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Economy: National Debt

Volume 708: debated on Wednesday 25 February 2009

Question

Asked By

To ask Her Majesty’s Government what consideration has been given to the impact on future generations of the Government’s proposal to increase the national debt.

My Lords, the UK economy faces exceptional challenges as a result of the global financial crisis. Supporting the economy through these difficult times will benefit not only current but future generations. While this means allowing borrowings to increase in the short term, the Pre-Budget Report sets a credible plan for fiscal consolidation, ensuring that, in the medium term, borrowing is low and debt is stable and falling as a proportion of GDP.

My Lords, I thank the Minister for that optimistic reply, but I ask as a concerned grandparent what plans the Government have to avoid the possibility that our grandchildren will be left with a huge burden of taxation and ever-diminishing public services.

My Lords, public borrowing as a percentage of GDP is the second lowest of the G7 countries. We have laid out a clear fiscal plan to move back to a cyclically adjusted balance once we are past this global economic crisis and eventually to return to the course which we were previously on of reducing debt as a percentage of GDP. In the mean time, we strike an appropriate balance between the current generation and the future generation. At 2.7 per cent of GDP, public expenditure and net investment will be the highest that they have been since 1977. Future generations will benefit from the investments being made now. It is only fair and proper that they should pay a contribution towards the investment from which they will benefit.

My Lords, my noble friend asked a serious question about intergenerational equity. The level of current debt is forecast to rise to around 70 per cent of GDP. According to the ONS, by the time that we have added in the nationalised banks, it will be multiples of GDP. Can the Government say what is an appropriate amount of debt to bequeath to future generations?

My Lords, the appropriate amount of debt will depend on where we are in the economic cycle. It is clearly sensible when we are in an economic crisis of a global nature that the public sector should be an important support of demand to bring the economy back into equilibrium. We shall not see wasted investment, wasted capital or wasted manpower. We shall move back towards a more sustainable fiscal position once this crisis is behind us. I have already addressed intergenerational benefit by reference to public sector net investment.

My Lords, I understand why the opposition party might want to talk down the British economy, but can we not bear in mind that we do not know the extent and effect of any recovery that comes about and therefore we cannot know the nature of public debt in the future? Indeed, if the banks recover in the way that Northern Rock has done, it could be rather better than some of the more pessimistic forecasts. However, the reality is surely that doing nothing would have been even worse.

My Lords, I completely agree with my noble friend. The consequences for the economy if we did not have the combined benefit of the fiscal stabilisers and the bringing forward of capital expenditure as announced in the PBR would be GDP growth this year that was at least 0.5 lower than would otherwise be achieved.

My Lords, does the Minister accept that we on these Benches believe that it would be mad not to borrow for public investment at the moment, particularly in vital areas such as social housing and to avoid the building industry collapsing? Does he also accept that, if we let the economy fall even faster, as the Conservatives seem to imply we should, it would lead to vast swathes of British industry going bust and even more pressure on pension funds? That would be a very short-sighted view.

My Lords, my experience of listening to the noble Lord, Lord Oakeshott, is that he is either spot-on and correct or spot-off and wrong. On this occasion he is spot-on and correct.

My Lords, does the Minister not agree that young people going to university have been and continue to be particularly vulnerable to taking out large overdrafts and student loans, which have to be repaid at the very time when they should be putting aside money in pension schemes to pay for an ever-longer future? Should the management of debt be a compulsory subject to address this on the school and university curriculum?

My Lords, the management of debt should be a compulsory subject for directors of banks, as well. There is clearly a continued need, as the noble Baroness cites, for improved understanding of debt and expenditure management, and there is an important place in the educational curriculum for helping people to develop their own skills and knowledge in the management of their finances.

My Lords, will the Minister and his colleagues bear in mind the view expressed by the late Lord Jenkins of Hillhead in 1975 that when borrowing reached 60 per cent of GDP we would be at the frontier of social democracy and that, beyond that frontier, lay totalitarianism in one form or another? I am sure that the Minister and the rest of this House would say God forbid that that should happen in this country.

My Lords, we would certainly not wish to see such an outcome, nor do we believe that it would occur. That is one reason why we are committed to reducing borrowing as a percentage of GDP once we are past this global crisis. We have set out very clear programmes and have said that the rate of growth for public expenditure will be lower. We have also identified already taxation increases that will be introduced at the appropriate time to ensure that we manage our debt in a sustainable and prudent manner.

My Lords, does my noble friend agree that it is far better to increase debt now so that our grandchildren about whom we are all concerned will not have an economy that cannot afford to pay for healthcare, education, housing and all the things that we need? Is it not far better to increase debt now rather than so impoverish our economy that we will not be able to afford those things in future?