The sun might not be shining, but it’s time to fix the roof
Within the space of a week, the Chancellor has delivered a pre-Budget signal, rowed back from it, and left the impression of a government unsure of its fiscal bearings. One could be forgiven for feeling a little whiplash. At a moment when clarity is at a premium, the message has become confused.
After years of successive shocks – the pandemic, the energy crisis, and the surge in interest rates – what the country needs is, at its heart, very simple: a clear, credible plan to rebuild fiscal resilience. This need has little to do with the fiscal rules, despite the handwringing about them. If anything, those rules have been the weakest imaginable commitment device: a fig leaf for prudence rather than a straitjacket.
Since the Office for Budget Responsibility was created in 2010, the UK has roughly doubled its stock of IOUs, adding over £1.6 trillion to the national debt. We now owe around £3 trillion. And debt is still growing. Last year the government ran a budget deficit of 5% of GDP, or around £150 billion. That isn’t free money. It’s debt that our children will inherit: a negative inheritance.
How do we know debt is too high? One clue is the hypersensitivity of bond markets to any hint of fiscal slippage. When rumours swirled in July that the Chancellor might be replaced – perhaps by someone less attached to the rules – gilt yields spiked and sterling fell. Some call this undemocratic. In truth, it’s the price of relying on global investors to buy our IOUs.
Another clue is the sheer size of our interest bill – now over £100 billion a year, about the size of the entire education budget. For years, low interest rates allowed governments to carry a large stock of debt at little cost. But the arithmetic has flipped as interest rates have risen globally. Even keeping debt at 100% of GDP now demands persistent primary surpluses – surpluses before interest payments. The UK hasn’t managed one since 2001, and only six times in the past quarter century.
Some argue we shouldn’t worry too much: after all, the UK’s debt ratio is the second lowest in the G7. But the US enjoys the “exorbitant privilege” of issuing the world’s reserve currency. The Euro Area has the ECB to cap spreads. And Japan’s central bank owns roughly half its debt. By contrast, the UK must pay the market price – a curse and a blessing. The curse is having interest rates around one percentage point higher than France, despite its worse fiscal position. The blessing is being forced to act now, something our future selves will thank us for.
What’s needed in the Autumn Budget is a credible plan to reduce debt – not just over this Parliament but over the decade ahead. That will require cross-party acceptance that fiscal repair is a first-order national task. The adjustment needed is around £50 billion beyond what’s already baked in – enough to move to a primary surplus of about 2% of GDP. Think of that as plugging the £20 billion hole the OBR is likely to identify and building a £30 billion buffer on top against future shocks.
None of this will be easy. And the temptation to defer difficult choices will be intense. But the risks of delay are enormous.
The most immediate danger is that markets simply don’t believe the plan. That would risk a repeat of the Truss-Kwarteng episode – a fiscal event that remains seared into policymakers’ minds. I doubt the government will make the same mistake. Yet Labour backbenchers need to understand that credibility can’t be taken for granted – and a second emergency budget would be waiting.
The more likely risk is a fudged Budget: a patchwork of minor tax tweaks designed to skirt manifesto commitments. That might preserve short-term political capital but would leave debt drifting ever higher – ratcheting up with each shock, reducing our ability to respond to crises or invest in public services.
In the end, that path leads to a loss of control. History shows that when debts grow faster than governments can service them, something has to give. Some countries inflate the debt away. Others resort to financial repression – leaning on the central bank to cap borrowing costs. Either route erodes trust in the institutions that underpin our economic stability.
We need to call time on fiscal wishful thinking. The sun may not be shining, but it’s still the moment to fix the roof – before the next storm arrives.
Dr David Aikman is Director at the National Institute of Economic and Social Research (NIESR).
