UK debt at risk of becoming ‘unsustainable’ with ‘flawed’ debt rule, peers warn

Britain’s national debt is at risk of becoming “unsustainable” unless the Government chooses between tax rises and the state doing less and changes its fiscal rules, peers have warned.

Sir Keir Starmer’s administration must make “painful” decisions on spending and taxation within this Parliament and “muddling through is not an option”, the Lords Economic Affairs Committee (EAC) said.

In a report published on Tuesday, the influential group of peers concluded the UK has a “flawed” fiscal rule – that debt as a share of gross domestic product (GDP) should fall over a five-year period.

This rolling target can be easily “gamed”, with the possibility of debt rising for four years and success being claimed if it falls in year five even if it is higher than in year one, the committee concluded.

The rule, created by the former government and adopted by the new administration in a similar form, should be replaced by one with a fixed date in the fifth year in order to properly hold ministers to account, it said.

The conclusions come as the Government faces mounting pressure over its tax and spend plans, including plans to scrap the winter fuel allowance for all but the country’s poorest pensioners.

Ministers insist the cut is necessary to fill a £22 billion “black hole” in the public finances left by the Conservatives and Chancellor Rachel Reeves has hinted at the prospect of some tax rises on the horizon in the autumn Budget.

The competing demands of increasing defence spending, supporting an ageing population, transitioning to net zero and the prospect of interest rates exceeding the growth of national income mean that Labour continues to face “painful choices on spending, tax and borrowing”, the committee warned.

Despite stronger than expected growth in the first half of 2024, the EAC said it was not convinced that upswings could be relied upon to avoid pressure on the public finances, nor that productivity alone can offset the projected rise in Government expenditure.

The EAC report said: “If we wish to maintain the level and quality of public services and benefits that we have come to expect, we face a choice: taxes will need to rise or the state will need to do less.”

Ms Reeves has not ruled out increasing some taxes in the Budget later this year, but has committed to safeguard the UK’s main revenue raisers of VAT, income tax and national insurance.

UK national debt currently stands at around £2.7 trillion, according to data from the Office for National Statistics released last month.

Lord Bridges of Headley, chairman of the committee, said the report highlighted a “grim reality: our national debt risks developing on an unsustainable path”, which has not been given enough attention in part “because of a flawed debt rule”.

“If we are to tackle the serious risks we face, muddling through is not an option,” he said.

“To put debt back on a gradual, downward path, tough decisions must be taken in this Parliament.

“And we need a revised debt rule that has teeth and holds ministers to account.”

Chief Secretary to the Treasury Darren Jones said: “The Lords could not have been clearer about the dire state of the country’s finances.

“We have inherited a decade of lost economic growth, an economy that isn’t working, a £22 billion black hole in our public finances and unsustainable long-term debt.

“That is why we have to take tough decisions now to fix the foundations of our economy, so we can rebuild Britain and make every part of the country better off.

“To make sure this reckless overspending does not happen again we are strengthening the OBR and will confirm our robust fiscal rules at Budget.”

Nigel Huddleston MP, shadow financial secretary to the Treasury, said: “Labour are now constantly rolling the pitch to raise taxes and fiddle with the fiscal rules so they can borrow more on the taxpayers credit card.

“It is becoming undeniable that these are changes they planned right from the beginning, but they simply did not have the courage to tell the British public about during the election.

“This Labour Government is no different to any of its predecessors – they will raise taxes and damage the economy leaving hardworking Brits to pick up the tab.”