Peter Franklin: A plan exists to save Britain from its growing debt crisis – but are we brave enough to do it? | Conservative Home

Peter Franklin is an Associate Editor of UnHerd.

 When she was Chancellor of Germany, Angela Merkel would often remind her audiences that Europe accounts for 7 per cent of the world’s population, 25 per cent of its GDP and 50 per cent of its social spending. Those figures have altered somewhat over time, but the essential point still stands: European welfarism — the British version included — is a global outlier.

In an era when the West no longer dominates the world economy, has a rapidly ageing population and remains wide open to mass immigration, the European model is coming under unprecedented strain.

Furthermore, there’s good reason to believe that this long crisis has entered a new and more dangerous phase.

For decades, Western governments have been able to borrow their way out of trouble — debt financing their social spending and/or tax cuts. Indeed, they’ve been able to supercharge the process through quantitative easing. But as it always must, QE is unwinding, and interest rates have rebounded.

And so now we’re experiencing the hard limits of government borrowing.

Five years ago, UK bond yields — i.e. the interest rate that the government pays on the money it borrows — hovered around 1 per cent. Now, the level is more like 5 per cent. For the current financial year (2025-26) the Office for Budget Responsibility forecasts that the government will have to spend £111.2 billion on servicing our national debt. That’s a lot of money, says the OBR — equivalent to “8.3 per cent of total public spending” or “over 3.7 per cent of national income“.

What’s more, there’s the potential for the situation to deteriorate if the bond markets — i.e. the traders who buy up tranches of government debt — begin to suspect that a particular country’s finances are unravelling. That fear is expressed in demands for higher interest rates, which in turn puts public finances under greater strain as budgets buckle under the escalating cost of interest repayments.

And it’s not just the bond markets we have to watch out for.

There are other working parts of the money-go-round that have to keep going or else. That’s something that Liz Truss found out the hard way when the adverse market reaction to the 2022 Mini Budget led to a crisis in the pension fund sector — necessitating an emergency Bank of England bail out.

Today, Rachel Reeves and Keir Starmer live in fear of something similar happening to them. Which is why they’re so desperate to fill the “black hole” in the public finances.

In this respect, Truss — despite her fleeting tenure — is shaping up to be the most consequential prime minister of 21st century.

Inadvertently, she has destroyed the entire basis on which the Labour Party has operated since Margaret Thatcher killed-off socialism proper.

The Blair-Brown approach — i.e. the borrow-and-spend expansion of the state within a globalised market economy — has run out of road. That leaves British progressives with two options: either accept the new financial reality or, as is increasingly common, flee to the fantasy economics of the Green Party.

So much for the Left; what about the Right?

It should be obvious to fiscal conservatives in all parties that our current situation is unsustainable — and a correction urgently needed.

Note that I’m not talking about any ambition to shrink the state as a purely ideological project — nor do I mean the generational effort required to head-off the fifty-year fiscal emergency facing every nation with declining birth rates.

Rather, I mean pulling Britain out of the immediate danger zone.

For an idea of what that might look like don’t bother with the vaguely defined savings that Kemi Badenoch referred to in her conference speech. And certainly don’t waste your time with the DOGE-lite pretensions that currently define Reform UK’s contribution to this debate. Rather, turn to a must-read report just published by Policy Exchange. Aptly entitled Beyond Our Means it sets out a plan to get public spending back down to 40 per cent of GDP by 2030.

In other words, this isn’t a libertarian blueprint for a night-watchman state — merely a solvent one.

The authors — Roger Bootle, Iain Mansfield, Ben Ramanauskas and Ben Sweetman — don’t shrink away from the extent of the change required. As they set out in considerable detail, it would involve £115 billion of annual savings by 2030. Finding that sort of money doesn’t just require cuts to one or two easy targets, but radical action across the board.

So while the plan includes cuts to working age benefit provision and to the asylum seeker bill (netting savings of £30 billion and £3 billion respectively), it’s also goodbye to the triple lock on the state pension, which (together with related changes) would add another £22.5 billon to the total. The NHS doesn’t escape unscathed either — for instance, a £20 charge for GP appointments is proposed.

On and on the list goes, taking in cuts to the education budget, higher education, civil service, public sector pensions, green subsidies, international development, childcare subsidies, housing benefit and much more besides. So, make no mistake, this would be a massive undertaking for any government.

It would be resisted at every step of the way — and not just by the Left, but by vested interests of all kinds.

So how on Earth could one, or both, of the right-of-centre parties sell such a programme to the voters? Well, from a Conservative perspective it’s worth remembering one of the points I made last time: we’ve got nothing to lose. Any hint of a post-conference bounce has dematerialised, so let’s not pretend we have to tread carefully here. We’ve been doing that since Rishi Sunak took over from Liz Truss and none of it — absolutely nothing — has worked.

Nor is there any real evidence that a more overt strategy of aping Nigel Farage would work either. So, all else having failed, we should try telling the truth. That should start with our own record in office, then Labour’s record and finally what needs to be done to rescue Britain from its doom loop.

Honesty has to come packaged with hope.

We can’t just re-run the austerity messaging of the Cameron and Osborne years. This time the savings plan needs to go hand-in-hand with a growth plan. And as well reducing the size of the state, we need a programme for reducing demand for the state.

There are no contradictions between these objectives — indeed, properly conceived, they are mutually reinforcing. However, the breadth and depth of the policy development required — whether in opposition or government — is of a scale and seriousness greater than anything we’ve attempted since the Thatcher years. There’s no point in even attempting such a feat unless we’re willing to junk the superficial, comms-led culture of politics that has dominated British public life for decades — our own party included.

It’s going to require investment too.

If there’s one substantive point on which I disagree with the Policy Exchange report, its over how they want to use the proceeds of their savings programme. Basically, it’s a three-way split: half to reducing the deficit, a quarter to boosting defence spending (plus other special priorities) and a quarter for tax cuts.

I’d propose a somewhat different set of emphases.

Firstly, that we focus on promoting growth to reduce the deficit (and the accumulated debt) as a proportion of GDP rather than as an absolute amount.

Secondly, that we do work towards the 3 per cent target for defence spending — but not if it means wasting money on billion-dollar weapons that can be destroyed with a million-dollar drone swarm.

And thirdly, that we put growth-boosting investment before tax cuts. This country wouldn’t be skint if it wasn’t for our stubbornly persistent productivity crisis, which is, in turn, the result of chronic under-investment. We’ve already tried to remedy that problem with cuts to Corporation Tax and it didn’t work. So until the British economy is thriving again, housing, infrastructure and industry must come first.

That’s not only to boost growth, but to protect the proceeds of a savings programme from any future left-wing or populist government. Tax cuts can be reversed, so can a concerted effort to pay back our national debt. Conservatives can spend years restraining the growth of current spending only for their opponents to win back power and undo that all that effort. That’s what happened after 1997 and, for a short while, 2024 too.

So next time (if we’re lucky enough to have one) let’s endeavour to lock-up the savings we make in a long-term programme to rebuild Britain.