National Debt: It’s Time for Tough Decisions (Economic Affairs Committee Report)

Lord Lamont of Lerwick Excerpts

Friday 25th April 2025 Lords Chamber

[Lord Lamont of Lerwick (Con)]

My Lords, it is a pleasure to follow the noble Lord, Lord Burns, not for the first time in my life. It is also a pleasure to congratulate the noble Lord, Lord Bridges, on his incisive speech today and his excellent chairmanship of the committee that produced this report.

Despite the time lag, this debate is timely in another sense because of the IMF’s warning this week that global debt—that of all Governments in the world—is likely on track to exceed 100% of GDP. It said that is a risk to the financial system, so this debate is perhaps not just about the UK; it could be about many countries, including the United States of America. Nevertheless, I think many people were surprised in 2024 when the OBR came out with the projection, on certain assumptions, that debt to GDP in this country could rise to 270% in the 2070s. That seems an astonishing increase and would plainly pose a threat to sustainability. How could this be?

The reason, as has already been said by the noble Lord, Lord Bridges, is that in 2020 we saw one of the largest surges in debt since the Second World War. The UK debt-to-GDP ratio was below the G7 average in 2001; it then grew faster and is now forecast by the IMF to be above the G7 average in 2029. The problem is not just the ratio but the structure and the maturity of our debt, and it has also been, as the noble Lord, Lord Bridges, said, that this Government and previous Governments have tended to react to shocks by spending more money. Public expenditure and borrowing have increased, then public spending comes down but not to the pre-crisis level. That is the story of Covid and the response to the financial crisis.

Why is it that we have this threat to our sustainability? One reason is interest rates. Interest rates are unlikely in the future, many people think, to be as low as they have been in the recent past. It was the very low nature of interest rates, particularly with quantitative easing, that got us into this situation in the first place. Nobody knows whether interest rates are going to be higher in the long run, but many people think that is the case—they are higher today than they were. As the noble Lord, Lord Liddle, said, if the interest rate on government debt is higher than the growth of GDP, the debt-to-GDP ratio will increase in the absence of a primary surplus. I do not think the Government’s fiscal rules—perhaps the Minister will comment on this—provide for a primary surplus.

The funding of the existing stock of debt is a substantially greater burden today than it has been in the past. In the 2010s, debt could be stabilised while running a government deficit of over 2% of GDP. Today, because of higher interest rates in money and real terms, you need a primary surplus greater than 1% of GDP in order to stabilise the debt ratio. The Government will say they are aiming to achieve growth—that is their “get out of jail” card—but can they actually get a rate of growth that is higher than the interest rate? They may increase the growth rate but find that interest rates have increased further, and so they are not able to escape from the challenge that confronts them.

Then there is the significant risk of an ageing society. We are living through a period that is unique in world history. By 2070, one person in work will be equalled by one person in retirement. This poses huge problems fiscally. The dependency ratio will go up. The Prime Minister of Japan, a country further along this road of an ageing society than we are, said the other day:

“Japan is standing on the verge of whether we can continue to function as a society”.


These words are chilling, and we should reflect on them. The fiscal challenge of an ageing society is massive. There are no easy answers. As the noble Lord, Lord Bridges, said, we need to make some tough decisions. Nothing is inevitably going to happen, but if something looks unsustainable, the chances are that it will prove unsustainable, and that is the risk we face.

--- Later in debate ---

[Lord Livermore (Lab)]

I absolutely hear what the noble Lord says and will of course pass those comments on.

I congratulate the Economic Affairs Committee on its report and the committee’s chair, the noble Lord, Lord Bridges of Headley, on his excellent opening speech, which achieved the extraordinary feat of summarising in just 12 minutes such a wide-ranging and in-depth report. As the noble Lord, Lord Forsyth, just mentioned, I had the privilege of serving on the Economic Affairs Committee under his chairmanship, so I know the amount of time and effort that go into producing reports such as this. As the Chancellor did in her response to the committee last November, I thank all members of the committee and the committee staff for producing this thoughtful and considered report.

As the report rightly recognises, and as the noble Lords, Lord Bridges, Lord Razzall, Lord Lamont and Lord Londesborough, highlighted, the UK’s national debt has risen rapidly over recent years, from around 64% of GDP in 2010 to over 98% in August last year, the highest level since the 1960s. Latest figures to the end of March this year show public sector net debt at 95.8% of GDP, which still remains high by recent historical standards. As the noble Baroness, Lady Wolf of Dulwich, said, debt interest payments alone now stand at £105.2 billion this year—that is more than we allocate to defence, the Home Office and justice combined.

The title of the report speaks of “tough decisions” to prevent national debt from being on an unsustainable path. The Government agree. That is why in the Budget last October, we took action to fix the foundations of our economy and repair the public finances, as the noble Lord, Lord Horam, observed. That included repairing—and noble Lords would expect me to say it—the £22 billion black hole in the public finances that we inherited. That meant making difficult choices. They were not easy decisions, but they were the right decisions.

Since the committee’s report was published in September last year, and then the Budget in October, as many noble Lords have rightly said today, the world has changed further significantly. As the noble Lords, Lord Burns and Lord Forsyth, and the noble Baroness, Lady Kramer, observed, new tariff barriers are now disrupting global trade. Borrowing costs have risen in all major economies; volatility in global markets has seen bond yields rise, including in the US; and growth has been downgraded across the world, with the IMF now predicting global growth to be 0.5% weaker than it was expecting as recently as January.

Of course, the UK has not been immune to these challenges. As the noble Lord, Lord Bridges, said, the OBR downgraded the UK’s growth forecast for this year at the Spring Statement, reflecting the worsening global outlook, and earlier this week the IMF did the same. In this context, maintaining sustainable public finances is a shared challenge for major economies right across the globe.

Against this backdrop, the decisions we took in the Budget to fix the foundations look ever more necessary. Imagine if we were now facing this global economic uncertainty with that black hole still in the public finances. What confidence would that have given to the Bank of England to cut interest rates? What signal would that have sent to investors about the stability and resilience of our economy?

The OBR will produce an updated forecast in the autumn, and despite the kind invitation of the noble Lord, Lord Bridges, I will not speculate now on the impacts of recent global events on the fiscal outlook ahead of that. But, as the committee’s report rightly concludes, global instability underlines the need to put debt on a sustainable trajectory and build resilience to future shocks. It also reaffirms the importance of stability as the foundation of our approach.

That is why, as the noble Lord, Lord Bridges of Headley, asked about, in the Spring Statement we again took tough decisions so that we continued to meet our non-negotiable fiscal rules, even when they were tested. That meant restoring in full the headroom against the stability rule, maintaining a surplus of £9.9 billion in 2029-30. It is why we continue to work with international partners, as the Chancellor has done at the IMF spring meetings this week, to make the case for free and open trade.

The noble Lords, Lord Bridges, Lord Burns and Lord Lamont, and the noble Baronesses, Lady Noakes and Lady Cash, all mentioned the importance of economic growth. It is why we are doubling down on our growth agenda of stability, investment and reform, including £13 billion of new capital spending in growth-generating projects announced at the Spring Statement, as well as support, for example, for a third runway at Heathrow and a new Oxford-Cambridge growth corridor, as my noble friend Lord Liddle spoke about.

As the noble Lord, Lord Griffiths, mentioned, this week’s IMF report makes it clear that the “landscape has changed” and has downgraded the growth prospects of all G7 nations. However, the UK remains the fastest-growing European G7 country, and the IMF has recognised that this Government are delivering reforms which will drive up long-term growth in the UK. Our upcoming modern industrial strategy, mentioned by the noble Baroness, Lady Kramer, and spending review will say more about how we intend to drive long-term sustainable investment and boost productivity.

The committee’s report includes a number of key recommendations, central to which is the committee’s call for an “overhaul” of the UK’s fiscal framework. The Government’s thinking was clearly along very similar lines, and in the Budget in October, we implemented the most significant change to the fiscal framework since 2010—as my noble friend Lord Wood said. I congratulate him on becoming the new chair of the Economic Affairs Committee, and I look forward to working with him.

The new framework we have put in place is designed to support long-term growth, by ensuring the UK’s debt is put on a sustainable path and by prioritising sustainable public investment. First among these reforms are the Government’s non-negotiable fiscal rules, the embodiment of our unwavering commitment to economic stability. The first rule, the stability rule, moves the current Budget into balance, so day-to-day spending is met by revenues, and ensures that the Government will borrow only for investment, which the noble Lord, Lord King of Lothbury, questioned. This rule differs from the previous Government’s borrowing rule, which targeted the overall deficit rather than the current deficit and created a clear incentive to cut investment that is detrimental to growth, as the IMF has made clear.

The noble Lord, Lord Lamont, asked about the primary surplus, which the OBR forecast to move from a deficit of 1.9% of GDP in 2024-25 to a surplus of 1% by 2029-30. The Government understand and respect the argument made by the committee in respect of the fifth year. However, the Government’s position is that targeting the third year of the forecast provides a strong anchor for fiscal sustainability, while providing the necessary flexibility to respond to macroeconomic shocks in the short term.

Our approach is supported by the OECD, which recommended that the UK should

“shorten the time horizon of fiscal rules”.

Similarly, the Institute for Fiscal Studies has made it clear that a fiscal rule targeting debt falling in the fifth year of the forecast is

“more arbitrary and gameable than most”.

The second rule—the investment rule—ensures net financial debt falls as a proportion of GDP. This keeps debt on a sustainable path, while allowing the step change in investment our economy needs.

The noble Baronesses, Lady Wolf of Dulwich and Lady Noakes, and the noble Lord, Lord Forsyth, raised the issue of definitions. Net financial debt is an accredited official statistic that has been measured by the Office for National Statistics since 2016 and forecast by the Office for Budget Responsibility since that date. It recognises that government investment delivers returns for taxpayers by counting not just the costs of investment but the benefits.

The noble Lords, Lord Burns and Lord Howell of Guildford, spoke about the importance of investment to economic growth, as did my noble friends Lord Wood, Lord Liddle and Lord Davies of Brixton. As a result of this second fiscal rule, we were able to increase capital investment by over £100 billion in the Budget in October, boosted by an additional £13 billion announced at the Spring Statement. The OBR has confirmed that we are meeting both fiscal rules, and borrowing is forecast to fall in every year of the forecast—from the 5.3% of GDP that we inherited to 2.1% in 2029-30.

In addition to our fiscal rules, the Government’s Charter for Budget Responsibility contains a further serious of measures to improve certainty, transparency and accountability in our fiscal framework.

[Lord Lamont of Lerwick (Con)]

I am very grateful to the Minister for answering my question about primary surplus. He said that the OBR is saying that there will be a surplus in 2029-30. Am I not right in saying that that refers to the current Budget, but of course might mean that there was, overall, a primary surplus? By itself, it does not mean a primary surplus. Can the Minister indicate whether there would be an overall primary surplus, which many people are saying is necessary to alter the debt-to-GDP ratio.

[Lord Livermore (Lab)]

I am very happy to check that point and I shall write to the noble Lord.

The measures set out in the Government’s Charter for Budget Responsibility implement many of the recommendations in the committee’s report and provide important guard-rails to ensure that capital spending is good value for money and drives growth in our economy. The IMF has called these important reforms to strengthen the fiscal framework. They include a commitment to hold one major fiscal event each year, giving families and businesses stability and certainty on upcoming tax and spending changes. The noble Lord, Lord King, suggested moving to just one forecast, a point echoed by the noble Lord, Lord Macpherson.

We introduced the fiscal lock through the Budget Responsibility Act, ensuring all major fiscal announcements are subject to an independent assessment by the OBR. Spending reviews must now take place every two years, setting departmental budgets for a minimum of three years. According to the IMF, this will

“improve the credibility of the medium-term fiscal framework”.

The Government have accepted all 10 recommendations in the OBR’s review of the March 2024 forecast for departmental expenditure limits, to ensure that no future Government can conceal unfunded spending pressures from the OBR, as the previous Government did.

The committee’s report sets out a number of recommendations relating to the nature of UK debt and how it is managed. The report argues—and the noble Lord, Lord Bridges, made clear—that it is the trajectory of debt, rather than the level, which should be the principal consideration when assessing debt sustainability and that debt levels become unsustainable if there is an insufficient buffer to absorb future economic shocks.

The Government agree with this analysis, which is why the Chancellor rebuilt in full the buffer against the fiscal rules at the Spring Statement—which was mentioned by the noble Lords, Lord Bridges and Lord Burns, and the noble Baroness, Lady Manzoor—and why our investment rule requires net financial debt to be falling in 2029-30. Building this resilience is key to protecting the UK against global shocks.

The committee’s report recognises that the UK is not currently an outlier in the overall stock of debt but notes the relatively high share of index-linked gilts. Issuing index-linked gilts has historically brought cost advantages, and analysis shows direct savings of around £90 billion in total from the issuance of index-linked gilts. However, it is right that the Government keep the proportion of index-linked gilts under review to balance the benefits and risks.

Separately, the noble Lords, Lord Razzall, Lord Lamont, Lord Forsyth, Lord Macpherson and Lord Weir, noted that the report argues that quantitative easing has increased the sensitivity of government borrowing costs to short-term movements in interest rates. However, it remains the case that the average maturity of the Government’s wholesale debt continues to be consistently longer than the average across the G7 group of advanced economies. This helps to limit how quickly changes in interest rates affect debt interest costs. Other countries also face significant effects because of quantitative easing. Quantitative easing is now unwinding, which will increase the effective maturity of the UK’s debt, all else being equal.

The last concern raised by the committee in this section of the report relates to the UK’s reliance on debt purchases by overseas investors, which my noble friend Lord Liddle and the noble Lord, Lord Forsyth, mentioned. The Government deliberately maintain a varied gilt-issuance strategy, to promote a well-diversified investor base. Overseas investors help maintain a diversity of gilt investors, keeping demand for UK debt strong and ensuring that the Government are not overly reliant on any one type of investor.

The committee’s report covers the longer-term challenges of getting debt to fall—the noble Lord, Lord Bridges, referred to these as the “Ds”. These include the impact that demographic shifts, such as an ageing population and a rising dependency ratio, will have on the public finances, as my noble friends Lord Davies of Brixton and Lord Browne of Ladyton said. The Government recognise these challenges, including the rising cost of care, which is set to double in the next 20 years alone. That is why, for example, we have established an independent commission, led by the noble Baroness, Lady Casey, to develop a new national care service, able to meet the needs of older and disabled people into the 21st century. We are taking immediate action to stabilise the care sector and invest in prevention, carers and care workers.

Other spending pressures discussed in the report include migration, the green transition and defence. The noble Lord, Lord Macpherson, made an interesting suggestion about debating annually the OBR’s fiscal sustainability report.

On migration, the report concludes that high net migration cannot be the solution to debt sustainability, as many noble Lords mentioned today. The Government’s position remains that we value the contribution that legal migration makes to our country, and will continue to strike a balance between ensuring that we have access to the skills that we need, while encouraging businesses to invest in the domestic workforce. Further detail will be set out in the forthcoming immigration White Paper.

The noble Lords, Lord Horam and Lord Weir, mentioned the green transition. The Government believe that early and ambitious climate action is vital to delivering long-term economic growth and enabling a cost-effective transition to net zero. As the Chancellor said earlier this year:

“Net zero is the industrial opportunity of the 21st century, and Britain must lead the way”.


On that point, I agree with the comments made by the noble Baroness, Lady Kramer.

The noble Lords, Lord Forsyth and Lord Tugendhat, and my noble friend Lord Browne of Ladyton spoke about defence spending. The committee’s report was published before the Government’s announcement that defence spending will rise to 2.5% of GDP next year, which represents the biggest sustained increase in defence spending since the Cold War. This new funding, delivered within our fiscal rules, will deliver the stability that underpins economic growth and unlock prosperity for working people, through new jobs and opportunities.

Finally, the report considers the impact of productivity improvements in the context of the projected rise in government expenditure. The Government’s view is that tackling the UK’s historic weak productivity performance is central to delivering higher economic growth. The OBR estimates, for example, that every 0.1% increase in productivity growth will reduce the rise in the debt-to-GDP ratio by 25 percentage points over the next 50 years. It is for these reasons that we are pushing ahead with vital reforms to cut waste and bureaucracy, including in the planning system, and to make the state leaner and more efficient.

I once again sincerely thank and congratulate the Economic Affairs Committee on its work on this important report. The Government share the committee’s view that tough decisions are required to put debt on a sustainable path. That is why in the Budget last October we fixed the foundations of our economy and, at the Spring Statement this May, took the action needed to meet our fiscal rules, even when they were tested. The global instability we have seen over recent weeks demonstrates why this approach was necessary. It is only by delivering sustainable public finances that we can maintain resilience in the face of global shocks. The approach we are taking will continue to put debt on a sustainable path. It will provide certainty to families and businesses in an ever-changing world, and it will generate the long-term investment we need to grow our economy.

Spring Statement

Lord Lamont of Lerwick Excerpts

Thursday 27th March 2025 Lords Chamber

[Lord Lamont of Lerwick (Con)]

My Lords, is the Minister aware that there is considerable support on this side of the House for the aims of the Government’s welfare reforms? We agree that the programme is unsustainable and that there are perverse incentives, but if changes are to be made, do they not need to be made on a targeted and very sensitive basis? Will the Minister therefore tell us—this was raised by the Liberals but not really answered by the Minister—why, as a result of these reforms, 250,000 will go into poverty? It has also been reported by many MPs that people unable to wash the lower half of their body will be deprived of all benefits, and that people who cannot go to the toilet without assistance will lose all benefits as well. If, as the Minister says, this is being done on a targeted basis, why are these the results? Can the Minister actually convince us that this is a programme that is being done on a targeted basis and not just the cobbling together of some cuts at the last minute in order to make the books balance?

[Lord Livermore (Lab)]

I am grateful to the noble Lord for his question and for his concern and compassion in the examples he sets out. I will set out our three principles when it comes to welfare. First, the state should always be there to support people when they need it, and I think the reforms set out in the Green Paper deliver on that point. Secondly, the system should better incentivise work, and everyone who can work should work. Thirdly, we need a system that is sustainable, so that we have a welfare state that is there for generations to come. As I said in my answer earlier, the impact assessment that has been published today does not take into account the £1 billion being reinvested into the system from the £4.8 billion of savings. It is very clear that that £1 billion will help people get back into work. As we know, and I am sure he knows, work is the best route out of poverty.

International Banking: Payments

Lord Lamont of Lerwick Excerpts

Thursday 28th November 2024 Lords Chamber

Asked by

[Lord Lamont of Lerwick]

To ask His Majesty’s Government what assessment they have made of the plan by the BRICS countries to establish a separate banking payments system, and of the implications for the international banking system and the ability of the United Kingdom and its allies to impose economic sanctions.

[The Financial Secretary to the Treasury (Lord Livermore) (Lab)]

My Lords, the Government believe an integrated global financial system is the best way to achieve global prosperity and financial stability. Fragmentation is damaging to the global economy, whereas deep, liquid markets boost economic efficiency. That is why we will continue to work with our international partners to strengthen the rules-based international system and our interconnected financial and economic systems.

[Lord Lamont of Lerwick (Con)]

My Lords, I thank the Minister for his reply. While the idea of a BRICS payment system, which was announced by Mr Putin at the BRICS conference in Kazan, may seem rather fanciful and a long way off, it nevertheless needs to be taken seriously. Does he not agree that, if it ever happened, it would be a major threat to the western-led financial system? Above all, it would make it impossible for the West to impose sanctions on countries such as Russia, China, Iran or other malign countries. Is the Minister aware that, after the BRICS conference, Chinese state media reported that the proposed new payment system would be based on technology taken from the Bank of International Settlements, with its bridge development? Is he also aware that America has apparently expressed some concern to the Bank of International Settlements about this transfer of technology to possible malign actors? Should we not be taking this very seriously?

[Lord Livermore (Lab)]

I am grateful to the noble Lord for the points that he raises, and I agree that, of course, we should take these developments seriously. I will not comment on the specific proposals announced by the BRICS countries that he refers to; I would not want to speculate as to what systems may or may not come into common usage. The Government believe very much that the current international model for the financial system works effectively, and we will continue to work with our international partners to maintain an interconnected financial and economic system. On the noble Lord’s question on the effectiveness of sanctions, we continue to believe that economic sanctions are an important and effective tool, and we will continue to utilise those sanctions where necessary. On the potential to undermine them, we will pursue any necessary steps with our allies to maintain the interconnected system and reduce opportunities for the circumvention or evasion of international sanctions.

Autumn Budget 2024

Lord Lamont of Lerwick Excerpts

Monday 11th November 2024 Lords Chamber

[Lord Lamont of Lerwick (Con)]

My Lords, as the first Labour Budget for 14 years, this was bound to be a very big occasion, and indeed it was: it was a bold Budget, with bold increases in taxation, bold increases in borrowing, bold increases in spending and a bold tearing-up of everything that Labour said in the general election.

As we heard from the Minister, this is all justified on the basis of the spurious £22 billion black hole. But Paul Johnson, the IFS director, said that there was no “unknown black hole”. The OBR, despite the Government trying to enlist its support, said that nothing legitimised the figure of £22 billion. It talked of an unaccounted for £9.6 billion, but how does that justify tax increases of £40 billion?

The party opposite—the Government—says it has the worst economic inheritance since the Second World War. In fact, the UK economy is recovering faster from the twin shocks of the pandemic and the energy price rises than our EU partners and all the countries in the G7 other than the United States. The financial position—the deficit—was better than the Conservative Government inherited when they came to office as a coalition.

Labour’s fiction is necessary to justify eating their words and breaking their promises, but the truth is that Labour always intended massive increases in spending but did not dare put forward the tax increases to pay for this during the election. The Chancellor promised that she would not change the fiscal rules, but she has done exactly that and changed the definition of government debt, in effect to exclude borrowing for investment from the total. This mantra of borrowing for investment, which we first got from Gordon Brown, is questionable. First, the distinction between current spending and investment is not clearcut. Some current spending has favourable long-term impacts; Ministers frequently refer to more spending for nurses as an investment, and one understands why.

Borrowing for investment is justified, so the theory goes, because it supports growth as long as the return exceeds the cost of borrowing. But this assumes that projects are well-designed and completed to time and on cost. I need highly emphasise that our record, nationally, does not need very much emphasising.

The argument for borrowing to invest might apply to power stations or infrastructure, but not all public investment yields an economic return. We welcome investment in health or education—it is a good thing in itself—but it earns an economic return only very slightly and over the very long term. If we are serious about sustainable public finances, borrowing for investment should not be accounted for outside the Government’s measure for meeting their own debt target. The truth is that this is not a Budget for growth or investment; it is simply a Budget for the public sector.

There is no ideal target for debt sustainability. What the markets are interested in is a country’s ability to service its debt. Note that, under the plans that the Government have put forward, interest payments have now risen to over £120 billion—over 3% of GDP; over 7% of public spending. The Chancellor believes massive borrowing for public investment will lead to growth, but that is not what the OBR’s forecasts show. They show that growth in the next five years will be less than it said it would be in the next five years during the last Conservative Government at the time of the Budget in March.

The OBR says that the Budget will have little positive effect until 2032 or later. The Government fought the election saying that they intended to have the fastest rate of growth in the G7; they never said they intended to have the fastest rate of growth in the G7 in 10 years’ time.

Debt remains at just under 100% of GDP at a time when the IMF has warned that, internationally, government debt is becoming a problem worldwide. The OBR has warned that UK debt is on trend to reach an unsustainable level of 270% of GDP. You may say, “That won’t happen”, but it will not happen only if we have our eye on the long term and make some very difficult decisions.

The Prime Minister a few weeks ago said that this Government were all about “wealth creation”. When I heard that, I am afraid I laughed out loud. Then he said that the Budget would be a Budget for business. It is a strange Budget for business which has a main tax increase aimed fairly and squarely at the corporate sector.

Many observers question whether the increase in national insurance contributions will raise the £25 billion forecast for it. Paul Johnson of the IFS has forecast that the Government will have to come back for more tax increases in the next couple of years. One can make the pips squeak, but our tax base is relatively narrow. The top 1% of all taxpayers paid 29% of all income tax and the top 10% paid 61%. Those individuals involved are not numerous, and so it does not require a big change in behaviour by these top earners to do huge damage to the country’s tax revenues.

The Prime Minister talks about putting “country before party”. He talked about governing for people who had not voted for him. Where is the sign of that in this Budget? It is massively divisive, it is a massive gamble and it has massive increases in spending and borrowing and a new high for taxation. If the gamble fails, the country, alas, will pay a painful price.

[Baroness Wheeler (Lab)]

My Lords, the advisory speaking time for this debate is five minutes. I urge all noble Lords to keep remarks within that limit so that the debate may finish at a reasonable time.

Bank of England (Economic Affairs Committee Report)

Lord Lamont of Lerwick Excerpts

Thursday 2nd May 2024 Lords Chamber

[Lord Lamont of Lerwick (Con)]

My Lords, I congratulate the noble Lord, Lord Bridges, on his excellent speech and this very good report. I was not a member of the committee but I am most impressed by the report and agree with all the conclusions. I will concentrate on recommendations 10 to 13, which deal with forecasting, the alleged lack of diversity, and groupthink—subjects mentioned by the noble Lord, Lord Bridges. I want also to look at the Bernanke report, which we now have.

In discussing forecasting, it is important, as I think the noble Lord, Lord Macpherson, suggested, to demythologise the subject. First, contrary to what many people believe, policy is not dependent on forecasts. Secondly, we do not, and should not, elevate forecasters into some priestly caste examining the entrails and telling us whether the gods will look favourably on a particular action. The gods are often deaf. Forecasting responds to a deep human need but, alas, the forecasts are often wrong.

There are several reasons why forecasts are fallible. One, which we should welcome, is that human beings are not machines or computers. They do not always react as they did last time. Another is the limits of government statistics. I do not think I should be saying this, but do we really believe that we can add up all activity in the economy month by month and measure changes to the last month within a fraction of a percentage point? Inevitably, government statistics are continually revised. Recessions that once undermined confidence and spread doom mysteriously disappear years later. Then there are exceptional events. You cannot forecast a pandemic. You may know that one is likely, but you do not know when. These are exceptional events but, unfortunately, history is exceptional events.

In his response, Dr Bernanke made some constructive suggestions for improving the Bank’s forecasting capacity to do with staff, software and hardware, but I suspect that these are all at the margin. They will always be subject to the limitations inherent in forecasting that the noble Lord, Lord Macpherson, referred to, and one cannot escape the need for an element of judgment.

The governor, Mr Bailey, pointed out that the Bank has not one model but several, but that invites the aphorism: all models fail but some are useful. Dr Bernanke makes this very point: a forecast can be inaccurate and still be useful in enabling us to understand why the policy was wrong. Forecasts make a central bank more transparent and accountable, particularly if a policy has been consistently applied but the outcome is not as forecast.

Dr Bernanke’s comments on the Bank’s forecasts are, interestingly, somewhat milder than the newspaper headlines. He points out that the Bank was in the middle of the pack of central banks when it came to inflation and output. Its belief that inflation was transitory was one shared by many central banks, but that merely poses another important question: why did so many central banks get it so wrong? Was it a case of groupthink? Interestingly, Dr Bernanke defends the Bank of England against accusations of a lack of diversity in the MPC. Surprisingly, his view is that there is more diversity than in other central banks, and some of the witnesses, including Charles Goodhart, agreed, so it will be interesting to have the Minister’s comments.

Too much diversity of thought for the sake of diversity itself can push a committee towards artificial consensus in which no one believes. This is where the fan charts, so loved by the Bank of England, have been so convenient. Who can disagree with a fan chart covering so many possible outcomes? As in an oriental dance, a fan can be used to conceal as well as to reveal. For that reason, Dr Bernanke recommends getting rid of the fan charts and substituting conditional forecasts, which he terms “scenarios”. This might help to deal with the problem of exceptional events, but will it contribute at all to forward guidance?

What about groupthink between central bankers themselves? There may be value in forecasts that are wrong, but there is a difference between predicting the right trajectory with errors and predicting a completely wrong trajectory. Many central banks thought the pandemic would continue to be deflationary, hence the resort to a huge injection of quantitative easing. At the time, a number of commentators, including Paul Tucker, the former deputy governor of the Bank, questioned why central banks wanted to stimulate aggregate demand just as aggregate supply was closing down. It was almost as though there was an assumption that QE ought to be the default response to every crisis. That would surely be a mistake.

Dr Bernanke is a disciple of Milton Friedman. I was therefore surprised that he did not address the point made in conclusion 11 of the report that the MPC did not seem to have had any detailed discussions about the money supply or made any analysis of monetary aggregates and their effect on inflation. To be fair, the governor denied that this was the case, but Roger Bootle said in his evidence:

“Over the past few years … we have gone from a situation in which economic policy … was governed entirely according to … a certain definition of the broad money supply”—


that was the policy in the early 1980s—

“to one in which, apparently, the Bank took no notice of monetary aggregates at all”.

I was particularly interested in this, for the very reason that the noble Lord, Lord Macpherson, kindly mentioned: in 1992, when we introduced a new framework for policy, namely inflation targeting, the target was accompanied by target ranges for monetary aggregates. The regime of inflation targeting was continued and carried through to Bank of England independence by Gordon Brown, but the ranges for monetary aggregates were discontinued. Inflation targeting is not a perfect policy. It can be criticised for being backward-looking and a rear-mirror policy. But monetary policy, as Dr Bernanke reminds us, operates with time lags and therefore enables policymakers to focus on not just the current rate of inflation but what we expect inflation might be in two years’ time.

The report makes the point that the Bank has too many secondary objectives to which it is asked to have regard. Many of these objectives are not really affected by the instruments available to the Bank. This must be true of climate change. The Government ought to be clear that tackling climate change is a matter for the Government. To expect the Bank to lead on that makes no sense. I quote the governor himself, who said that climate change

“is not really an issue of monetary policy”.

In addition to the inflation target, the Bank is also charged with supporting the Government’s objectives on growth and employment. A major change was introduced in 2013, when George Osborne gave the Bank a new remit in which the MPC was tasked with setting out the trade-off when deciding how long it would be before an above-target inflation rate came back to target. As the governor said, these changes gave the Bank much more flexibility over how quickly it could bring inflation back to target. This considerable latitude, which is welcome in one sense, may be another reason why the Bank was so slow to raise interest rates and get inflation back towards target—and we are not there yet. As things have demonstrated in the United States, the last furlong may still prove difficult. Indeed, one former central banker said to me that, if we get inflation back to target without positive real rates of interest, it will be the first time this has ever happened. Let us hope that the optimists are right and that we are heading back towards target.

As my noble friend Lord Bridges said, the Bank is very different from the one made independent in 1997-98. It has expanded its discretion and the tools it uses. Its credibility matters. So it is important that it is robustly scrutinised and challenged, precisely as this report and this debate are doing.

Spring Budget 2024

Lord Lamont of Lerwick Excerpts

Monday 18th March 2024 Lords Chamber

[Lord Lamont of Lerwick (Con)]

My Lords, as the noble Lord, Lord Macpherson, has said, the Chancellor faced a very difficult set of conflicting challenges. Having myself delivered one Budget on the very eve of a general election, I particularly appreciate the almost intolerable pressure that was on the Chancellor—although I think he delivered a Budget that was both responsible and constructive.

In the recent past we have been fed an unremitting diet of gloom, which has caused a certain outbreak of schadenfreude in some quarters. But this Budget contains some modest rays of hope. There are definite grounds, as the Minister said, for believing that we are turning a corner. Fifteen months ago, the Bank of England was forecasting that the economy would contract by 4.1% last year. The OBR was saying much the same. If we had been told then that both of them were going to be proved wrong, that growth would pick up this year, that inflation would be expected shortly to reach its 2% target and that the government deficit and debt were now expected to edge down over a five-year horizon, I think we would have been both sceptical and rather pleased.

Growth may be modest, as has been emphasised already, but so it is everywhere in Europe. Now, as the Minister said, the UK is forecast by the IMF to experience faster growth than any major European economy over the next five years. GDP per capita, which the noble Lord, Lord Eatwell, chose to concentrate on, is forecast to increase by 1% to 1.5% per year, way above the figures he was quoting. That is better than the economy has achieved over the last five or 10 years. Even Bloomberg, hardly an enthusiast for the post-Brexit UK, declared, “Britain Isn’t a Basket Case After All”, and its chief economist announced that Britain might surpass the official forecasts this year.

The centrepiece in the Budget was the reduction in national insurance contributions. It was a bold decision, of course, to cut a tax not paid by the retired, but I think it was the right one because of the overriding need to incentivise work.

History, as we all know, consists of a series of exceptional events. But, when contemplating our present discontents, people are inclined just to dismiss or forget as excuses the extreme exceptional events of the last five years, which have been referred to in this debate. Covid resulted in a drop in GDP of some 10% and consequent expenditure of £500 billion on supporting the incomes of people through the crisis. After the energy price hike, it was always inevitable that living standards would fall for a period. If I have a criticism of the Government, it would be that they did not make that clearer at the very beginning.

Our situation is not different from those of other countries. Living standards have fallen in Germany and in Italy in the last few years. Some critics complained that the Chancellor in his Statement was not bolder and should have announced larger tax cuts. Anyone who advocates such a course needs to explain how they would deal with what the IFS has called the most challenging fiscal situation for 80 years, with our debt just below 100% of GDP, and debt interest which not so long ago reached a figure of £100 billion a year. Tax cuts do not automatically pay for themselves—although I do not entirely agree with Lord Eatwell about the Laffer curve.

If you spend £500 billion—50% of one year’s tax revenues—on Covid measures supporting people’s living standards, it is almost inevitable that the tax burden will increase somewhat. Our tax burden after this involuntary forced increase is still below those of major European countries. Of course it is still too high, but it is not a decision the Government made easily, willingly or with great enthusiasm. It does not mean that living standards cannot in time begin to recover, as we are seeing. Wages have risen by 10% in the last two years, and the national insurance reductions have cut in half the effects of freezing tax thresholds up to this point. We have been through a tsunami but we have weathered the storm, and I hope that, geopolitics permitting, calmer waters might lie ahead. Sustained growth does not come from turbocharging demand: experience teaches us that turbocharging usually ends badly. Sustained growth has to come from the supply side, from being more competitive, including competitive taxes of course, alongside innovation and an adequate labour supply.

On that point, a major challenge for the economy is the degree of economic inactivity. Some 9.3 million people of working age are currently economically inactive. The tax measures in the Budget and other measures increase the labour supply over the survey period by the equivalent of nearly 200,000 full-time employees. But these figures, impressive though they are, are dwarfed by the increase in the number of incapacity benefit claimants, up from 2.5 million in 2019-20 to 3.1 million in 2022-23. Two-thirds of claims for incapacity benefit now involve mental and behavioural disorders. I do not want to cause any offence, but I think the Prime Minister was quite right recently to ask: is the country really three times sicker than it was a decade ago? Can the Minister say what action the Government will take to tackle this crucial issue? I read in the newspapers that the Secretary of State for Work and Pensions is examining the capability assessments and thinks that, over time, this might release several hundred thousand people on to the labour market. I would be grateful if the Minister could give us some details of this.

A very significant further measure in the Budget was the productivity plan for the NHS. It is appalling that the UK public sector is less efficient than it was in 1997. The Chancellor believes that by investing 3.4 billion, the plan could unlock £35 billion-worth of savings in the NHS, 10 times the original sum. This, in theory, makes a lot of sense. Pouring an increasing amount of money into a broken system is pointless, as Wes Streeting has said.

I know that this is not a PR stunt but a serious initiative on which the Cabinet Office Minister has been working for some time. However, can we be absolutely sure that the Government really can deliver these productivity gains on the stated timeline? The Government’s record on productivity-enhancing IT systems is poor. If the productivity gains fail to materialise, the Government’s spending projections —already very tight—will become unrealisable and unaffordable. It is vital that these targets are met.

I welcome this Budget. It achieves the right balance in a difficult situation and gives a modest boost to the economy. I commend it to this House.

Bank Accounts

Lord Lamont of Lerwick Excerpts

Wednesday 19th July 2023 Lords Chamber

Asked by

[Lord Lamont of Lerwick]

To ask His Majesty’s Government, in light of the recent assurances from the Economic Secretary to the Treasury, what action they intend to take to ensure that no person’s bank account should be closed for political reasons.

[Lord Lamont of Lerwick (Con)]

My Lords, I beg leave to ask a Question of which I have given private notice. In asking this Question, I declare that I have a bank account with NatWest.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, the Government unequivocally support the right to lawful free speech and consider it unacceptable for banks or other payment service providers to terminate contracts on these grounds. Earlier this year, the Government launched a call for evidence which included questions on the issue of payment account terminations and freedom of expression. We will soon set out plans for enhanced requirements applying to the termination of payment accounts.

[Lord Lamont of Lerwick (Con)]

My Lords, I am grateful to my noble friend for confirming that it is the Government’s view that no bank account should be closed for political reasons. Does she therefore agree that it is not for a bank to judge whether someone’s personal or political views accord with the so-called “values” of the bank and that that is not a reason for closing an account? Equally, does she agree that it is not for a bank to judge whether someone’s views are out of tone with wider society and then use that as the pretext for closing an account? Is this not a fundamental issue which ought to concern everyone of every party—left, right, centre or flat earth—who might all be the next person to suffer under what is happening? Will my noble friend ensure that the number of cases that have been reported recently, which, prima facie, seem to indicate that accounts may have been closed for political reasons, are referred to the regulator and investigated? Will she confirm that this a fundamental right of free speech in a free society?

[Baroness Penn (Con)]

I absolutely agree with my noble friend and reiterate once again that the Government unequivocally support the right to lawful free speech and consider it completely unacceptable for banks or other payment service providers to terminate contracts on these grounds. We issued a call for evidence that covered these issues and will consider all evidence as part of that. As my noble friend noted, I am sure that the regulator will also want to consider these matters.

UK Economy: Growth, Inflation and Productivity

Lord Lamont of Lerwick Excerpts

Thursday 29th June 2023 Lords Chamber

[Lord Lamont of Lerwick (Con)]

My Lords, I thank the noble Lord, Lord Eatwell, for initiating this debate. It is always very interesting to listen to him; he always makes very thoughtful contributions.

I hope he will forgive me if I do not follow him on the long-term issues he outlined. This is because I want to concentrate on one part of what he talked about: inflation. The immediate problem this country faces is extremely serious. This is not because I want to ignore growth, but because I believe we cannot have sustained growth without first getting on top of inflation. Stability, sound finance and low inflation are preconditions of growth.

It is possible to be too downbeat about the UK’s economic growth. In 2020 and 2021, the UK had the highest economic growth of any G7 country. The eurozone is in recession, as is Germany. It is true that the UK has not recovered to its pre-Covid level, unlike several major European countries, but these are tiny differences in very small numbers. Some people talk about economic growth as though they are the first people ever to have thought of the idea—“With one bound, Jack will be free”. Of course, growth must be the ultimate objective of economic policy, but it cannot just be conjured into existence by politicians snapping their fingers.

Sadly, I do not believe that we can return from the present situation to inflation at 2% without a contraction—not a recession, but some contraction in activity—to realign demand with weaker supply. Of course, we have also to do what we can to increase supply. We need to bear in mind that, in this situation, the UK has a very tight labour market, with unemployment at 3.8%, 1 million vacancies and rising wages. We have a level of wage demands and wage increases that is incompatible with the 2% target set by the Bank of England.

Largely as a result of Covid and Ukraine, we have taxes that are far too high—and borrowing, for the same reasons, is also far too high and leaves little fiscal room for manoeuvre. Some suggest that the alternative to present policy is to seek a return to higher real incomes through economic growth and targeted tax cuts—again, with one bound Jack would be free. The hope that tax cuts and growth, if it materialised, would moderate demands for higher pay in the tight British labour market seems to me plainly illusory. If such an approach could ever have been on the cards, it plainly now cannot be after last year’s mini-Budget. Challenging the current approach risks upsetting market confidence.

As the noble Lord, Lord Eatwell, said, the latest inflation figures were extremely disappointing and, not to put a fine word on it, bad. Not only did inflation stop falling but core inflation actually increased, as did services inflation and the increase in wages. The UK is now an outlier in inflation, as the noble Lord said. We have a domestically generated element in our inflation. The Bank of England has responded by putting up rates by half a percentage point, and mortgage rates had anticipated that development and already risen in line with the market.

The changes in the mortgage market to more fixed-rate mortgages means that the impact of interest rate changes takes much longer today. The Resolution Foundation calculates that two-thirds of the impact of rising rates since 2021 still has to come through. Some 1.3 million people have fixed-rate mortgages expiring in the 12 months from 1 July. These figures have led to talk of a mortgage catastrophe impacting on the economy but, with a little flexibility and help from the banks, it need not be so. So far, mortgage holders have been remarkably resilient. This generation of mortgages were lent out far more cautiously than in previous cycles; the mortgage affordability tests imposed by the Bank of England mean that many borrowers already have a decent margin to cope with shocks.

Some voices have called for a government mortgage rescue package, but it makes no sense for the Bank of England to bear down on inflation by raising interest rates if, at the same time, the Government are to subsidise rising interest rates. Nor is it equitable to ask those not owning houses to subsidise those already on the ladder. Many renters pay a higher percentage of their income on rent than home owners do on mortgage payments. Regaining control is urgent, the best way to support home owners and essential for getting back growth.

Obviously, I support the independence of the Bank of England, and I supported it when Gordon Brown made that move, but the credibility of the Bank of England is on the line today. In the recent past, it has not sounded or acted as though it was determined to defeat inflation. In the summer of 2021, the Bank refused to halt the quantitative easing programme unleashed during Covid, even when it became inappropriate as prices accelerated and distortions in asset prices were obvious. In November that year, with inflation three times its target, the Bank was content to leave the base rate at 0.1%. If the Bank is to regain the confidence of investors, it needs to focus hard on this one core objective.

In recent years we have been through an extraordinary series of exceptional events. It is hardly surprising that growth, not just in this country but in many countries, has been slower than in the past. Some want to peddle illusory easy answers but, as the Prime Minister said, people know that if something is too good to be true, it is not true. Difficult as it is, I believe that the Government are on the right track, and I urge them not to be diverted.

British Banking Sector

Lord Lamont of Lerwick Excerpts

Tuesday 21st March 2023 Lords Chamber

[Baroness Penn (Con)]

My Lords, I emphasise to people at home the words of the Governor of the Bank of England that the UK banking system

“remains safe, sound, and well capitalised.”

The situation is different from 2008. Over the last 15 years, the Government and the Bank of England have taken robust action to strengthen the regulatory system and the resilience of the UK banking system. Specifically to the right reverend Prelate’s question, we have put in place a resolution regime to ensure that the failure of a bank can be managed in a way that minimises the impact on depositors, the financial system and public finances. I note that the resolution solution found for Silicon Valley Bank last week involved no UK taxpayer money whatever.

[Lord Lamont of Lerwick (Con)]

My Lords, is the implication of the right reverend Prelate’s question not a policy that would make banks far riskier than they already are? It is an extraordinary policy for him to advocate. I understand from the press that the Government were involved in the actions taken to save Credit Suisse and merge it with UBS, but a certain amount of disquiet has been caused by the preferential treatment that appears to have been given to shareholders rather than bondholders. Can she explain why this situation has arisen? Is the implication of that not rather disturbing for bondholders in other banks?

Autumn Statement 2022

Lord Lamont of Lerwick Excerpts

Tuesday 29th November 2022 Lords Chamber

[Lord Lamont of Lerwick (Con)]

My Lords, it is difficult to imagine a more difficult set of circumstances in which any Chancellor has had to frame a financial Statement to Parliament. Whatever the decisions, inevitably there will be predictable criticism from all sides: taxes are too high, borrowing could be a bit more, spending greater or less, according to taste. The Chancellor could not escape the shadow of the mini-Budget. It meant that, above all, he had to satisfy the markets that the national finances were sustainable.

Much public reaction to the Statement concentrated on the fall in living standards, which is indeed alarming and unprecedented, but it has been obvious, alas, for some time that a fall in living standards was absolutely inevitable because of the rise in imported energy relative to the price of exports. Sadly, no Government can protect all their citizens in circumstances such as these. I would argue that the Government have done a huge amount, spending over £100 billion supporting families and raising disposable income above where it would otherwise have been, but, alas, there is still a drop in living standards.

The Chancellor had to choose how much consolidation came from taxation and how much from cuts and expenditure, and he chose a balanced approach of 50:50. Given that many departmental budgets are under pressure because of inflation at this time, it seems improbable that he could have gone further, like cutting spending more. With inflation at 11%, protecting programmes in money terms, which the Chancellor has said he will do, means real cuts for certain departments.

The Chancellor was advised from many sources that you cannot raise taxes going into a recession. That, one might point out, flies in the face of historical evidence, such as the Budget of 1981, but leave that aside—that is in fact not what the Chancellor is doing. We are not tightening fiscal policy going into a recession. Most of the fiscal tightening falls in the latter part of the survey period, by which time, I hope, the recession will be over.

In the short term, borrowing actually increases, up by more than £64 billion this year and more than £40 billion the following year. The Chancellor raised taxes as a percentage of GDP by just over 1% during the survey period to their highest level since the war. Understandably, this leaves many of my noble friends very unhappy but the reason that tax as a proportion of GDP is at its highest level since the war is that spending as a proportion of GDP is at its highest level since the Second World War. Borrowing as a proportion of GDP is also approaching the same level, its highest since the war. All three are because of Covid, the secondary consequences of the Covid and the war in Ukraine.

Much of the increase in expenditure as a percentage of GDP—the measure of the so-called size of the state—over the survey period has come from indexation. The increases in both benefits and the triple lock increase spending-to-GDP ratios as indexation itself outstrips nominal GDP growth. Those who argued that we should take advantage of our second-lowest debt-to-GDP ratio in the G7 should look at what has happened to debt interest and why our previous financial position was, in many people’s opinion, an accident waiting to happen.

The noble Lord, Lord Fox, referred to debt interest but rather understated the problem. Debt interest has doubled from £56.4 billion last year to £120 billion this year, just slightly less than what we spend on the NHS. Much of this surge in debt was caused by indexed debt, which has nearly quadrupled from 6% of the stock of debt in 2001 to 22% this year. That process is part of the reason why, earlier this year, we saw some alarming predictions of how, in a few years’ time, debt in this country might begin to approach the levels in Italy or Japan.

Some people argue that the answer to all these problems is to go all out for growth through tax cuts, and that growth will float all these problems away. Unfortunately, however, we have another problem: severe inflation threatening to become embedded. At this moment, going for growth at all costs is likely to exacerbate inflation and probably end up exactly as the Barber boom did.

We use the phrase “cost of living” and realise the huge problems that there are for people, but we do not talk enough about the process of inflation itself. We need not just to protect people now but to prevent the situation becoming embedded and getting worse year after year. We need not just to stun the snake of inflation but to kill it. There is a real danger, as gas prices may come down, that we will end up living permanently—or for a long time—with a relatively high rate of inflation that does not go back to the 2% target where it ought to be.

Getting inflation down must be a top priority. We are in danger of forgetting, because it has been so long, the poison that inflation can inject. Getting on top of inflation is a job primarily for the Bank of England, which has not distinguished itself in recent years, but Governments also have a role to play. It is important that fiscal policy and monetary policy point in the same direction. Of course we also need growth, but we will not have growth if we do not get inflation down first. As Jim Callaghan reminded us,

“inflation is the mother and father of unemployment.”

Growth is not something that happens abracadabra because Governments will it or snap their fingers. Governments do not create growth but they can prevent it. What we need is a strategy to remove the obstacles to growth—a battery of non-inflationary supply-side measures, including training, infrastructure, deregulation and, most importantly, planning reform in the field of housing.

This Autumn Statement, against the background of a massive world crisis, makes some unavoidably tough decisions that are bound to be unpopular. However, in a very difficult situation, I believe that the Chancellor’s decisions are realistic and sensible. I commend them to the House.