Fiscal Outlook

Lord Turnbull Excerpts

Thursday 10th September 2026 Lords Chamber

[Lord Turnbull (CB)]

My Lords, there are two pillars to the Government’s financial framework: monetary policy and fiscal policy. Monetary targets were introduced in the late 1970s, being replaced by inflation targets in 1992. Since 1998, the MPC has been given responsibility to adjust interest rates when the inflation rate target is not being met. With the egregious exception of 2021 where it misjudged the economy after Covid, the Bank has kept inflation reasonably close to target—not perfect, but a creditable record.

Fiscal targets for deficits and debt were introduced in 1997. The governance here is different and the record is much poorer. If the fiscal metrics go off target, it is for the Government themselves to respond. Too often they have not done so. Instead, the metrics have been changed, with new definitions, new baselines and new time horizons. Announcements have been made that have been quickly reversed. Meanwhile, the debt to GDP ratio has continued to rise.

The OBR produces two reports a year. The Economic and fiscal outlook comes out with the Budget, providing a five-year outlook. As a result, it receives quite a lot of attention. The other is the Fiscal risks and sustainability report, which provides projections for another 40 years, starting where the EFO leaves off. It comes out mid-year and receives much less focus, though it is arguably the more important of the two. The two reports appear to have been written by two different organisations. In the first period, the fiscal position improves with a dramatic turnaround in the primary balance by 2030, enough to stop the debt ratio from rising. In the second period, covered by the Fiscal risks and sustainability report, it gets progressively worse all the way through to 2070, when it could have risen by 300%. Neither of these projections on its own is plausible. The improvement in the EFOR five-year programme is because the OBR is required to embody the path being assumed by the Government, even though few people believe it. The path tracked by the FRSR would blow up long before we got to 2070.

If we look through this bizarre first down and then up trajectory, some features are clear. The EAC report of 2024, which we are discussing today, said that the path we are on was not sustainable. Two years later, it is still not sustainable. Not enough is being done on either tax or spending, difficult decisions are being dodged and too many commitments are not being followed through. That many other large economies face similar problems is no comfort. We are not in the world of Tom Lehrer’s “We Will All Go Together When We Go”. Markets may well pick on what is perceived to be the weakest economy outside of the US. Of those, it is the UK that now has the highest cost of borrowing. It would be much better to be an early adopter of a more credible policy.

The term “headroom” can be ambiguous. Headroom, which is seen as a margin providing resilience, allowing time to respond to shocks, is fine, but it has to be replenished in better times. Otherwise, it slips into being a cosy back pocket to get you around the next corner, leaving you no better off to face the next shook.

As society ages, an increase in spending on collectively provided services will be unavoidable, as will spending on defence. Ruling out increases in major taxes would be unwise. The Government will not be able to rely on funding from domestic pension funds to the extent that they have been in the past. It is vital to improve the structure of the tax system as well as increasing the level.

There are many choices to be made, and I have time to mention only a few. As highlighted in last week’s debate on an ageing economy, it will be essential to increase the participation rate of those between 50 and 70, and to help more people into jobs rather than leaving them stranded on benefits. We need to be building more affordable homes to reduce the cost of rents in the housing benefit bill. We need to look at reforming the taxation of wealth that is locked up in owner-occupation. We need a more measured approach on climate change to reduce the cost of electricity closer to that of our competitors, by being prepared to exploit our own fossil fuels rather than importing them, but there many other difficult choices beyond that.

Preparing for an Ageing Society (Economic Affairs Committee Report)

Lord Turnbull Excerpts

Friday 4th September 2026 Lords Chamber

[Lord Turnbull (CB)]

My Lords, we have two related debates in successive weeks. Next week we will debate the issue of long-term debt and, this week, we are addressing one of its main drivers: an ageing population. The main elements of this are well known. Older people are putting less into the Exchequer and requiring more assistance from it. There is a sharp decline in the fertility rate. In mid-life, the shape of careers is changing. The old model of education to, say, 16 or 18 and 40-plus years of work followed by a retirement of 15 years has largely broken down. Young people are staying in education longer and taking longer to find settled employment. Taken together, these developments are producing a sharp rise in the dependency ratio, leading to severe pressures on public finances.

The EAC report looked at these developments and possible responses. It took the view that there has been significant change in the pension age, often going further than other countries, but that the scope for further rises is small. One change that should be made now—pace my noble friend Lord Redwood—is the abolition of the triple lock, which is, frankly, idiotic. Instead of a considered decision on how, over time, pensions should rise relative to prices or earnings, we have a chaotic system generating random windfall gains—and they are always gains—according to the movement of earnings and prices in particular years. The OBR has estimated that this could cost an extra 2% of GDP.

The report is rightly sceptical that the Government should try, or would be able, to influence the birth rate. We could permit greater immigration but not only is this politically sensitive; the effect may only be short term as, eventually, immigrants adopt the work and family patterns of the host nation. This leaves two areas where government action can be justified. The one emphasised most strongly in the report is trying to improve the participation rate in the 50 to 65 or 70 age range. Technological change is affecting how long jobs last. Someone may find that the line of work they have been in for 30 years has ceased to exist and they are therefore likely to need help to change jobs and skills to find new work.

Another issue, which gets less prominence in the report, is that many young people are finding it difficult after completing education and training to find fulfilling jobs. This is seen in the rise of the so-called NEETs to more than 1 million. It should be a priority to bring this number down. The policy response has been precisely the opposite of what is needed. Young people need incentives, mentoring and advice to help them into work, while we are in fact consigning them to the dead-end world of disability benefits.

The course we are now on makes for sombre reading—there will be more of that next week—but we are not without responses that could improve matters. I hope we will take them up as a matter of urgency.