Government faces ‘grim reality’ on national debt, peers warn

"If we wish to improve the level of and quality of services, and continue the current provision of benefits, taxes will need to rise. The alternative is that the state does less," the report said.
"If we wish to improve the level of and quality of services, and continue the current provision of benefits, taxes will need to rise. The alternative is that the state does less," the report said.

The government has received a stark warning on the state of the nation’s finances from an influential Parliamentary Committee.

In a report published today, the House of Lords Economic Affairs Committee (EAC) called for “clarity” about the “grim reality” facing the exchequer.

“If we wish to improve the level of and quality of services, and continue the current provision of benefits, taxes will need to rise. The alternative is that the state does less,” the report said.

“If this choice is ducked during this Parliament, the UK risks being on a path to unsustainable debt. Muddling through is not an option”.

The report comes at a time when national debt stands at its highest level since the 1960s even while the tax burden is on track to rise to its highest level in 70 years.

In the years ahead, state spending is only likely to rise further given the need for more spending on defence, the energy transition and support for an ageing population.

These spending pressures will likely take place in an environment in which economic growth is much more sluggish than it was for much of the 20th Century.

While the report made clear that the UK’s predicament was not unusual among international peers, and that there was no one level at which a debt burden becomes unsustainable, it still urged the government to take “tough decisions” to avert a crisis.

The report made a series of recommendations to help address the fiscal situation, most prominently reforming the existing set of fiscal rules.

The Chancellor’s main fiscal target is to get the debt to GDP ratio falling in five years, a target which rolls forward every year.

Richard Hughes, chair of the Office for Budget Responsibility (OBR), has described this target as a “mañana rule,” since it never actually requires debt to fall.

Lord Bridges of Headley, chair of the EAC, said the UK should replace the rolling target with a rule that has “teeth”.

The report recommended that the government establish a new framework which sets out how debt as a proportion of GDP will be lower on a given date in the fifth year.

The OBR should then publish annual progress reports on how the government is meeting its fiscal targets, including any reasons why the government is deviating from its plan.