British House of Lords calls for stricter debt regulations for more sustainable finances

In a groundbreaking report, the economic committee of the British House of Lords has called for stricter central public debt regulations in the United Kingdom. The current mechanism is too easily manipulated and provides a misleading view of the government's finances, according to the committee's criticism. Swift and decisive actions are necessary to prevent further growth of national debt. The committee advocates for a new fiscal framework ensuring that the debt-to-GDP ratio decreases over five years unless there are exceptional circumstances. The current approach, which only requires a reduction in the debt share between the fourth and fifth years of a rolling forecast, was deemed arbitrary and too easy to circumvent. Lord George Bridges, chair of the committee, warned: “If we want to address the serious risks we face, hesitation is not an option.” He called for firm decisions within this legislative period and a revised debt rule that has consequences and holds ministers accountable. These demands arise as Finance Minister Rachel Reeves is about to present the details of her fiscal framework in the budget on October 30. Reeves had already revised one of the Conservatives’ fiscal rules by changing the target that excludes investments. However, she still adheres to the existing debt-to-GDP target. The precise definition of the debt metric that Reeves intends to use remains to be seen. Many economists suspect she will exclude the negative impacts of losses from the Bank of England's quantitative easing program to allow more room for government spending. The House of Lords committee criticized the current debt rule as "largely implausible." The rolling target allows debts to increase over four years, with a forecasted slight reduction in the fifth year being declared a success without making tough decisions about public finances. Lord Terry Burns, another committee member, added: “The goal is to reduce debt slowly and steadily, so we have a buffer again.” Darren Jones, Secretary of State in the Treasury, emphasized the need to strengthen the responsibility of the Office for Budget Responsibility and announced robust fiscal regulations in the upcoming budget. Additionally, Reeves warned of tough decisions in her speech in the House of Commons as she aims to reduce public debt. Her options for raising taxes are significantly constrained because the Labour manifesto promises not to increase income tax, value-added tax, and national insurance. A separate report by the think tank Resolution Foundation calculated that reforms to inheritance tax, capital gains tax (CGT), and employer national insurance could generate over £20 billion annually, while improving tax efficiency and distributing increases among those with the broadest shoulders without breaking election promises. The Resolution Foundation described the CGT as "ripe for reform" since its rates are lower than those for other types of income. For example, earned income is taxed at a top rate of 53 percent, while some capital gains are only subject to a top rate of 20 percent. The foundation proposes harmonizing CGT rates for shares with dividend tax rates, taxing property gains like earned income, introducing CGT exit fees when moving abroad, and levying CGT at death. A comprehensive reform of the CGT regime could bring in £10 billion annually, according to the foundation. Adam Corlett, principal economist at the Resolution Foundation, said: “Overdue reforms to inheritance tax, capital gains tax, and pension contribution tax relief would meet the requirements and could each potentially bring in over £20 billion while making the tax system fairer and more consistent.” The think tank also emphasized the need to close loopholes in inheritance tax that allow the very wealthy to avoid paying their fair share, undermining public trust in the tax system. The foundation described pension taxation as inconsistent and unfair. The best approach would be to tax employers on their pension contributions while exempting employee contributions from national insurance. This would benefit typical workers and generate an annual revenue increase of £9 billion by leveling the current arbitrary tax distortions between different forms of employee savings.