Capital Economy, Business and Finance
Members of the House of Lords have called on the government to reform the UK’s “flawed” debt rules with “teeth” to bring down borrowing. In July the UK’s debt stood at 99.4 per cent of GDP, or £2.7 trillion in cash terms, according to a new report by cross-bench peers. But economists who spoke to the Lords’ Economic Affairs Committee were less concerned about the overall level of debt than “trends”. Before the financial crash and Covid, governments relied on baby booms, reduced defence spending and growth in world trade to get debt falling relative to GDP. Those “tailwinds” – demographic, geopolitical and commercial – have now become “headwinds” that are affecting the UK’s ability to pay off its debt interest, which has spiked to a post-war record.
The UK isn’t alone; average debt-to-GDP ratios have nearly doubled in 33 advanced economies since 2000. But the Lords’ report worries about the structure of UK debt, which is unusually short term (a side-effect of quantitative easing), foreign-owned and index-linked. It calls on the government to lay out a plan to cut debt by a given date in five years’ time, rather than continuing with the rolling target rule set by the Conservatives.
Rachel Reeves is feeling the pressure. As budget day looms, the chancellor faces clamorous opposition to raising capital gains tax, and questions about what she claims is a £22 billion black hole in the UK’s finances. A Lords report that calls on her to abide by an essentially stricter debt rule – without using the get-out of “borrowing to invest” – isn’t ideal.
Lord Bridges of Headley, chair of the Lords’ Economic Affairs Committee, says that “tough decisions must be taken in this Parliament” and that “ministers must be held accountable” by a revised debt rule. The report says today’s geopolitical risks have changed the game, and that what’s required is a larger fiscal buffer to prepare for future economic shocks. Evidence provided also suggests that
- by 2070, the UK will have only one person in work for every person in retirement. As savings fall and wage inflation rises, this could put upward pressure on interest rates and public services.
- Between 2004 and 2023, UK government debt in foreign hands has roughly doubled from 15 per cent to 29 per cent.
- while high net migration has previously boosted GDP growth, “it has made little impression on GDP per head”.
The report says ducking the choice between higher taxes and cutting back on the responsibilities of the state “is not an option”.
