‘National debt: It’s time for tough decisions’: House of Lords Economic Affairs Committee report

Approximate read time: 10 minutes

A series of economic shocks over the last decade and a half, including the global financial crisis of 2008/09, the Covid-19 pandemic and the spike in energy prices following Russia’s invasion of Ukraine in 2022, and the response of fiscal policy to these shocks, have resulted in a sharp rise in UK public sector net debt, often referred to as ‘national debt’. As of February 2025, the national debt stood at £2.8tn. This was equivalent to 95.5% of gross domestic product (GDP), a ratio last seen in the early 1960s.^[1]

In December 2023, the House of Lords Economic Affairs Committee launched an inquiry into whether the UK’s national debt was on a sustainable path; if not, what steps were required; and whether the government’s then-fiscal rule regarding the national debt was meaningful.^[2]

1. Committee findings and recommendations

The committee noted that judging the sustainability of the national debt required assessing several different economic and financial criteria, including the ratio of public debt-to-GDP, the maturity profile of the national debt and current economic circumstances. On the whole, the committee judged that the “sustainability of public debt depends on tax and spending policies which credibly align with expectations for economic growth and the cost of borrowing”.^[3] In the committee’s view, “[a] debt level risks becoming unsustainable if there is an insufficient buffer to absorb future economic shocks; or if a government’s approach to fiscal policy creates a long-term trajectory of increasing debt service costs”.^[4]

The committee noted that a combination of fiscal pressures facing the UK meant that “there is a risk of the debt becoming unsustainable”.^[5] These pressures include demands for higher spending to support an ageing population, the current government’s commitment to increase defence spending, the need to invest in the green transition, national infrastructure and public services, and the likelihood that interest rates, and hence the cost of funding government debt, would be higher than in recent years.^[6]

The committee judged that were economic growth to continue at the sluggish rates seen since the global financial crisis in 2008/09, the mathematics of debt sustainability meant higher interest rates would require a tighter fiscal stance to prevent the debt ratio from rising. Moreover, in recent years, there had been changes to the structure of the UK’s public debt because of successive rounds of quantitative easing, and a rise in the proportion of inflation-linked debt, and debt held by overseas investors. Consequently, the national debt had become more sensitive to economic shocks than was the case in the past. This also implied the need for a larger fiscal buffer to weather potential future shocks.^[7]

1.1 Changing the main debt rule

To mitigate the risk of the national debt becoming unsustainable, the committee made several recommendations around revising the framework for fiscal policy in place at the time of the report’s preparation. The recommendations concerned the fiscal rule relating to debt which had been put in place under the previous Conservative government. This rule required that the headline debt measure should be falling as a percentage of GDP by the fifth year of the rolling forecast period. The committee was critical of this approach, saying that:

A rolling target means that this rule is easily gamed and incentivises the wrong behaviours. It allows the possibility of debt rising for four years, with success being claimed if it falls in year five—even if debt at the end of the five-year period is higher than in the first year. This is unwise: it gives a misleading impression as to the true state of the public finances and hides the need to take difficult decisions now to secure debt sustainability in the medium-to-long term.^[8]

In light of these concerns, the committee called for an “overhaul” of the existing fiscal framework. The committee recommended that such an overhaul should include the following:

• rather than have a continually moving target to reduce debt, the framework should set out how debt as a proportion of GDP will be lower on a given date in the fifth year, unless there are exceptional reasons
• to provide accountability, the target for the fifth year should remain fixed until reached
• a further year’s target should be added at each yearly update and this new target should not normally be higher than the year preceding it
• the Office for Budget Responsibility (OBR) should publish annual progress reports which set out how the government is meeting its fiscal targets and the reasons for any deviation from the plan
• as the definition of which government spending should be classed as ‘investment’ is not clear cut, borrowing for investment should not be accounted for outside the government’s measure for meeting its debt target.^[9]

2. Government response to the committee

On 18 November 2024, the Economic Affairs Committee published a letter it had received from Rachel Reeves, the chancellor of the exchequer.^[10] In the letter, the chancellor said that the government agreed with the committee that “tough choices are required this Parliament to prevent the UK’s national debt from being on an unsustainable path”.^[11]

The chancellor highlighted the reforms to the fiscal rules announced in the autumn 2024 budget, which are covered in section 3 of this briefing. In her view, these reforms implemented many of the recommendations of the committee’s report.^[12]

One area where the chancellor explicitly disagreed with the committee concerned the latter’s recommendation of a fixed date for reducing the ratio of public debt to GDP (such as targeting a specific financial year such as 2029/30 that gets closer each year). In the chancellor’s view, a rolling rule (targeting a year in the forecast that continuously moves forward) was preferable, since it “avoids the need to make sharp policy adjustments in response to small changes in the forecast or economic shocks. With a fixed rule, as the target grows nearer, adjustments like in-year savings or tax rises become more challenging and economically damaging. A rolling target instead provides a medium-term anchor to support stability and sustainable public finances”.^[13]

3. Recent developments

3.1 Changes to the debt rule in the autumn 2024 budget

The committee’s report was published on 10 September 2024. This preceded the autumn budget which took place on 30 October 2024 and which the chancellor of the exchequer used to announce changes to aspects of the previous government’s fiscal rules.^[14] These changes included the introduction of an ‘investment rule’. In some respects, this rule is similar to the previous debt rule, requiring public sector debt as a share of GDP to fall in the fifth year of the forecast period. However, the chancellor announced that the time horizon will be reduced to three years from five years in 2026/27.

The measure of debt targeted in the fiscal rules was also changed from public sector net debt excluding the Bank of England to public sector net financial liabilities, or what the chancellor termed ‘net financial debt’ for short. Net financial debt captures all financial assets (such as equity holdings and loans) and financial liabilities (such as funded pensions obligations) on the public sector balance sheet. As a result, it encompasses a wider range of the public sector’s assets and liabilities than the definition of debt targeted in the previous government’s debt rule.^[15]

3.2 Wider changes to the fiscal framework in the autumn 2024 budget

In the autumn 2024 budget, the chancellor also announced wider changes to the fiscal framework, including:

• a commitment to hold one major fiscal event per year
• a commitment to hold a spending review every two years, setting departmental budgets for a minimum of three years
• confirming the details of the fiscal lock, as already legislated for, to ensure that no government can announce fiscally significant measures without being subject to an independent assessment by the OBR
• accepting all 10 recommendations in the OBR’s review of the March 2024 forecast for departmental expenditure limits, including improving the transparency and consistency of the spending information the Treasury shares with the OBR^[16]
• requiring the OBR to report on the long-term economic impacts of capital investment and government policies in its forecast
• committing to publish an annual report on the government’s contingent liabilities (such as guarantees, insurance contracts, and provisions)
• an escape clause that provides a strengthened role for the OBR when the government assesses there is a need to temporarily suspend the fiscal rules due to economic shocks^[17]

4. Read more

• House of Commons Library, ‘The UK’s fiscal targets’, 13 February 2025
• National Institute of Economic and Social Research, ‘Public debt sustainability and fiscal rules’, 5 February 2025
• Larry Elliott ‘UK debt must be steered off unsustainable course, warns Lords committee’, Guardian, 10 September 2024
• David Connett, ‘Lords warn of ‘grim reality’ as UK national debt risks becoming ‘unsustainable’’, i News, 10 September 2024
• Andrew Lilico, ‘Borrowing is out of control—and tax rises are not the answer’, CAPX, 10 September 2024
• John O’Connell, ‘Taxpayers’ Alliance responds to the House of Lords report on the national debt’, Taxpayers’ Alliance, 10 September 2024

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