble Lords, such as the noble Lord, Lord Fuller, stressed the importance of actual change and the importance of this being felt through the whole of the regulator. Performance will be considered through reviews led by the Secretary of State and independent reviews, allowing underperformance to be challenged and targeted action to be agreed. The regulator sponsorship charter also sets out the responsibilities of sponsor departments.
My noble friend Lord Sikka is right that accountability is key. Accountability must extend through regulators, departments and government, and ultimately to Parliament.
The ultimate test will be what businesses experience: whether decisions are faster and more predictable, processes are simpler, duplication is reduced, and whether unnecessary barriers to investment are removed.
A number of noble Lords asked about the lead regulator model. We recognise that there is more to do here and that complex and fragmented regulatory processes can add delay and cost to major infrastructure projects. That is why the lead environmental regulator pilots are testing how environmental regulators can provide clearer and earlier co-ordinated advice to developers, while the wider reforms are focused on improving regulatory approvals and reducing unnecessary duplication. We are committed to learning from these pilots and taking forward their conclusions.
In response to the question from the noble Baroness, Lady Harding, on progress on the administrative burden of regulation, I underline that that is in addition to all the other changes that we are making to improve regulatory decision-making and regulatory transparency to reduce the effect on business. The Government are committed to reducing the annual administrative burden of regulation to business by 25% over this Parliament. That is equivalent to £5.6 billion against a baseline of £22.4 billion. We have delivered or identified £2 billion in net annual administrative burden savings, putting us over one third of the way towards the target. The Chancellor has now also announced up to £640 million in additional gross administrative savings for businesses in the Budget. We recognise that smaller firms feel regulatory complexity particularly acutely. The Small Business Regulatory Taskforce has made 15 practical recommendations, and we have accepted all but one.
Regulation also does not stop at national borders. We will continue to pursue international regulatory co-operation and—going to my noble friend Lady Gill’s point—the benefits of recognition of trusted overseas approvals. Doing so reduces unnecessary friction and benefits UK businesses and consumers, while preserving our ability to regulate in the national interest.
I agree with the noble Lord, Lord Bilimoria, on the importance of digital trade to the United Kingdom, which is a feature of our trade strategy.
Many noble Lords asked about digital markets and AI: the noble Lord, Lord Black, my noble friend Lady Gill and the noble Baroness, Lady Harding. The Government recognise the important role that competitive digital markets play in supporting innovation, investment, productivity and consumer choice in the UK economy. In their strategic steer to the CMA, the Government set out how they expect the CMA to operate the digital markets regime independently, flexibly, proportionately, and collaboratively to effectively unlock opportunities for growth across the UK digital economy and wider economy. The Secretary of State has made it clear that the Government are not issuing a new strategic steer.
To the questions my noble friend Lord Chandos and other noble Lords asked about our AI approach, as my noble friend and others highlighted, this is a general-purpose technology, and the Government’s approach is principally that it is best regulated at the point of use.
The committee’s report has made an important contribution to this agenda. The Government agree that regulators need clearer direction, transparency and stronger accountability if they are to support growth effectively. We will judge success by outcomes: simpler and more predictable regulation, faster decisions, stronger investment and innovation, and continued public confidence in the protections that regulation provides.
I again thank the noble Baroness, Lady Hayter, the members of the committee, and all noble Lords who have contributed today. We will continue to work with Parliament, regulators, businesses and wider stakeholders to deliver a regulatory system that protects the public, commands confidence and supports sustainable economic growth across the United Kingdom.
Baroness Hayter of Kentish Town (Lab)
I will try to do this briefly, as I can see that team B is just arriving.
I thank all the speakers, and I especially thank the Minister for that reply. She ought to take great comfort from how much agreement there was across the Room—although I know that no Liberal Democrats spoke. There has been a very strong commonality in our responses, particularly on the idea that regulation cannot create growth. The comment from the noble Lord, Lord Udny-Lister, about infrastructure pointed to where that could be of advantage more broadly. I am afraid I have been exchanging texts with the staff, and they think that it was the noble Lord who came up with the title, Time is Money. Can we congratulate him on that?
I will not try to repeat everything, except to say three things; I apologise for having said them before. One is that there was commonality around the need for regulators to be able to respond rapidly to innovation and to provide the pace, clarity, certainty and predictability that business needs. The noble Lord, Lord Ashcombe, used the phrase “intelligent regulation”, which may encompass it, but I think that it was the noble Baroness, Lady Harding, who said that all this has to be in the interest of British business and the British public. That is really the core of what we want to do.
There are three points to take away. As my noble friends Lord Chandos and Lord Sikka said, we must not lose sight of the need to protect consumers. These regulations did not grow. We do not have statutory regulation by accident; it is there for a purpose, and we need to continue to protect that.
Secondly, we need political cover if we are going to ask regulators to become a little more chancy and to meet the challenge that we and the Government have sent their way.
We also need to recognise the costs of poor regulation. It will fall to the Government to enable regulators to respond to new technology, but there are certain things that only the Government can do—the single front door, for example. No one regulator can do that or, in the words of my noble friend Lady Gill, deal with legacy rules. That falls to the Government, not to individual regulators.
The other challenge is that the existing growth duty—it is not new—has done very little to change regulators’ risk appetites, because it added another duty. They are going to have to make trade-offs. The Government must respond to that and think about how to change the conflicting demands of their core responsibilities and this, as well as about how to balance these new demands.
There are, therefore, things for the Government to do that individual regulators cannot do. Perhaps we can invite my noble friend the Minister to come to our committee when the Bill is published—I hope that the members of my committee will agree to this—to discuss how we can move forward. With that, I thank everybody for their contributions and I commend this report to the Committee.
Fortifying the Fiscal Framework (Economic Affairs Committee Report)
(1 day, 18 hours ago)
Grand CommitteeRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Lord Liddle
That the Grand Committee takes note of the Report from the Economic Affairs Committee Fortifying the fiscal framework (4th Report, HL Paper 291, Session 2024–26).
Lord Liddle (Lab)
This is the second occasion since being appointed chair of your Lordships’ Economic Affairs Committee that I appear before you as something of an imposter. The report that we are debating today was prepared under the guidance of my predecessor, my noble friend Lord Wood of Anfield. Having done his bit in this role to save Britain from bankruptcy, he is now more than doing his bit in the Foreign Office under Ed Miliband, so we wish him well.
It is also my pleasant duty to thank the officials who contributed so much to the report before your Lordships today—most of all, the staff of the Committee, Dervish Mertcan, James Parkin, Neil Mellor and our clerk, Matthew Manning, whose balanced judgments shine through its pages. I also thank those who served on the committee when we took most of the evidence for this report and have been rotated off since. A particularly brutal eight members were removed at the new year. I thank those members who have turned up to this debate—and I thank the three current members of the committee, the noble Lords, Lord Burns and Lord Razzall, and the noble Baroness, Lady Wolf, for participating in it today.
In preparing this report, we had the benefit of advice from two former Permanent Secretaries to the Treasury, the noble Lords, Lord Burns and Lord Turnbull. I am glad to see that the noble Lord, Lord Macpherson, is speaking today as well. Outsiders criticise the House of Lords, but what other institution in British life could boast that advice on its deliberations?
Fiscal policy is at the heart of our politics. Two key facts about it despite stand out and are rarely remarked upon. First, the OBR, the Office for Budget Responsibility, last July projected that if one simply rolled forward present trends, debt as a share of GDP would be about 270% by the early 2070s. Needless to say, witnesses in our inquiry were clear that that debt level could never in practice be achieved because the markets would stop lending to the Government well before that level was reached. The bond markets would have done their much-maligned job, especially as in Britain’s case—unlike, say, with Italy or Japan—as I think Mark Carney once said, we depend on the kindness of foreigners to fund our borrowing.
The 2070s may seem a long time away, but when I think about it, 50 years were not a particularly long time away for me. When I first started working as a special adviser in the Callaghan Government, in the midst of the IMF crisis, I would wonder whether my job would last more than a couple of months—that was 50 years ago.
The second key point that is rarely mentioned is that debt interest currently accounts for one in every 13th pound spent by the Government. We spend more servicing our public debt than we do on either education or defence, and it is nearly half what we spend on health. These are enormous numbers. A few weeks ago, I introduced the debate on our report on the demographic challenges of an ageing society. I strongly support our new Prime Minister’s ambitions for a radical reform of social care. In my view, it is fundamental to a decent society, and I admire his courage in deciding to reform the triple lock in order to help pay for it. We all know that social care is a huge commitment for the future. We also know that we have huge, unavoidable but as yet unfunded commitments on defence, which in a dangerous world we simply must meet. But in meeting those targets, let us remember that 270% figure which hangs over us on present trends.
This is why the framework within which the Government set fiscal policy is an essential ingredient ensuring that Governments can set themselves on the path towards sustainable borrowing. Our report looks at two elements of that framework: the fiscal rules themselves, which Chancellors loudly proclaim as non-negotiable; and the institution responsible for assessing the Government’s compliance with them, the much-maligned Office for Budget Responsibility.
On the rules, my personal feeling is that Chancellors protest too much. There is some benefit to the Government sticking to the existing rules, but the rules themselves have been shown to be eminently gameable. Debt is invariably shown to fall as a percentage of GDP in the final year of the plan, and the claim of sticking to the rules has limited value if the spending assumptions for the final years of the fiscal plan are of extremely dubious credibility. The risk of gaming was particularly high when the timescale for meeting the fiscal rules was set at five years. Meeting the rules depended on spending assumptions five years ahead that were unspecified.
The present Government—they are my Government and I support them—have, to their credit, shifted to a three-year rolling target to demonstrate a falling public debt to GDP ratio. I dare say Sir Humphrey would have described this as a brave decision because it means that, from now on, the commitment to lower the debt to GDP ratio is aligned with the Government’s three-year public spending plans, and, in our case, they have to be decided next year. This year’s Red Book implies that the Government’s plans for unprotected departments—that is, other than defence and health—would face real-term cuts of some 2.5% in order to meet that target. If I were a Labour Back-Bencher in the Commons, which I am glad I am not, that commitment might cause me a few uneasy nights of lost sleep. But the whole approach to policy remains Augustinian: we are promising to be fiscally prudent, but just not quite yet.
The committee was also generally concerned with the relentless yearly focus on whether the Government have met the short-term rules for so-called headroom rather than the long-term trends, which are more important. In report after report, the OBR has clearly set out the trajectory for debt; it is manifestly unsustainable but no one seems to take any notice. The Government are ignoring this, and we as a committee were concerned that there is a lack of attention to the annual Fiscal Risks and Sustainability report that the OBR produces. Parliamentary time should be set aside for discussing the Government’s response to this report.
Perhaps one reason for the reluctance to do so is the increasingly meagre content of the response that the Treasury provides. Richard Hughes—the chairman of the OBR before, unfortunately, he had to resign—noted that the Government’s response in 2017 was 136 pages of argument, while the most recent was 19 pages, and it was in the form of a Written Statement to Parliament, which of course was never debated. That is not good enough for such a serious matter. Our committee will do what it can to draw greater attention to the Fiscal Risks and Sustainability report. We will invite the OBR and Ministers to give evidence to our committee each year following its publication. The long-term health of our economy turns on Governments grappling with the issues that the OBR repeatedly highlights.
On the OBR more generally, we welcome the change in tone of the rhetoric that was previously unfairly targeted at it. In contrast to some claims, the OBR does not police government policy; it is merely an impartial judge of the Government’s compliance with rules that they impose on themselves. The Government are always free to disagree with the OBR assessment and make their policy accordingly, if they want to. We also welcome the OBR’s approach to forecasting. Projection is not prediction, and confusion on this point underlies misguided attacks on its work.
We heard of the frustration of some at the OBR not scoring the impact of tax cuts or public investment on its growth numbers, but if the Government genuinely believe in the value of a policy, they should implement it whether or not the OBR chooses to score it. Not to do so because of its approach to scoring would be to reveal a concern with meeting a metric rather than promoting the actual well-being of the economy. The Government should be making policy on the basis of their considered view of the economic fundamentals, not on the basis of what they think will lead to narrowly passing rules that they have imposed on themselves.
In particular, the focus on headroom, and how specific decisions of the OBR affect the result of the headroom calculation, are a product of narrow margins. Between 2010 and early 2022, headroom averaged about £30 billion. One might worry that, with headroom in this October’s Budget now falling to £15 billion, we are returning to a world in which OBR decisions about scoring will again be politicised. These decisions should be dry matters, more suited to footnotes in documents than headline news stories. The amounts that we are considering are, in terms of public spending and borrowing, rounding errors compared to the Government’s total tax and revenue spending. Although we accept that buffers are there to be used in tough times, those buffers should arguably be a lot greater than they are.
Sadly, the fundamentals of our fiscal position remain difficult, and nothing in the Budget last week suggests any meaningful change in the country’s long-term debt dynamics. I am expressing a personal view here, but fiscal sustainability is not just a matter of the scale of public spending and taxation. Personally, I want the Government to throw everything they can at growth; in my book, that must include rejoining the European single market. I want a simpler, radically reformed tax and welfare system that removes the multiple disincentives to work with which we have ended up. I would like to see a much sharper focus on public sector efficiency, where the public sector trade unions recognise that the only sustainable route to higher wages lies in greater public sector productivity.
The fact is that the public finances are on an unsustainable path. Apart from the Government’s brave decision on the triple lock, which I applaud, it is unclear how we are going to address this situation. The Prime Minister says that he is in favour of radical reform of our politics and electoral system to bring more consensus to our politics. Perhaps that is a fundamental change; we will have to see. I beg to move.
Lord Redwood (Con)
My Lords, I welcome this very perceptive and timely report, and I congratulate all those who prepared it.
I agree that the current fiscal rules system set up by the previous Conservative Government, and extended and modified by this Government, cannot possibly achieve its main aim, which should be to control debt better. Whether there is a five-year target or a three-year target does not really make much difference. Some people thought that that was a welcoming tightening, but the underlying truth is that year 3 or year 5 never comes and there is no pressure on the Government to make sure that they meet it. By the time they get to that year, it is no longer year 3, so it no longer has a biting target. That is clearly absurd.
I also agree with the committee saying that the OBR’s role has to be that of an independent forecaster and that the Government should be able to talk to it but should not be bound by it. Obviously, a good Government would wish to explain why they disagreed, or should explain how they intend to handle debt and deficit if they do not like the figures that are being produced.
In 2010, when this family of targets first started after the banking crash and the explosion of debt and expenditure over the period of that crash, public spending—that is, total managed expenditure—was £760 billion. This year, according to the latest forecast, it will be £1,449 billion. That is an increase of 90% over the years. I cannot remember a year, until we got to a Labour Government, when I was not told that we were cutting public spending, but spending is up 90% in cash terms. The inflation check from the Bank of England says that there was 62% inflation over that period, so there was a fairly substantial real increase, which occurred in most years. Some individual programmes were cut, and some priorities could not be pursued, but it is difficult to see that we have had a rigorous set of controls over either spending or borrowing.
If we look at where these targets came from, ultimately, they are derived from our Maastricht targets, which we were meant to obey when we were a member of the European Union. Noble Lords may remember that there were two treaty-driven targets. We were to keep debt at 60% of GDP or lower. Every country bar one, I think, broke that—including the United Kingdom—so it was transposed into something saying, “As you are over 60%, you should start getting your debt down towards a 60% target”; that was transformed into our fiscal rules after we left. There was also the 3% running deficit ceiling, which, again, has been often broken; it was broken by us in our period of membership. This Government have revised and tightened that by saying that there should still be a 3% deficit ceiling, but only to allow 3% of GDP borrowing for capital purposes, and that the aim should be to have a current balance. That is a good amendment to a target that does not work.
Where one needs to go from here is to say, as the committee does, that we are close to running out of money—and the people who lend it to us are close to running out of patience—for us to carry on spending at the rate we are doing. We have had three very big spending increases over the past 20 years: over the banking crash, with a big increase in debt; over Covid; and post Covid. I do not think that enough was done to control the spending coming out of the Covid exceptional expenditure; the extra borrowing was complicated, with a massive programme of quantitative easing. We then had, of course, a very substantial policy decision to go for more spending and more borrowing by the incoming Government in 2024.
I think that we would be much better off if, on a cross-party basis, we could agree on two overarching aims for the UK economy, based on one of our targets at the moment and some of the American experience. We should have as our aims 2% inflation and 2% growth, so that all policy and Bank of England considerations recognise that there can be trade-offs between those two, and we should embed the 2% inflation target on the Government as well as on the Bank of England, because inflation in public sector costs is one of the main forces of inflation at the moment; that should be taken much more seriously by the public sector.
In the brief time I have, I want to mention two expensive quirks in our figures, which I have highlighted and in which I would like other people to get interested; I find them fascinating, and they might be of use to those conducting public policy. The first is that Rachel Reeves made a decision, which I and my party condemned as being anti-jobs and anti-vacancies, to increase national insurance. The curious financial thing about it was that, of course, the bulk of the national insurance revenue has to be paid into the National Insurance Fund. That is now accumulating a surplus of £12 billion extra each year and has a surplus of £100 billion already, so I am not quite sure why she wanted a bigger surplus in the fund; it has to be lent back to the Government at the base rate.
The second funny money is the dreadful situation with the ownership of bonds by the Bank of England. The latest OBR figure says that the losses will come down a bit: it now thinks that, from 2022, when the losses started, until 2033, the losses will be £228 billion. Can we not get that figure down a bit?
Lord Burns (CB)
My Lords, I thank the noble Lord, Lord Liddle, for his introductory remarks to, again, a report to which I do not think he contributed when we wrote it. As he mentioned, I was a member of the committee during the investigation. I thank the noble Lord, Lord Wood of Anfield, for chairing the committee during that period, and I wish him well in his new tasks. It is a great pleasure to follow the noble Lord, Lord Redwood; I agree with much of what he has said today.
I want to discuss, first, the OBR’s role in budget-making, and, secondly, whether the fiscal rules are really helping. The OBR has recently been getting a tough press from some corners about its role. I regret this; I must declare an interest as a past chair of the oversight committee of the OBR. Releasing the forecast early last year was clearly an embarrassing mistake. Anyone who has been involved in forecasting knows that all forecasting is difficult, particularly when we have a background, as we have had, of unexpected military conflicts. However, the OBR basically does what it is asked to do in the legislation that set it up. At Budget time, it produces forecasts, offers an independent view of the impact of various Budget measures and provides an opinion on whether the Government will meet their own rules. Separate from the Budget, it also gives its opinion on whether the long-term fiscal outlook is sustainable on present policies, which has already been mentioned.
There is nothing to stop the Government producing their own forecasts in parallel. They can dispute the longer-term effects of policy measures. They can also change the fiscal rules, as we have often seen them do in the past. The suggestion that the OBR somehow dominates the construction of the Budget is simply not correct: it is the Government who set the rules and procedures. For me, the OBR’s value has been its real contribution to impartiality and transparency. It has published much more analytical information than before; it has shown much more of the workings in how it has reached its conclusions; and it undertakes a regular evaluation of its forecasts, providing a public record to all even when they might be embarrassing.
At the same time, we must acknowledge that the 2010 fiscal framework has not been enough to prevent a huge increase in the Government’s debt since 2010, as the noble Lord, Lord Redwood, pointed out. The crucial questions are: how much responsibility lies with the OBR, with the various crises over the past 18 years, or with the specific rules and policies that successive Governments have chosen to follow? There is no time to get into that today, but I will touch on the issue of fiscal rules.
The committee’s report highlights some weaknesses in the rules. The pattern is for the post-Budget forecast to show the debt ratio stabilising or increasing in the first year or two, followed by a decline in the later years. However, this improvement often relies on optimistic public expenditure figures set by the Government, and the projected decline of the debt ratio does not happen; the debt ratio has been stuck at the present level for some years now.
Personally, I am not a fan of short-term Budget rules. The word “rules” seems inappropriate in a world where the likely margin of error around the forecasts is large relative to the fiscal offer. We do not have an inflation rule; we have a target. Why do we have Budget rules? Rules are very difficult to set when there is so much global uncertainty, and the changes that take place inevitably generate suspicion that they are being made to give Governments more discretion and room for manoeuvre.
Governments of course need a strategy for fiscal policy. The committee’s report argues for a greater focus on reducing the debt ratio over time, rather than the endless debate about rules and fiscal buffers. This can be achieved only by bringing down the balance of current spending and income closer to zero. The OBR forecast published last week shows a decline in the deficit, but the question remains: will this be achieved in practice? Once again, the forecast for government spending appears ambitious. Even if it is accurate, the debt ratio is likely to be higher in the final year of the forecast than it was last year.
We now look forward to the forthcoming 10-year plan. It will be another stab at setting out a plan for the future. It is crucial that this next step also includes a compelling pathway to financial sustainability by reducing the debt ratio.
Viscount Chandos (Lab)
My Lords, I am grateful to my noble friend Lord Liddle for securing this debate and introducing it so cogently. I congratulate him on his appointment as chair of the committee.
The committee’s report, Fortifying the Fiscal Framework, could not be more timely or important. Today, the day of the US mid-term elections, might be a good time to remember that, in 2016, President Trump promised to eliminate US national debt, which was then around $17 trillion. In recent months, it broke through the $40 trillion level—around 130% of GDP. If the US had a fiscal framework, we can be confident that President Trump and Secretary Bessent would pay little or no attention to it. Even if there has been intermittent nervousness in the US Treasury market—arguably caused predominantly by other factors—the US continues to be able to finance itself on internationally competitive terms. So who needs a fiscal framework?
The US, fortunately or unfortunately, is not a representative model in the light of, inter alia, the dollar’s dominant position as the world’s reserve currency. Why do we attach so much importance to a stable fiscal framework? It is of course vital in maintaining confidence—international and domestic—to ensure that, whatever the national borrowing requirement is, the Exchequer pays the lowest possible interest rates. It is also a framework for promoting intergenerational fairness, which I acknowledge needs nuanced analysis but is an important and relevant consideration none the less.
One of the most striking parts of the report is contained in its final pages, in the form of Appendix 4. It shows over 20 changes in fiscal rules since the global financial crisis in 2008. The report correctly acknowledges that the rules should not be set in stone for many decades, but also argues that moving the goalposts this much and this often does not generally engender the very confidence that is the central purpose of the exercise.
I will not take much more time, as I unequivocally endorse the report’s conclusions and recommendations. The welcome reduction of the rolling forecast period from five years to three could, as the report recommends, usefully be amended further to include the requirement that debt at the end of the third year should be lower than in the first. I hope the Government will reflect on this beyond the initial dead bat that they have played.
I welcome the support given by the committee to the role and performance of the OBR, as well as the appointment of Jonathan Haskel as chair after, inter alia, his distinguished tenure on the Bank of England Monetary Policy Committee. I also endorse the support given for the new cycle of two forecasts and one fiscal event each year, whether or not the gap between the forecasts could be evened out to some extent.
I was struck by the evidence given by the economist and journalist Ben Zaranko advocating a broader assessment of financial resilience than the numerical level of headroom, as my noble friend Lord Liddle also argued in his introduction. The fiscal framework should not be overly mechanical in its interpretation and analysis, but the symbol of the financial responsibility and discipline pursued by the Government. If it is not too frivolous, I am reminded—for film buffs—of “Pirates of the Caribbean”, where the pirates’ code is argued to be not so much a code as a guideline.
The Government have made a strong start in stabilising the country’s fiscal position. I disagree with the noble Lord, Lord Redwood, that we are anywhere near the point of being unable to cover our financing needs, and this report can further strengthen that position.
Baroness Wolf of Dulwich (CB)
My Lords, as a member of the committee that produced this report, I express my gratitude to the noble Lord, Lord Wood, and to the committee staff. I thank the noble Lord, Lord Liddle, for his excellent chairmanship of the committee and his opening remarks.
I shall make four points. First, when our committee decided to undertake this inquiry, the OBR was experiencing unprecedented levels of publicity and criticism. You would have thought it was directly responsible for the country’s challenging and deeply worrying fiscal situation, rather than consisting of analysts and messengers. A year later, after another Budget, that seems no longer to be true; if there were widespread attacks this year, I missed them. I think that this is because, in the meantime, and in no small part because of the OBR’s work, far more people are aware of our ever-growing national debt and the state of our public finances.
However, while this growing recognition in Westminster and the country is welcome, we are not doing anything very significant about it. To quote the executive summary of the OBR’s own October report, in classically somewhat bland language:
“The UK’s economic and fiscal position remains very challenging”.
It points out that weak growth and government borrowing have resulted in a sharp increase in government debt while debt interest spending is expected to grow yet again by billions of pounds.
Observers of the Budget regularly point out how bizarre it is that so much time and national attention goes on whether or not the Chancellor of the Exchequer is using up her or his headroom, an amount that is a tiny proportion of total public expenditure. However, the reason for this is that we are in fact in hock to the bond markets and in an unnecessary situation where small changes in interest rates are a major daily concern for the Government because of their impact on total debt interest.
Secondly, it is perfectly possible to reduce the national debt. In 1946, after the Second World War, the national debt reached 252% of GDP, but by 2006 it was down to 36%. As our committee has argued in this report, and in its previous 2024 report on debt, we really have to act.
Thirdly, I underline the hugely valuable work done by the OBR in producing its Fiscal Risks and Sustainability reports. As we said in our report, these reports get far too little attention, but, if you want to understand what is going on with the public finances, they are an essential source; I commend them to everybody.
Fourthly, there is a concrete change that this Government and future Governments could, and should, make; in my view, it is the single most important recommendation in this report. The Government should set out an additional debt target that will show cumulative performance over three years, such that, in normal times, debt in the third year is lower than in the first year. That should be easily monitored and clearly understood by the general public. However, this has not been our recent experience. This October’s economic and fiscal outlook predicts that, in 2029, public sector net debt as a percentage of GDP will, again, be significantly higher than was forecast just six months ago.
We are hardly the only people to observe that, all too often, the current and recent fiscal rules allow ample room for gaming the debt target. As a former member of the Budget Responsibility Committee confirmed to us, as a witness,
“you can have debt rising for ever”
and still meet most of the targets that the Government have set for themselves and observe their rules. The committee criticised this situation in 2024, but nothing happened. We called for change in this report, but the Government’s response to our report said:
“The Government has been clear that the fiscal rules are non-negotiable”—
end of subject. Well, the rules may be non-negotiable, but it is beyond time for them to change and for them to be discussed publicly and widely. We need a cross-party commitment on our fiscal framework, including a clear, easily monitored commitment to ongoing debt reduction—and sooner rather than later.
Lord Howell of Guildford (Con)
My Lords, this is an extremely interesting subject. I thoroughly enjoyed the opening comments from the noble Lord, Lord Liddle, without necessarily endorsing every single one of his points; nevertheless, that is the way to start a good debate on this subject.
When we debate this subject, as we did in the Chamber the other day, it is a little difficult to suppress the feeling that we are attacking it from the wrong end. I am told that our total national debt is just about to pass, or has just passed, £3 trillion. That is a milestone; it is almost too big a number to write on a single piece of paper. Of course, that prospect also includes the very expensive debt interest bill, which is coming in now and will be coming in for years to come—it should be falling, but it is not.
I think it was the 18th-century philosopher Adam Ferguson who said that a nation that burdened with high debt is on the path to decline. He was a bit premature, because things did not quite work out that way in the succeeding century, but that is the possibility if we saddle ourselves with this kind of debt interest. Never mind whether it is inhibiting or encouraging growth, or even what it is doing to inflation: if that is one of the huge bills that is intruding on our national payments and government payments every year—it is, at present, and it is getting bigger all the time—we are in deep trouble.
To say that the Budget, such as the one we have just had, is “steady as she goes” and has not worried the bond markets is not enough. Where she is going is down, so it is “steady as she sinks”. That is what this do-nothing Budget, which fails to begin on the path and halts this fantastic growth, is doing. There is no opportunity for just ignoring the whole thing, like the MMT—modern monetary theory—movement in America, which says that the whole thing is just a myth. That is not right. There are appalling prospects unless we get some sort of grip.
In the country as a whole, there is a feeling that our full productive capacity is not being exploited. The economists have come up with a lot of numbers, a sort of a new fiscal prison. As Keynes faced in the 1930s and 1940s, there is a need for a balanced budget. He pointed out that, if you depart from that prison, there are possibilities of escape to higher living standards and a better-balanced life for the citizens of this country. We are in the same sort of position now. I was wondering why everyone was flocking to this play in the West End about Keynes’s life; it is absolutely full and impossible to get seats. Perhaps the answer is that they are looking for a new Keynes, or what Keynes would have to say in the face of this apparent imprisonment, which seems to bar us from breaking out and realising our full potential.
When it comes to what we do about this, there are only three broad sets of approaches worth considering—three unburdening strategies. The first is doing nothing very much, which is roughly what we are doing now, and hoping that inflation and growth, if there is any, will lift us out of debt through time. We hope that the OBR will nobly reduce its two forecasts a year, plus a single fiscal event, whatever that is meant to be, but we will not actually do anything to affect policy.
The second strategy, which is related, is to talk about cuts—yes, cuts—and a new war on efficiency, the sort of language we had in the last century under every Government from Ted Heath onwards, and promise to have a review next year. I cannot quite see the point of this review next year. For 50 years, we have been reviewing the possibilities on the efficiency side and indeed of transferring whole functions out of the public sector altogether. I have filing cabinets full of suggestions and proposals worked out in enormous detail. There is no need for another review. In the 1970s, we marshalled the 20 ablest brains in the nation to work out how to challenge waste and redefine objectives in every department. They worked very hard; we chose them very carefully. I have to say that, after 18 months, every single one that we brought into government left, because they found a complete wall of obstruction to everything they wanted to do. We had a pamphlet, “A New Style of Government”, which outlined this; it is all ready and sitting there unused.
In my last 30 seconds, I have to say something about transferring functions, because that is the only way that this can be done. The only possible way to reduce the rate of growth of this colossal figure is by reducing functions, which will in turn reduce the number of civil servants—as we did, from 800,000 to 500,000, in the 1970s and 1980s—and the functions of government, as we did on the industrial side. There now has to be a list of new things. I have in my hand a list that anybody can put together, with about £100 billion that could be taken off tomorrow morning. You do not need any reviews at all. It can be done by determined people. It can be done even with parties in the House of Commons that disagree with everything. Some things can happen automatically. I do not have time to read out this list now, but if anyone would like it, I would happily give it to them. It is all around the corner. Reviews can wait for another day. We can act now if we are serious about curbing the enormous growth of this enormous burden.
Lord Bilimoria (CB)
My Lords, the Economic Affairs Committee report, Fortifying the Fiscal Framework, was done in April 2026. To summarise, it said that the UK was
“on a path to unsustainable debt”,
and it urged the Government to introduce a rule to ensure that debt falls in normal times and permit a larger fiscal buffer. The Government’s response is that the rules strike an appropriate balance and their fiscal buffer provides flexibility against future shocks—surprise, surprise.
I congratulate the noble Lord, Lord Liddle, the noble Lord, Lord Wood, who was chair at the time, and the members of the committee on their report. If you look at the fiscal headroom, the figure that we just talked about, it was £9.9 billion in March 2025, £21.7 billion in November 2025, £23.6 billion in March 2026 and £15 billion in 2030, according to the latest Budget. In context, on the headroom, the average buffer has been over £30 billion from 2010 until 2022. The Office for Budget Responsibility’s average forecast error is £54 billion. Borrowing is 4.4% of GDP in 2025-26, falling to 1.8%, which is £18 billion higher than March’s forecast—some £65 billion over the period. National debt is approaching 100% of GDP. If you look at the other measure on the public sector, the PSNFL, it is 83.2%. Debt interest is now £124 billion, which is £14 billion more than forecast in March, and is more than defence, policing and prisons combined. It is forecast to go up to £147 billion by 2029-30.
The tax burden is the highest on record, at 38.5% of GDP. This is the highest since records began in 1948. Of course, tax never ever matches spending, and spending is 44.3% of GDP in 2025-26. There is therefore a constant deficit but, as we know—and this is surprising, given the backdrop of the geopolitical situation, the challenges we are facing, and the figures I have quoted—we are still managing to grow at about 1% a year: 1.2% this year, 1% next year, and cut from 1.6% because of the Iraq war. The 2% inflation target is now meant to peak at 3.8% in quarter 1 next year. On gilt yields, 10-year gilts were 5.32% on Budget Day, which was the highest in the G7, and 30-year gilts hit 6.04% on 7 October, the highest since January 1998. Greece borrows at a cheaper rate than we do as a country. In the long-term projection, and this is the scary figure, debt is heading for 300% of GDP by 2075-76, on an unchanged policy. There has been rule churn, with nine sets of rules since 2008, and 28 since 1997. The average rule since 2010 lasted just 1.8 years.
Where borrowing is concerned, we are scared about this 100% figure, and we should be. To put it into context, at the end of the Second World War, our borrowing was 250% of GDP. After a six-year brutal, horrible war, it reached 250%. It took from 1945 until 1963 to get it down to 100%. Then, in the Gordon Brown years, it came down to 40%. Now we are climbing back up to 100%.
The question before the committee concerns the fiscal rules and the OBR. We have done two major things in recent memory. First, there was the independence of the Bank of England, brought in by Gordon Brown. I think most people would agree having an independent central bank is a good thing and is trusted by businesses and the market. Secondly, the OBR was brought in. Is the OBR doing a good job? Is it forecasting well enough? The £54 billion of average forecast error is quite a frightening thing. The OBR has had a pretty tricky time—for example, leaking its report before Rachel Reeves came to the Dispatch Box, leading to huge embarrassment, the resignation of its director and a new director coming in. So is the OBR a referee, a policeman or a watchdog? Is it to be trusted? I think that on balance we are all going to conclude that yes, it should be there, but is it doing enough when it comes to dynamic scoring? It was agreed that that would probably not work. The OBR’s independence is there to stay.
The noble Viscount, Lord Chandos, spoke about US debt being 130% of GDP, $40 trillion. Its debt interest is higher than its defence spending, which is almost $1 trillion, the highest in the world, and of course it has the dollar as reserve currency.
The bottom line is this: Liz Truss and Kwasi Kwarteng’s Budget in 2022, containing £45 billion of tax cuts paid for by extra borrowing but with no OBR forecast, led to disaster, with the bond markets absolutely reacting. James Carville, Bill Clinton’s adviser in 1993, said:
“I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a .400 baseball hitter. But now I would want to come back as the bond market. You can intimidate everybody”.
It is good that we have the OBR and that we have that independence. We must bring down taxes, welfare spending and borrowing and then generate growth. That will generate the jobs that will pay for our public services.
Lord Macpherson of Earl’s Court (CB)
My Lords, I congratulate the noble Lords, Lord Liddle and Lord Wood, and the committee on a persuasive and thoughtful report.
I must confess to having a love/hate relationship with fiscal rules—love because I am all in favour of fiscal rectitude but hate because, whatever rule is put in place, it is steadily subverted as Governments become fixated on hitting the target while missing the point. I am arguably the author of my own misfortune, since I was Permanent Secretary to the Treasury when five of the 10 fiscal rule regimes, so expertly catalogued by the committee, were put in place.
I recognise and share all the committee’s criticisms of the rules, and last week’s Budget provides further proof of its analysis. Borrowing and debt is higher in every year of the forecast compared to last year’s Budget, but nevertheless the Government meet the rules with broadly the same headroom. That is counterintuitive. I should be clear that that is not a criticism of the macro judgment of the Chancellor’s Budget; I thought that judgment was broadly correct, and I welcome the reception that has been given by the gilt market.
I also welcome the strengthening of the framework in 2024, but the challenge of fiscal policy, as the noble Lord, Lord Liddle, pointed out, is that spending and revenue levels are huge and subject to substantial forecasting error. Left to my own devices, I would set a fiscal target of balancing a Budget—or at least the current Budget—year by year, but such a target would not lend itself to the current fiscal rules framework without having a very large cushion indeed. Fiscal targets therefore have to be set over the medium term. That means they have to be rolled forward year by year, and that provides endless scope for gaming, as just about everyone has pointed out.
No doubt the rules can be further improved, and the committee makes some good suggestions but, as I told successive Chancellors, “Don’t get mesmerised by the rules. Meeting them on their own does not give you credibility. Rather, focus on the substance. If you have a credible plan underpinned by credible tax and spending policies, the markets will reward you”.
At the weekend, I ignored the advice of the noble Lord, Lord Blackwater, and read the book by the last Prime Minister but two, Bank Job, in which she argues that the OBR should be abolished. It is always important to expose yourself to different views, and actually it is worth a read—it is quite short—but, sadly, I was not persuaded. In my view, the committee is right to praise the role of the Office for Budget Responsibility. It is not the OBR’s fault if Governments feel constrained; that is the inevitable consequence of sailing too close to the wind. The OBR will never get its forecast right—that is because no forecaster gets forecasts right over and over again—but at least its forecasts are unbiased, unlike the Treasury’s of old. One of the many things I learned there is that, when Governments assumed they had increased the trend rate of growth in the economy, they were invariably deluding themselves.
Between 1945 and 2008, the British economy generally grew by 2.25% a year. Since then, it has grown much more slowly. The OBR’s latest forecast reflects that. Perhaps it assumes that the economy will grow too slowly, but it should attach a high bar to raising its view of the trend growth in productivity. As the committee advises, it should also attach a high bar to the dynamic scoring of policy measures. In my experience, it takes many years, even decades, for any structural reform to feed through to economic growth. I worry that Chancellors and officials of late spend too much time trying to press the OBR to accept their view of the dynamic effects of policy changes. Again, they would be better advised to focus on the substance; if policies have a dynamic effect, they should regard that as a bonus.
Finally, I endorse the committee’s desire to upgrade the status of the OBR’s Fiscal Risks and Sustainability report. You did not have to be a genius to spot the demographic time bomb, which has finally exploded; indeed, I remember working on the Fowler reviews in the 1980s, which were predicated on this demographic time bomb. Setting out its fiscal consequences so lucidly provides a service to a media and political class who have an uncanny knack of ignoring it. Anything Parliament can do to give it a higher profile should be warmly welcomed.
Lord Sikka (Lab)
My Lords, I thank the committee for its timely and informative report. The fiscal rules have focused mechanically on selected macroeconomic issues but they have not been accompanied by social objectives, such as targeting a reduction in poverty or in NHS waiting lists. The rules are suspended to support corporate welfare but not human welfare. They were suspended after the 2007-08 crash to save banks from their own follies but are not suspended to save lives.
Around 300,000 people a year die in England while waiting for a hospital appointment. In 1948, when the NHS was launched, government debt was 270% of GDP. I cannot recall our parents lamenting that. The resources enabled the entrepreneurial state to invest in infrastructure, biotechnology, information technology and aerospace, and to promote economic prosperity, which helped the private sector grow. By 1979, the debt had declined to 42% and, later on, to 36% by 2007. Now we have a phobia about the debt being 94% of GDP. The key question is: what exactly is it used for?
The constraints on government borrowing have forced the privatisation of vital services and increased government costs. Public borrowing through the PFI has been undertaken to keep within the fiscal rules. Every £1 of private investment has resulted in £6 of repayment from the public purse. Fiscal rules have reduced the economic levers available to the state. It cannot easily nationalise water, as that would violate fiscal rules; for the same reason, it cannot nationalise energy and end profiteering, even though that fuels poverty. It cannot get rid of potholes on roads, even though they impose extra costs on households and businesses. After fiscal rules, elected Governments cannot promise affordable housing, energy, safe roads and timely healthcare. Faith in democracy is the inevitable loss in having fiscal rules. Swathes of the NHS have been privatised because Governments choose to follow the fiscal rules. The private sector makes whopping profits from it. Cataract surgery contracts handed out by the NHS have profit margins of 32% to 43%, leaving less for front-line services.
The committee’s report seeks a reduction in public debt, but it does not discuss the resulting social consequences. Let me give some examples. What would happen to social cohesion and businesses if, say, tomorrow—or in the next year or the next decade—£500 billion were removed from the economy? How would savers get a risk-free rate of return? Would banks and building societies be forced to hold risky portfolios? What might the consequences be? Would pounds sterling still be regarded as a global premier currency?
For the past 30 years, the UK has been at or near the bottom of the OECD league for investment in productive assets. That has coincided with the rise of blunt fiscal rules, which constrain public investment. The entrepreneurial state has been restructured as a guarantor of corporate profits. The private sector has not delivered the required investment. Public and private investment work best in tandem, but the fiscal rules have disabled that partnership.
The report could have examined the fiscal rules through the lens of modern monetary theory and asked questions about the composition of public debt, but it does neither. So I have two questions for the Minister about the composition of this public debt. First, why is the balance of the Bank of England’s asset purchase facility included in the Government’s debt? The Treasury indemnifies the Bank’s losses, but the Bank is solvent and cannot go bankrupt; it can even create money, as the £895-billion quantitative easing experience shows. In short, is the public debt grossly overstated?
Secondly, why is the Bank of England paying interest on central bank reserves? That is part of the Treasury’s debt-servicing cost. More than £100 billion has been paid in the past three years. The European Central Bank has adopted a tiered approach to managing the reserves and has drastically reduced such payments. Under what circumstances would the Treasury do the same?
I have asked these questions a number of times; I have never received an answer to them, but I am feeling lucky today, so I am sure Minister will add to them.
Lord Londesborough (CB)
My Lords, it was a pleasure and privilege to sit on the Economic Affairs Committee to interrogate the effectiveness of our fiscal rules under the astute chairmanship of the noble Lord, Lord Wood of Anfield.
Just a year before this report and before our brutal rotation, the committee conducted an inquiry into the sustainability of our national debt; it was entitled, somewhat fancifully, National Debt: It’s Time for Tough Decisions. Since then, I regret to say that there has been an almost complete absence of tough decisions on the fiscal front. Chancellor Healey’s muted Budget was, I am afraid, yet another example of procrastination and back-ending a whole host of decisions on spending into the next three to four years, which history shows are never, or very rarely, fulfilled.
We now have a new term: a “breathing space”— that is, a period in which we will do as little as possible to address our addiction to borrowing in a low-growth economy but keep just within the fiscal rules. Therein lies the problem with our fiscal architecture: it allows for rolling forecast targets to be three years out. That is an improvement on the pre-existing five-year rule, admittedly, but it ignores the cumulative impact of our deficit financing and thus allows our debt to grow and grow. Our track record on debt is deeply disturbing. Having breached £3 trillion, as we just heard, it has tripled in size over the past 15 years in spite of, or perhaps because of, our fiscal architecture.
The committee’s report also points out, correctly, that there is an excessive focus on short-term rule compliance but insufficient attention is paid to longer-term trends, as the OBR’s much-maligned long-term forecast of debt approaching 270% of GDP by the middle of the 2070s has highlighted.
I have sympathy for the OBR, particularly after last year’s pitch-rolling and kite-flying exercises by the Treasury. However, the truth is that when Chancellors operate with such little headroom, now down to £15 billion, their margin for error is tiny when taking the difference between around £1.5 trillion of both tax and spending by the end of the forecast period.
My background is private sector, not public sector, first as an entrepreneur seeking to raise debt and to attract investment, and latterly on the other side of the table, as an investor seeking to lend or invest in start-ups and scale-ups. The debt and equity financing that goes into loss-making companies is judged on their ability to grow revenues at a faster pace than costs, and ultimately to generate profits on a sustainable basis.
As investors, we pay special attention to what we call fantasy hockey sticks resulting from excessive optimism. I was reminded of that when reading the OBR’s latest economic and fiscal outlook. The OBR has a history of bias, specifically optimism bias, in terms of both budget deficits and borrowing requirements. Now the OBR is projecting that borrowing will fall from last year’s £134 billion to £133 billion in FY 27, this year. It will then apparently fall steadily over the next four years, down to £67 billion in FY 31—an inverted hockey stick, if you like, but no more credible. That also assumes that the Government make unspecified but substantial real cuts in spending, which was likened to fiction by the former chair of the OBR during our national debt inquiry.
Remember that these cuts have to be achieved despite the “five D” headwinds. I remind the Committee that they are demography, with an ageing society; dependency, with a soaring benefits bill; a defence programme that is to increase by 40% over the next eight to nine years; decarbonisation; and the fifth D, which has now become the most menacing of all: debt, as in debt interest, which has grown from £40 billion to £120 billion this year and, warns the OBR, will structurally settle at between £160 and £190 billion in the 2030s.
If our national economy was treated as a private company, not a sovereign entity, the bond markets would not just be charging us a premium for lending but would very likely pull up the drawbridge altogether as there is no credible plan to get us back into surplus. The hope is that AI will positively impact productivity, but that is a hope, not a strategy.
I agree that the rules have their place. They provide us with guardrails so that we can show the bond markets some level of fiscal discipline that enables us to go on borrowing and piling up national debt. Ultimately, though, we can only reduce the debt, let alone our servicing costs, by delivering real GDP growth per capita over a sustained period, but that cannot happen if you keep increasing borrowing, as well as raising the tax burden to ever higher percentages of GDP. Fiscal rules without economic growth are, to an extent, sticking plasters that enable us to go on tapping the bond markets for finance as we continue to generate huge budget deficits.
Lord Razzall (LD)
My Lords, as a member of the committee I believe, without conceit, that this is an important and timely report. At its heart lies a fundamental question: is the UK’s current fiscal framework sufficiently robust to ensure the long-term sustainability of our public finances? The committee’s conclusion is concerning. It warns that the UK is on a path towards unsustainable levels of public debt and that the existing fiscal rules, despite successive revisions, do not provide sufficient assurance that debt will fall over the long term.
I believe that the report deserves serious consideration, because fiscal credibility is not simply about meeting targets in an individual Budget. I believe that the answer to the comments by the noble Lord, Lord Sikka, is that fiscal credibility is about establishing confidence that the Government can maintain public finances responsibly, withstand economic shocks and protect future generations from an excessive tax burden.
First, I will address the effectiveness of the current fiscal rules. The committee identifies a significant weakness in the existing framework, as people have said. Under the current arrangements, the Government are required to demonstrate that debt is falling as a proportion of GDP by the third year of rolling forecast. However, this does not necessarily mean that debt is falling over the longer term. Indeed, the committee highlights that the Government could technically meet their fiscal targets while the overall level of debt continues to increase. This raises an important question about the credibility and effectiveness of fiscal rules: rules should not be designed simply to demonstrate compliance at a particular point of time but should ensure that public debt is placed on a genuinely sustainable downward trajectory. As people have indicated, the committee therefore recommends an additional debt target requiring debt in the third year of the forecast period to be lower than in the first year. I support the principle behind this recommendation: fiscal rules must focus on the underlying direction of public finances rather than short-term improvements that may prove temporary.
Secondly, the report raises important concerns about fiscal headroom. The Government’s relatively small fiscal buffer leaves limited room for manoeuvre when economic forecasts change or unexpected pressures emerge. We know that economic forecasts are inherently uncertain and that, when the fiscal buffer is too small, even relatively modest changes in economic conditions can force difficult decisions about taxation and public spending. The Government obviously have not helped in the recent Budget by lowering the estimated fiscal buffer from £25 billion before the Budget to £15 billion. The committee therefore recommends that the Government commit to maintaining a substantially larger fiscal buffer, reflective of the unavoidable uncertainties in economic forecasting, and I support that recommendation. In addition—I do not think anybody has really touched on this—fiscal headroom should not be treated as money available for immediate spending commitments; it should provide genuine protection against economic shocks and unforeseen circumstances.
Thirdly, I highlight the importance of stability and credibility in fiscal policy. One of the report’s central concerns is the repeated modification of fiscal rules by successive Governments. Frequent changes risk undermining confidence among investors, financial markets and the wider public. A credible fiscal framework must provide predictability. Businesses need confidence when making long-term investment decisions, while international investors need assurance that the UK remains committed to responsible economic management—Liz Truss talked about that in her book, no doubt. This does not mean that fiscal rules should never change; economic circumstances evolve, and Governments must retain the flexibility to respond. However, changes should be carefully considered, evidence based and subject to meaningful consultation. The committee is right to argue that further changes should follow a comprehensive consultation process rather than being driven by short-term political considerations.
A number of noble Lords touched on the role of the Office for Budget Responsibility. The OBR provides independent economic and fiscal forecasts and assesses the Government’s performance against its fiscal rules. Its independence is absolutely essential to maintaining transparency and accountability. The committee rightly supports retaining responsibility for economic and fiscal forecasts with the OBR. It also recommends maintaining two forecasts each year while adjusting the timing of the spring forecast to create a more balanced interval between forecasting exercises. I particularly welcome the emphasis on strengthening co-operation between the Treasury and the OBR while preserving the latter’s independence. Independent scrutiny should not be seen as an obstacle to government policy; rather, it should help ensure that policy decisions are informed by realistic economic assessments.
Finally, we must consider the wider implications for economic growth. The UK’s public finances face considerable long-term pressures, including an ageing population, rising demands on public services, and commitments and the transition towards net zero. At the same time, weak productivity growth and the burden of debt interest payments constrain the Government’s ability to invest in the economy. We must therefore strike the right balance between fiscal discipline and productive investment. A strong fiscal framework should not simply focus on reducing borrowing; it should also support sustainable economic growth, encourage investment and ensure that future generations are not left with an unsustainable debt burden.
The Government have responded to the committee’s recommendations by defending their existing rules and arguing that their reforms provide an appropriate balance between fiscal discipline and flexibility. I would argue that the Government should remain open to the committee’s proposals, particularly on debt reduction and maintaining a large fiscal buffer.
To conclude, the central message of the report is straightforward. Fiscal responsibility must be measured not simply by whether a Government meet their targets today but whether they leave the country’s public finances stronger and more sustainable tomorrow.
Baroness Neville-Rolfe (Con)
My Lords, I thank the Economic Affairs Committee for producing this excellent report and the noble Lord, Lord Liddle, for his enjoyable and historically-focused introduction. As he said, we are lucky to have two Permanent Secretaries, the noble Lords, Lord Burns and Lord Macpherson, speaking in the debate. I also want to pay tribute to the noble Lord, Lord Wood of Anfield, for his work in chairing the committee and congratulate him on the positive start he has made as FCDO Minister. I look forward to the Minister’s response to the interesting points made by my noble friend Lord Redwood on different macroeconomic targets, 2% inflation and 2% growth, and on the quirks that he identified in national insurance funding and the ownership of bonds by the Bank of England, a theme that was also picked up the noble Lord, Lord Sikka.
His Majesty’s Opposition broadly support the report’s conclusions. This debate is exceptionally timely coming, as it does, in the immediate aftermath of an unsatisfactory Budget. Let us quickly come to the essence of the matter, which is to be found in the final paragraph of the report’s summary:
“On current tax and spending settings, the UK is on a path to unsustainable debt levels”.
There we have it, starkly put. Noble Lords may ask if the position has been affected by the recent Budget? The answer is “not much”. This Budget can only be described as a missed opportunity. However, since the necessary decisions have been put off—yet again—the position has deteriorated somewhat since the Committee’s report was drafted.
In short, the recent Budget presented 108 tinkerings to the Commons, while probably the most pressing and ominous shadow facing us as a country went unaddressed. When the markets decide, as at some unknown time they will do, that enough is enough and the prospect of debt being repaid eventually has become too small to countenance, 10-year plans and other gimmicks will not cut the mustard. Very unpleasant things will happen. Just look at the experience of another Healey, Denis, Lord Healey, in 1976.
With the level of national debt close to 100% of GDP, a responsible Government would be planning to move as quickly as possible to a position of surplus, not making up excuses for doing nothing about it. My noble friend Lord Howell of Guildford quoted the £3 trillion debt figure on this point, which was echoed by the noble Lord, Lord Londesborough, who said it had trebled over the last 15 years.
I turn to two lesser, but still important, matters. The first is the committee’s conclusion, echoed in discussion, that the current debt rules can be gamed. As noble Lords will know, the existing rule requires debt to fall as a proportion of GDP only in the final year of a rolling forecast, meaning that debt can rise substantially in the preceding years, while the Government continue to promise a reduction. As the forecast period moves forward, this may never materialise. In other words, a Government can comply with their fiscal rules year after year, even as the national debt continues to rise. The committee recommended an additional debt target, requiring debt in the third year of the forecast to be lower than in the first. This is an interesting and sensible proposal that warrants serious consideration, as the noble Lord, Lord Razzall, said.
The Government have rejected this recommendation. I would be grateful if the Minister could explain why. How do the Government consider that the present debt rule provides a meaningful guarantee of fiscal discipline, when it is possible to meet that rule without achieving a genuine reduction in debt over the forecast period? The current system is satisfied if you predict a fall, rather than measuring one that has actually taken place, resulting in an upward spiral. Is that the Government’s plan? I add that the OBR is unlikely to go along with that indefinitely. I agree that Jonathan Haskel will be a respected new chair, and I am sure we all miss his father, Lord Haskel.
I agree with the noble Viscount, Lord Chandos, that the long list of changes in the fiscal rules in Appendix 4 is unsettling. I remember presenting a similar annexe for our Built Environment Committee report on demand for housing, but that listed the large number of Housing Ministers that there had been. These long lists are worrying.
A further risk arises from the growing use of public financial institutions. Under the Government’s chosen debt measure, borrowing can appear less burdensome where it creates a corresponding financial asset. Ministers must ensure that PuFins, such as the British Business Bank, do not become a means of moving borrowing outside the effective constraint of the fiscal rules, while leaving the public exposed to the risk of future losses.
My second point concerns the so-called fiscal headroom. The current Budget rule requires receipts to cover day-to-day public spending, with a deficit of no more than 0.5% of GDP permitted in 2029-30. Once that year becomes the third year of the forecast, the current Budget must be forecast to be in surplus in the third year of the rolling forecast period. Fiscal headroom is the estimated margin by which the Government are forecast to meet that rule. It is intended to provide some protection against adverse changes in the economy, higher spending, lower tax receipts and the ordinary uncertainty inherent in forecasting. Of course, if there were a serious plan to reduce the deficit over time this would be of less importance—but, for now, it is important. Following the Budget, the Government now have just £15 billion of headroom, down from £24 billion in the spring forecast and contrary to the recommendation in paragraph 40 of the report, which the noble Lord, Lord Razzall, also supported.
Indeed, the OBR estimates that the Government have only a 56% probability of meeting that rule, which I find extraordinary. We face a time of considerable economic and geopolitical uncertainty, while the Government have left themselves with a margin for error which could be eliminated by a relatively modest deterioration in the forecast. The OBR has noted, for example, that a 1 percentage point change in gilt yields and bank rate expectations across the forecast could change medium-term borrowing by approximately £16 billion. That single risk is greater than the Government’s entire £15 billion margin against the current Budget rule.
Further, the Government’s forecast assumes that the extraordinary post-pandemic growth in health-related benefit caseloads will moderate significantly. The OBR forecasts that annual spending on health and disability benefits will nevertheless rise from £86 billion in 2025-26 to £120 billion in 2031-32, an increase of almost £35 billion under its central forecast. However, if incapacity and disability caseloads continued to rise at their post-pandemic rates, the OBR estimates that welfare spending in 2031-32 would be approximately £25 billion higher than in its central forecast. That additional expenditure is for one year alone. The fact is that just one assumption in one department could eliminate the headroom the Chancellor has left himself.
Nor is welfare the only area of concern. We have growing commitments to defence, considerable pressures across our health and social care systems, and a prison and justice system that requires substantial investment to meet its existing obligations. These are not some remote or unforeseeable possibility. That, to me, is the central problem. If our fiscal rules can be breached by the continuation of existing spending trends, an ordinary forecasting revision or a relatively modest economic shock, what confidence can we have that those rules are being met today?
This brings me to the wider economic picture presented in the Budget. The OBR forecasts real growth of just 1.2% this year and 1% next year, with no real earnings growth in 2027 or 2028. This is too low. I agree with the noble Lord, Lord Liddle, that we need a simpler tax and welfare system and need to do more on public sector productivity. However, I do not agree that we should reopen Brexit, ushering in years of more uncertainty for business and citizens.
The situation is worrying. May I give noble Lords one or two more figures? Borrowing remains at approximately £133 billion this financial year, debt is expected to reach around 97% of GDP, and the tax burden is forecast to reach a record 38.6% of GDP, as we heard from the noble Lord, Lord Bilimoria. Meanwhile, the cost of servicing government debt has risen from £39 billion in 2019-20 to £109 billion in 2025-26 and is forecast to reach £160 billion, which is 4.2% of GDP, by 2031-32.
These are enormous sums increasingly being spent on servicing debt. They are burdens on our children, grandchildren and later generations. That is a reason, indeed, for a greater focus on the OBR’s annual risks and sustainability report, as recommended by the committee. The noble Lords, Lord Liddle and Lord Bilimoria, drew our attention to the enormous figure for the 2070s if markets were to allow that, and the noble Baroness, Lady Wolf of Dulwich, and the noble Lord, Lord Macpherson, rightly praised this annual report by the OBR. I very much agree that this should be given a higher profile.
Despite the historically high level of taxation, as I said earlier, the Budget contains no plan to reduce the deficit. That is why I welcome the committee’s emphasis on the long-term sustainability of the public finances, rather than simply considering the Government’s compliance with an arbitrary target in a particular year. Fiscal rules matter, independent forecasting matters, and the credibility of our public finances matters enormously—not simply to financial markets but to every household and business.
We all know why the Government are not dealing properly with this huge challenge: their Back-Benchers will not face up to the actions necessary to do so. As the committee has effectively demonstrated, meeting the rules on paper is no substitute for achieving those objectives in practice. I fear that the Budget has illustrated precisely the weaknesses which this excellent report identifies. We will return to that in our debate next week—by then, I will have seen the Keynes play mentioned by my noble friend Lord Howell of Guildford.
The Parliamentary Secretary, HM Treasury (Lord Pitt-Watson) (Lab)
My Lords, it is a pleasure to respond to this debate on the Economic Affairs Committee’s report on the fiscal framework, and to do so alongside so many distinguished noble Lords: to have the noble Lords, Lord Burns and Lord Macpherson, talking at this debate, with their experience, is a real treat. I thank all noble Lords for their thoughtful and considered contributions during today’s debate and congratulate the Economic Affairs Committee on the report.
In particular, I thank the committee’s first chair, my noble friend Lord Wood of Anfield, and its current chair, my noble friend Lord Liddle for his opening speech and chairmanship. I also thank members of the committee, past and present, and the committee staff for producing the report. It raises important questions about fiscal rules, the role of the Office for Budget Responsibility and the long-term sustainability of the public finances. Along with officials across the Treasury, I have studied the findings and look forward to continuing to work with the committee in my role as Lords Treasury Minister.
Indeed, I have studied the report more often than noble Lords might imagine, because when I was appointed as a Minister in the summer, I asked civil servants to put together a package of documents which they thought would be particularly informative, including on the fiscal rules. That the committee’s report was among that bundle is testament to the seriousness in which it is held.
Before I address the substance of the report, I should say a few words about the wider economic context and the Budget that took place last week, since it has been raised a number of times. I do not want to address the particular political points that have been made. If we want to look at the graph of when the debt of this country was built up and map that against the administration, we can. If we want to look at the time when Britain had to start paying a premium, we can do that too. I set that aside.
I would like to talk about the Budget, set, of course, against the backdrop of global economic storms. The Chancellor has made it clear that we cannot wish those storms away. Indeed, we must set a course to steer through them. That is why both the Prime Minister and the Chancellor have been clear that fiscal responsibility will underwrite every promise that the Government make. In this Budget, we met our fiscal rules. For the first time since 2022, we are meeting fiscal rules which are assessed in the third year of the forecast, with borrowing falling across the Parliament.
Despite the warning from forecasters that our economy would slow down, Britain has shown real resilience. The OBR has upgraded the UK’s growth forecast for this year to 1.2%. One swallow does not make a summer but, in the first part of this year, we were at the top of the G7. Productivity was up at 2.2% last year, compared with an average growth rate of 0.5% between 2015 and 2024. Whole economy investment and business investment have grown more in this Parliament so far than they did in the entirety of the last one.
Nevertheless, debt and the deficit are big and considerable issues. People have said that there is not enough will or evidence that the debt and deficit are being kept under control, but I note that earlier this month the IMF forecasted that our deficit would be the lowest in the G7 by 2029. It also said that the UK now “stands out” as a country where
“action to reduce the debt and deficit has been taken decisively”.
I know that concerns have been raised about this, quite rightly. It is an important thing to be thinking about but, in saying that this is just a fantasy hockey stick, the noble Lord, Londesborough, is in disagreement with Kristalina Georgieva. That is certainly not to claim that everything is rosy, but it shows that this Government take fiscal discipline seriously. Indeed, we believe that it is a sine qua non for steering through these difficult times.
Let me return to the report, where I think we find a considerable degree of consensus. First, we all believe that fiscal rules are important. I think even my noble friend Lord Sikka would think they are important, although he would want a social report on their effect. The report suggests some reform. It covers five areas: the control of debt and whether a new debt rule is required; the adequacy of headroom; fiscal rules and whether new ones are needed and how they should be agreed; fiscal forecasting and the critical independence of the OBR; and long-term sustainability. Let me try to take each of those in turn, beginning with debt.
As I have already set out, this Government met the fiscal rules at the Budget last week and, for the first time for the Government, they were assessed in the third year of the forecast. The second fiscal rule, the investment rule, ensures that government debt, defined as public sector net financial liabilities—when I got this job I discovered that this is known as “persnuffle”—must be falling as a percentage of the GDP. We are meeting that rule with a headroom of £24 billion in 2029-30, so that will be lower at the end of the forecast than now.
I accept that a number of noble Lords, starting with the noble Lord, Lord Redwood, asked: is this not just always “jam tomorrow”, and therefore do we not need something that tightens the fiscal rule? Indeed, the committee’s report proposes that the Government should set out an additional debt target that would show cumulative performance over three years. I understand that, but the Government’s position is that the design of the fiscal rules needs to strike an appropriate balance between maintaining a clear, medium-term anchor and allowing near-term adjustments in response to changing economic conditions before the three-year target. Similarly, the committee’s report raises concerns that debt can rise while the fiscal rule is still met. However, targeting a reduction allows space to respond to near-term shocks and return debt to a sustainable path.
To be clear, all the statistics and measures that we are looking at are fully transparent. From the independent record, outsiders in particular, such as this committee, can see how debt is evolving over time. These are important numbers, and it is appropriate that the Government are questioned on them, but it is another, bigger step to say that a new fiscal rule therefore needs to be introduced. The fiscal rules just set a minimum target, and the OBR forecast shows that debt stabilises in 2008-09 before falling in the following year.
That is supported by the fact that the level of borrowing falls across the forecast to 1.8% of GDP by the end of the forecast, after having already fallen by 0.7% of GDP last year. This may not be St Augustine—we are not entirely holy yet—but it feels as if things are happening here. The noble Lord, Lord Liddle, and others said that perhaps it is possible to game the fiscal rules that we have, but the IMF’s independent and serious international observers have noted that our consolidation plans, underpinned by our rules, stand out compared to our peers. The UK is one country where action to reduce debt and deficit has been taken decisively. So it is not clear to me that a new debt rule is needed, although the figure may be an important one to look at.
With regard to the fiscal rules, the committee’s report makes three further recommendations. The first relates to the frequency of changes in the fiscal rules, the second argues for fuller consultation before fiscal rule changes are made, and the third calls for an additional fixed rule rather than using the rolling rules alone.
First, I think we have consensus on the frequency of changes. It has been pointed out that fiscal rules in the past have often had a short lifetime, but we have stuck to the rules for three Budgets and there are no plans to change them.
On the second recommendation, there is some scepticism that consultation on the rules would be done better through a broad political grouping. Rather, it is right that the fiscal rules are set by the Chancellor in line with the Government’s priorities and fiscal strategy, consistent with manifesto promises. The Government’s economic priorities and fiscal strategy are set out in the manifesto before a general election. However, when it comes to consultation, of course the Government regularly engage relevant stakeholders and experts, as well as those from other countries. Fiscal rules were legislated through the Charter for Budget Responsibility, providing a full opportunity for debate and scrutiny.
On the third issue of rolling and fixed rules, as noble Lords will be aware, from this fiscal year the fiscal rules target the third year of the forecast, which binds near-term decisions while still providing some space for macroeconomic adjustment. It also links to the three-year spending plans of government departments. We therefore believe that rolling rules provide the Government with the flexibility to respond appropriately to adverse shocks in the near term and allow time for public finances to recover, while maintaining a clear medium-term anchor. With a fixed rule, as the target grows nearer, adjustments to in-year savings or tax rises become more challenging and potentially economically damaging. A rolling target instead provides a medium-term anchor to support stability and sustainable public finances.
I turn to headroom, which is needed to absorb the impact of economic shocks. This is what a buffer is for: to be used when needed before being rebuilt when conditions allow. The conflict in the Middle East has driven up borrowing costs all around the world; for the UK, this is broadly in line with the G7 average. All G7 countries have seen borrowing costs rise. It is our forecast that costs will be about £14 billion a year in extra government debt interest. At the last Budget in 2025, the headroom was, £21.7 million. It is now £15 billion for 2029-30, before rising to £22 million in 2030-31, so some of the increase in borrowing costs has been absorbed in the Budget. We feel that is the right level, as a matter of both contingency and challenge, to make sure that the Government stick to their fiscal consolidation.
As regards forecasts and the OBR, the report and the Government are in entire agreement as to the importance of the OBR and the critical role it plays. As the noble Lord, Lord Burns, said, it is the Government who set the rules and the procedures, but the OBR is an independent adjudicator on what those plans look like. The committee’s report argues that requiring two OBR forecasts a year creates unnecessary policy volatility. The UK has a long-standing practice of having two official forecasts per year. This predates the OBR, and we value the OBR’s role in ensuring economic and fiscal transparency. It will continue to publish two forecasts a year, in line with best practice internationally. In line with the recommendation made by the IMF, the OBR now assesses the fiscal rules only once per year, in the Budget. This aims to create a more predictable framework, strengthen stability and give business and households certainty about the future.
I turn to the question of a long-term fiscal sustainability. The OBR’s recent Fiscal Risks and Sustainability report confirms the need to boost growth and maintain sustainable public finances. That is what the Government are committed to doing. It also shows—I think some of the figures have been quoted—that if there were no change from the assumptions made today then, over a long period of time, debt goes very high indeed. The report says that that is a path to unsustainable debt levels. However, one can overlook the Government taking action to think about this, to bring down borrowing over the long term, including, for example, announcing the electric vehicle excise duty, which is necessary to replace taxes on petrol. I think that might have been part of the projections that noble Lords were looking at. We mentioned that, from April 2030, the Government will adjust the triple lock, which will have a big effect on what the long-term future looks like. That reform ensures that the state pension is sustainable, protecting pensioners today and today’s workers when they are pensioners. The observations of the committee are understood, but these actions show that they have been taken on board by the Government.
The charter for Budget responsibility, which this Government updated to reform the fiscal framework, ensures that fiscal sustainability will remain central to the Treasury’s objectives for fiscal policy. We will continue to consider a wide range of metrics to inform a full assessment of the sustainability of public finances. As a result of our 2024 reforms, the OBR will also continue to report on the long-term impact of capital investment and government policies in its forecasts. But fiscal stability is an ongoing process. Constructive criticism is welcome; indeed, it was part of the briefing for a new Minister in the Treasury.
I once again sincerely thank the Economic Affairs Committee for its work on this important report. The Government share the committee’s overriding commitment to fiscal responsibility and to ensuring that the fiscal framework continues to operate effectively. The challenges to the fiscal outlook set out by the OBR last week demonstrate why this position is necessary, because it is only by delivering sustainable public finances that we can maintain resilience in the face of global shocks. I look forward to continuing to engage with the committee as we take forward the measures in this Budget, including through the upcoming 10-year plan and the spending review.
Lord Liddle (Lab)
My Lords, I thank the Minister for an excellent response to the committee’s report. I also thank the Members who have contributed, who have all had something very interesting to say; that is not what you often get in the House of Lords, but every contribution has been of great interest. I will not talk for long, because the noble Lord, Lord Wilson of Sedgefield, will be glaring at me about how we have to terminate this debate. However, I want to say just one thing about fiscal rules.
In the 1990s, when Labour was trying to make itself credible under Gordon Brown and Tony Blair, I remember having long discussions with Brown and Ed Balls about the fiscal rules. There was this wonderful, simple idea that we came up with: we will borrow only to invest. I think that that is a good rule and principle; obviously, you need to take account of Keynesian fluctuations in the economy et cetera, and perhaps some social investment is justified, but you have to be careful that that does not become just a means of extra borrowing.
I disagree strongly with my noble friend Lord Sikka, who seems to think that you can get away with 300% borrowing to GDP or something of that kind—I do not know what he said. I would say to him that my kind of social democracy, and the reason I supported toughness in borrowing only to invest, comes from what I learnt from Sweden, the most successful social democratic country in Europe, which had always pursued a fiscally responsible policy—except for a period in the 1990s when it got it very badly wrong, and it knew it had got it badly wrong. The truth is that, if you get into a fiscal mess and you have a crisis, it is precisely the working people who you claim to defend who suffer most. That is the myth of the left, which is wrong, and we must have a sensible approach to these questions.
Lord Sikka (Lab)
My Lords, do I have a moment of reply, since I have been accused? Indulge me, please, because I have been incorrectly represented.
Lord Sikka (Lab)
I have been misrepresented and it will go in Hansard, but my reply will not if I respond privately. I at no point mentioned 300% debt—I do not know who the noble Lord was listening to. I reminded the Committee that debt was 270% when the NHS was founded in 1948, and that brought—
Lord in Waiting/Government Whip (Lord Wilson of Sedgefield) (Lab)
I think the noble Lord, Lord Liddle, has already responded to the debate, so I think it has come to an end.