Fortifying the Fiscal Framework (Economic Affairs Committee Report)

Lord Sikka Excerpts

Tuesday 3rd November 2026 Grand Committee

[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.

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[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.

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[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.