Raise taxes or rein in the state, Labour warned

Sir Keir Starmer must raise taxes or rein in the state, because not doing so would risk putting Britain “on a path to unsustainable debt” that could trigger Liz Truss-style market crises, a House of Lords committee has warned.
The Lords’ economic affairs committee said in a report that the prime minister must confront “painful choices on spending, tax and borrowing” to rebalance the public finances.
Lord Bridges of Headley, who chairs the committee, said that “muddling through” was not an option and cautioned that the absence of a financial buffer could leave the government scrambling to contain a surprise market shock similar to the one sparked by Truss’s mini-budget in 2022. “To put debt back on a gradual, downward path, tough decisions must be taken in this parliament,” he said.
Like other rich countries, Britain has suffered from a sharp growth slowdown since the 2008 global financial crisis. This, in an era of rising interest rates worldwide, ever-growing health spending and an ageing population, has made it tougher for governments to raise spending or to cut taxes without destabilising the public finances.
Over the past 16 years, the UK’s debt-to-GDP ratio has risen from about 35 per cent to nearly 100 per cent owing to a surge in government spending to support households and businesses through a series of shocks.
“To maintain the level and quality of public services and benefits that people have come to expect, the choice is between tax rises or the state doing less,” the committee said. “Addressing this will demand clarity as to the responsibilities of the individual versus that of the state.”
Britain is more exposed to changes in interest rates and bouts of inflation than its peers because a large share of its debt stock is tied to the retail prices index, an old measure of inflation. The economic affairs committee said that the Bank of England’s bond purchases had magnified these exposures. It said that these bond purchases, known as quantitative easing, had ignored the burden placed on the taxpayer by the Treasury covering losses the Bank incurs when disposing of the assets. “These decisions have blurred the boundary between monetary and fiscal policy,” it said.
Lord Bridges said that wider economic trends that had strengthened public finances in the past, such as lower defence spending and healthy productivity growth, had “now become headwinds”. On some measures, the contribution to growth from productivity has fallen to only 0.1 percentage points, from 1.7 points in the decade to 2007.
Foreign ownership of UK debt has risen sharply over the past 20 years to the second highest in the G7, leaving the country exposed to swings in investor sentiment.
In a letter sent to the economic affairs committee last month, Richard Hughes, chairman of the Office for Budget Responsibility, warned that over-reliance on overseas holdings had made the UK’s “debt position more vulnerable”.
The report, National debt: it’s time for tough decisions, illustrates the tough fiscal bind that confronts Rachel Reeves as she prepares to unveil her inaugural budget on October 30. Labour ministers have been criticised for cutting winter fuel payments for pensioners on the grounds that the public finances are too tight. Government overspending, higher inflation than expected and steeper interest rate forecasts are likely to have trimmed the amount of cash available to the chancellor without breaching her fiscal rules.
Lord Bridges said that Reeves should implement a “revised debt rule that has teeth and holds ministers to account”. The committee said that the existing rules, curbing debt on a rolling five-year target and balancing the current budget, could be easily gamed. It recommended setting a static five-year lower-debt target that renews at a lower level with each yearly fiscal update. Borrowing to fund investment should be kept within the government’s debt target.
Darren Jones, chief secretary to the Treasury, 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.”