Campaigning parties should tell the truth about debt servicing

The writer was chair of the economic affairs committee of the House of Lords in the last parliament

Democracy does not sit well with candour. “Difficult choices lie ahead, life may get tougher” is hardly the way to win votes. Yet in a year of elections, the political class across the west is not being honest about the challenges or the trade-offs required in the future.

For over a decade, populations have been cushioned from the full impact of economic crises — Covid, the energy shock — thanks to quantitative easing. Low interest rates, combined with massive state intervention, created a sense that governments can grow, and spending balloon, without taxpayers footing the bill. In this make-believe world, there are no trade-offs: you can have your cake, and eat it.

The political class has not dispelled this myth. Nor has it spelt out the dire reality: the economic shocks of the last few years have had a similar fiscal impact to fighting a major war. Worse, nations now face a string of interconnected challenges, all of which require government action.

Top of the list is debt itself — and the cost of servicing it. In the past, governments having to manage and bring down high levels of debt were helped by a growing working age population, a peace dividend, trade barriers falling and rising growth.

Yet today most western nations face an opposite set of challenges. Demographics — an ageing population. Defence — the need to rearm. Deglobalisation — the impact of growing protectionism and how to respond. And there are new challenges: digitalisation — the cost of reskilling, and decarbonisation — the green transition.

Better productivity and growth are the answer. But in the EU and UK growth is forecast to be, at best, anaemic. The US economy continues to power ahead but the cost of servicing its record high debt now exceeds defence spending. Governments could make supply side reforms: but these take time to yield results. The nature of today’s challenges means time is not on the side of governments. Difficult decisions and trade-offs will have to be made soon.  

Some trade-offs are well known. Have nations struck the right balance between low taxes that support enterprise, and decent support in old age? Or between immigration that helps improve a country’s competitiveness and that which strains public services without boosting GDP?

Free trade supports growth: and growth is critical to finance the green transition. But green protectionism is on the rise as governments put tariffs on Chinese electric vehicles and carbon taxes on imported goods. So, are governments striking the right balance between decarbonisation and growth? Simple robust regulation underpins competitive markets. But are unelected regulators prioritising financial stability and consumer protection over competitiveness and growth, making the business culture too risk averse?

Other trade-offs have been created by global events. How should we prioritise defence, digitalisation and decarbonisation? Rearmament relies on power-hungry sectors that have high carbon emissions — like mining, metals and chemicals. Digitalisation — AI’s rapid rise — demands data centres, which also consume large amounts of power. To rearm, or to be a digital leader, should a nation prioritise reliable, affordable energy from gas (or even coal) over the drive for renewables?

The enormity of these challenges requires a bold response. When politicians stand for office, unless they are honest about the decisions they will take and the trade-offs they will make, those elected will lack legitimacy in acting both quickly and at scale. The longer the delay, the more governments muddle through, the greater the risks — with more pain stored up for the future. To govern is to choose. Worryingly for the west, the political class seems unwilling even to confront the choices, let alone make one.