Fortifying the Fiscal Framework (Economic Affairs Committee Report)

Tuesday 3rd November 2026 Grand Committee

Motion to Take Note

17:50

Moved by

[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.

18:06

[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?

18:12

[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.

18:17

[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.

18:22

[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.

18:27

[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.

18:34

[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.

18:41

[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.

18:46

[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.

18:52

[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.

18:59

[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.

19:05

[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.

19:17

[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.

19:36

[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 Liddle (Lab)]

No, not at all. He has not.

[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.

Motion agreed.

Committee adjourned at 7.40 pm.