When one of the most senior figures in investment banking was asked at a private event last week what keeps him awake at night, he replied “government debt”. A recent House of Lords report will not help him sleep any easier.
The Economics Affairs Committee has warned of the “grim reality” that at £2.74 trillion – 99.4 per cent of GDP – public sector net debt is close to becoming unsustainable. Without urgent changes to fiscal policy, the UK could face a market reaction to make Liz Truss blush. Forget the £22bn ‘black hole’ the government believes the Tories left behind, this is the real fiscal crisis.
More worrying still, the peers say the tailwinds that helped governments control debt in the past – the baby boom, reduced defence spending and the opening up of global trade – have all gone into reverse.
Though Rachel Reeves is right to have prioritised growth, these negative geopolitical trends will make it harder to achieve, particularly at the speed the perilous situation demands. The Chancellor has staked much of her credibility on sticking to the Conservatives’ commitment for debt to fall as a proportion of GDP by the end of the five-year forecast period. But this, in itself, is Alice in Wonderland economics, allowing a government to rack up debt for four years but claim success as long as it falls in the fifth year. The truth is that until we can achieve sustained economic growth, Britain faces a stark choice: higher taxes or lower spending.
There are those on the left who say that this is too simplistic, that the public finances are not like a household budget and that levels of borrowing don’t matter as long as it’s used to fund ‘investment’. Even the chimerical fiscal rules we have are criticised by the likes of the New Economics Foundation, who would prefer to use debt to fund day-to-day spending items like nurses’ pay. And given the outcry she has faced over a relatively modest cut to pensioner benefits, the Chancellor may be tempted to listen to such advice. She must not. The economy is in a pit and the ladder out of it is a state that costs less and does less. That’s the economic reality; the political response to it is up for debate.