Tag: UK Budget

Why do we need one?

When are decisions made?

And why is so much of the jargon cricket-based?

We are less than a week away from the Budget – a special day for the House of Commons, and one of incredible significance for the UK as a whole (writes Fraser of Allander Institute’s João Sousa).

In a speech expected to last around 60 minutes, the Chancellor of the Exchequer, Jeremy Hunt, will lay out plans for taxation and spending over the coming years, introduce some immediate tax measures and provide an update on the economic and fiscal forecasts he received from the Office for Budget Responsibility (OBR).

But though important, it can also be a confusing event for those not deeply involved in the process – even those meant to scrutinise it! A former Leader of the Opposition once remarked in his response about the Chancellor’s statement “that quite obviously no Member of this House, apart from any financial genius who may be here, can fully grasp” it.

But what we can do is demystify it and provide some historical context. So join us on this tour through the weird history of how it has come to be the way it is.

A statement to the House of Commons – but it wasn’t always like that

The Budget Statement – or historically called the Financial Statement – was originally made to the Committee of Ways and Means, a committee similar to the Committee of the Whole House (which still exists) concerned with financial matters, and in which all members could sit. This is why the Budget was originally chaired by the Chairman of Ways and Means, one of the most senior Deputy Speakers, rather than the Speaker of the House.

In 1967, the Committee of Ways and Means was abolished as part of a series of reforms to modernise the operation of the House under the Commons’ Leadership of Richard Crossman. Unfortunately, the modernisation didn’t extend to the existing the inherently sexist name of Chairman of Ways and Means – Dame Eleanor Laing (the current post holder) continues to be referred to as Chairman in official proceedings. Maybe it’s time we finally ditched it.

The Chairman of Ways and Means continues to chair the Budget debate to this day, which can look odd to the casual observer. The reply is also not by the corresponding shadow cabinet member, as one would expect, but by the Leader of the Opposition – a custom dating back to the 1938 Budget, which seems to have arisen from the fact that the Ministers of the Crown Act 1937 defined the role and duties of the Leader of the Opposition, as well as granting them a cabinet minister-equivalent salary.

The development of specific roles in the shadow cabinet happened significantly later (during the 1950s with the advent of television), by which point the convention had already been established.

The Budget has become more powerful and concentrated over time

The Committee on Ways and Means formally allowed for any member to raise proposals for taxation and spending, which would not be the case in a sitting of the House – during which the Government has control of the agenda, or “business” in the jargon.

In practice, however, this almost never happened. As party discipline grew over time and stronger governments backed by a Commons majority became the norm, the Government’s majority served to eliminate that possibility.

When the Committee was abolished in 1967, all responsibilities for fiscal policy decisions were transferred wholesale to the Chancellor of the Exchequer – but in practice that had already happened.

The Budget is now a three-part statement: it encompasses economic forecasts, taxation proposals and spending plans. It wasn’t always like that. The financial statement itself was originally concerned principally with tax powers.

Spending plans were a consideration of course, as they determined the balance that the Chancellor wanted to strike, but they were (and still are formally) voted separately as part of the Estimates process.

It was only in 1993 that Ken Clarke formally merged the presentation of plans for tax and spend as part of the move to an Autumn Budget – although really the Government had been using the Budget for many decades to pre-announce and revise spending plans when presenting the Budget.

Economic forecasting has contributed to fiscal events being more frequent – which is not necessarily great

What about economic forecasts? They are a more recent addition to the Government’s business, certainly in the level of detail that they exist today, and are to some extent a by-product of the need to more accurately forecast the public finances of a more complex economy.

But it was the 1970s inflationary shocks that really caused economic forecasting to become front and centre of the Chancellor’s statements to the Commons. It was also felt that an annual update was too infrequent given the rapidly evolving situation, and therefore that it would be appropriate for the Treasury to publish forecasts twice a year from a macroeconomic model that it was to build in order to project economic conditions.

Many of the provisions contained in Schedule 5 of the Industry Act 1975 would strike a current observer as peculiar or even downright ridiculous – for example, the need to require explicitly that “[t]he model shall be maintained on a computer” – but the twice yearly publication specified in that has subsequently been enshrined into the Budget Responsibility and National Audit Act 2011, which governs the operations of the OBR and its relationship with the Treasury.

For many years, the Budget was by far and away the largest fiscal event of the year, and for all intents and purposes, the only one worthy of that name. The Autumn/Summer/Spring Statement (timings have fluctuated over the years) was merely a statement of updated economic and fiscal forecasts – the only recent example of which was Philip Hammond’s 2019 Spring Statement, which did not even have a command paper alongside it.

The bloat in the “secondary” fiscal event started in 1998, with the introduction of the Pre-Budget Report. It was billed as setting out “the direction of Government policy and further measures that are under consideration in the run up to the 1999 Budget”, but it became another decision-making point in its own right. This approach has continued ever since, even if the name has changed, save for that singular 2019 Spring Statement.

This development evolved as a series of historical accidents – the need for more frequent forecasts, and an attempt to lay out the direction of travel for government policy – but has been seized by successive Chancellors as an opportunity to “make the weather” and generate headlines. But many experts – and we agree with them – would argue that having than one budget-like event a year is not a great thing, encouraging tinkering and zig-zagging policy rather than the stability that is often needed.

It is often argued as a reason for having more of these events that economic conditions can and do require at times rapid response – take the Covid-19 pandemic for example. That was such a rapidly evolving situation that it necessitated what the OBR called “twelve ‘mini-Budgets’ through the course of the year” during 2020-21. But emergency situations have always called for emergency statements to the House – something that already happened before the requirement for multiple events a year (take 1961 or 1966, for example). It’s the insistence on having them when it isn’t required that creates unwelcome uncertain.

Why do we even need a Budget every year?

In its current state, the operation of the UK’s public finances requires a number of resolutions to be passed in each financial year. The main reason is to allow the collection of income tax, which is brought into place by statutory instrument each year and must be renewed.

The Finance Bill also generally takes forward changes announced at the Budget, but that can take a while to pass through Parliament. In the meantime, the Government can collect taxes at newly announced rates by using the Provisional Collection of Taxes Act 1968.

This is why you’ll hear the Deputy Speaker mention this rather obscure act of parliament and the Budget resolutions just before calling the Chancellor to make their statement.

Could we have a Budget less than once a year? It would be possible, though some changes would have to be made. In practical terms, however, a year is quite a natural length for planning and monitoring expenditure and tax receipts – and there is often enough movement in the economy for it to be worthwhile and convenient to make decisions at such an interval.

How does the forecasting process work, and when are decisions made?

As per the Memorandum of Understanding between the OBR, Treasury and other government departments, the Chancellor has to give the OBR 10 weeks’ notice to produce a forecast in normal circumstances. The letter of the requirement was fulfilled in this case – though arguably not the spirit, as notice was given on 27 December. So the effective notice period was more like 8 and half to 9 weeks.

In a welcome move, the OBR has in recent times published the timetable for the forecast process. This has increased transparency, though it still requires some interpretation. The forecast timetable can broadly be divided into two periods: pre- and post-measures.

Pre-measures rounds (in this case, 1 and 2) refer to the incorporation of underlying data, both economic and administrative. For example, the OBR will have taken on new GDP figures and inflation data, as well as tax receipts and spending figures from government departments.

The last pre-measures round closed on 14 February, and so market determinants – including, importantly, interest rates and market expectations about the Bank of England’s behaviour in the coming months – will have been closed around a week before (6 or 7 February). They are now fixed and will not have been updated since then, despite the fact that there will have inevitably been movements.

This is a normal process in the OBR’s forecast, for two reasons. One is that the fiscal forecast needs to be conducted by departments and scrutinised by the OBR, and that takes around a week in early rounds.

But there is also a significant amount of time for the Chancellor to make decisions about policy measures on a stable base. Jeremy Hunt has been keen to extend the length of the decision-making period, and that has meant the OBR is now closing the forecast period about a week earlier.

Rounds 3 and 4 will have given the Chancellor the opportunity to notify the OBR of all major policy measures. These rounds allow the OBR to model any large impacts of major policies on the economy (also known as indirect or second-round effects). This forecast is then returned to the Treasury. Round 4 was returned on Wednesday (28th February), and all major decisions have now been taken.

This means any supposed agonising by Jeremy Hunt over whether to abolish ‘non-dom’ tax status in the coming days is purely pitch-rolling: a PR exercise to guide people through a supposed decision-making process that in fact has already happened.

All major decisions (i.e. over £1bn) are now closed. The final scorecard will be delivered to the OBR on Friday, 1 March. All numbers will then be closed for good, subject to any errors being found, and the OBR will spend the weekend writing their Economic and Fiscal Outlook. Likewise, the Treasury will be writing the speech for the Chancellor and the Red Book that comes out on Wednesday.

Of course, this won’t avoid many news articles over the weekend about the Chancellor still having to make tough decisions, and poring over the numbers to make it all add up. But if you’re reading this, you’ll know how to spot when a reporter is being fed lines directly from 11 Downing Street.

Speaking of which, what exactly is the scorecard?

Much like pitch-rolling, the scorecard is a term borrowed from cricket and in the Treasury’s parlance, it refers to the detailed list of measures taken by the Chancellor since the last fiscal event. It is essentially a very large spreadsheet, with often hundreds of rows detailed the movement in each tax and spending stream from each measure. It was originally called the tally, and it has been present in one form or another in every Budget document going back to the 1870s.

The table does quite resemble a cricket scorecard, and the metaphor has stuck. But it also resembles many other large tables, so why cricket?

It’s probably not unrelated to it being historically a past-time of the upper classes and very popular with Parliamentarians, reflecting the make-up and cultural references of those historically in the Treasury and Parliament.

There are a few different versions of the scorecard – table 4.1 in the Red Book is the one that Westminster insiders are most familiar with already, which is also called the ‘presentational’ scorecard. This is the ‘themed’-version, and measures are quite often grouped together. For most people, that is already more than enough.

But for the purists, the OBR publishes supplementary table 3.11, which is a version of the ‘analytical’ scorecard – which just means it has all the detail on revenue and spending stream.

The OBR’s version is also much more transparent, including a section labelled ‘non-scorecard’ measures – meaning decisions that the Government has taken and probably should have included in their presentation, but has decided not to. This used to be a large number, but has been heavily cut back – in large part because the OBR started publishing it.

Look out for more analysis from Fraser of Allander next week