James Mahone: The first step to a prosperous Britain is a ‘Sound Money Act’

James Mahone is a Conservative Party member, and Founder of the Horizon Centre for Public Innovation.

British fiscal policy has for decades, alternated between a cycle of carelessness and panic. This cycle is not unique solely to Britain. It is in fact, a global addiction. Earlier in 2025 the Financial Times released a video titled ‘Why governments are ‘addicted’ to debt’.

We are currently approaching nearly 20 years since interest rates plummeted. However, the era of free money is over. The important way to look at debt is as a percent of GDP. Britain currently has a debt-to-GDP ratio of around 96.4 per cent. Developed countries also now have an average public debt-to-GDP ratio of the same levels as was the case in 1945.

The result is undeniable: a towering debt mountain, punishingly volatile markets, and a profound erosion of trust. The UK is now ‘front and centre’ regarding market fears over sustaining debt levels. This is not simply a business cycle. It is a failure of statecraft.

Proponents of Modern Monetary Theory (MMT) economics might argue that the fear is irrational, since Britain can always service debts in Sterling because Britain prints the currency that the debt is in. They also argue that inflation is also not a concern, since the increase in money is matched by a corresponding increase in goods and services. This academic argument does not hold up in the real world. Even if money printed were simply aimed at productive investment, matching all ‘printing of currency’ with real economic output, does not happen perfectly. Thus, the true definition of inflation is an increase in the money supply. Prices then follow.

The UK urgently needs a ‘Sound Money Act’. This would force discipline into law and restore global faith into Sterling. This first step is not about imposing austerity. It is the framework for sustainable, long-term growth. It will also reclaim our economic sovereignty from sudden movements in the bond market.

It is important to point out the following, since there still seems to be some basic confusion in national conversation. If the government spends more than it collects in revenue, this is called the budget deficit. The accumulated sum of previous budget deficits is called the government debt. A deficit can be useful, for example during a recession. However, Britain has had a perpetual deficit, even during times of economic growth. This shows a failure to prepare. The debt burden has simply been allowed to build. What then follows are the drastic effects on future policy choices.

Before the 2008 financial crisis, Britain’s public debt-to-GDP was roughly 35 per cent. It is now just over 96 per cent. As debt levels and interest rates have risen, the cost of servicing the debt is now one of the largest expenses in the Treasury. Thus, billions of pounds that could have been spent on things such as the NHS, education or defence, gets diverted to simply paying the interest on the debt. Britain needs enforceable limits on the national debt. Every pound spent today needs to contribute to a secure future, not in continuing the same path of the current financial spiral.

The current weakness is compounded by our reliance on foreign capital. Japan has one of the highest debt-to-GDP levels in the world at around 255 per cent. However, most of this debt is held domestically in Yen. The UK, by contrast, depends on foreign investors’ confidence in gilts. This is what we are currently placing our economic sovereignty on.

This confidence can’t be assumed to hold indefinitely. We saw what happened when “bond vigilantes” lose faith, as what happened during the Liz Truss episode. Families and businesses get hit hardest. This largely manifests in surging borrowing costs, higher mortgage rates, higher costs for consumers and an economic crisis.

A Sound Money Act would ensure that fiscal responsibility becomes law. The Act would be built on four pillars:

1) A Legally-Binding Fiscal Anchor: The foundation is a clear, dual mandate: the structural budget deficit must not exceed 2 per cent of GDP when the economy is growing, ensuring that the debt grows slower than the economy, and public sector net debt must be on a downward path towards 70 per cent of GDP. If these limits get breached, a mandatory 90-day Parliamentary correction plan would be triggered. Thus, consolidation happens in good times and would preserve flexibility for downturns. This would be independently verified by the OBR.

2) A Golden Investment Rule: We must end the practice of borrowing for today’s consumption. Capital investment must be distinguished from current spending. Capital expenditure boosts future productivity and includes projects such as cutting-edge research, high-speed rail and renewable energy infrastructure.

3) A Transparency and Audit Mandate: British fiscal management is plagued by off-balance-sheet liabilities. This must stop. Any fiscal intervention valued over £5 billion must undergo a full, published cost-benefit analysis and be subject to an independent audit within one year.

4) A Monetary Integrity Clause: The silent, routine monetisation of deficits must end. The Bank of England must not be allowed to finance government debt, unless in a declared national emergency. This would be authorised by a supermajority of Parliament. Stimulus can then happen in drastic times such as war, recession or situations such as with the Covid pandemic. This fiscal responsibility will protect the Pound from devaluation which has cost savers and people who hold Sterling. Some theorists claim that deficits are a net contribution that fuels private sector savings. This is an excuse for more borrowing and ignores how the brutal real world bond market works. Britain is currently around £2.9 trillion in debt. Theories don’t pay the interest on that debt, taxpayers do.

The Sound Money Act represents the best of British statecraft, from Gladstone’s ‘principle of sound finance’ to Thatcher’s resolve. It is the solid foundation upon which the next step can be built. It will also signal to the world that Britain is fiscally responsible and would restore our credibility. After this essential first step, the next action is to employ the ‘British Growth Covenant’. This will be discussed in our next piece. It is the blueprint for massive public and private investment, on our solid foundation and hard-won credibility. This will create a dynamic, globally competitive economy.

First, we secure our finances. Then, we build our future.