Is it really time to change how we budget?

March 9, 2016

This is the fourth fiscal event within a year. Economic forecasts may sometimes change drastically, but is a new Budget every three months really necessary? Many have complained that the even twice annual (more in an election year) process of Budgets have become counterproductive, encouraging hyperactivity, corporate lobbying and ‘wheeze-itis’. The UK has one of the most centralised systems of executive control of any democracy. Nowhere is this more obvious than in the Chancellor’s power to single-handedly set a Budget with the legislature’s input theoretically limited to rubber stamping it through. So what are the benefits and drawbacks of the way we do Budgets? And would the alternative really be any better?

Let’s start with the benefits. Parliamentary systems like the UK are much better at avoiding the kind of gridlock regularly suffered in the US Congress – let alone a government shutdown or debt crisis. The Budget creates the political space for Chancellors to react quickly and comprehensively to changes in the wider economy, and if necessary make unpopular but necessary decisions, separate from normal levels of Parliamentary scrutiny. This avoids big decisions getting bogged down in an indeterminable debate over policy when sometimes the decision is the least bad option (raising VAT for example). It can be good for democracy too, providing a highly visible platform for the public to engage with the decisions made by the Government and the counter-views offered by the Opposition. Performance at the Budget can be an important determinant of competence in the public’s eyes. When decisions do prove too controversial, Chancellors often find their seemingly absolute power is forced to succumb to a political u-turn.

The drawbacks are many and varied. For business and taxpayers, the constant churn introduced by the Budget make it hard to plan for the long term. With Government, the semi-annual cycle reinforces the dominance of the Treasury, and forces Ministers and officials to come up with things to announce regardless of whether they want or need to do so. When so many changes are made at a single point of time, the individual impact of various tax increases, exemptions and other wheezes are pretty opaque. Big ‘rabbit in the hat’ policy changes like introducing a National Living Wage, announcing the detail of £12 billion in welfare cuts or starting a pensions shake-up typically get announced with little prior consultation, bypassing the normal policy process.

Despite its flaws, it is likely that we will always have something like the Budget. It is the ultimate manifestation of Executive control, giving us strong and decisive Governments. Its shape will however continue to change. Already, it looks like a vestigial relic of a different time Treasury. Over the past decades, monetary policy has moved to the Bank of England, forecasting to the OBR, departmental spending to multi-year Spending Reviews, and deficit strategy to fiscal rules. Taxes are still overwhelming determined at the Budget but even here the Conservatives are increasingly setting medium term aspirations with corporation tax roadmaps or promises to raise the personal allowance to £12,500 over a Parliament.

Rather than abolish it entirely, it would be better if the Budget was a much smaller affair, making minor changes on the margin to ensure the government met its fiscal targets, rather than introducing new policy goals. This would operate similar to the way now the Government can tinker with the spending envelopes for departments but largely sticks to the overall trajectory set at the Spending Review. Instead of the big bang approach of the Budget, individual spending polices and tax changes would be developed and announced according to their own timetable. This would give MPs and the public the opportunity to scrutinise legislation more extensively. It might also strengthen the hand of departments in relation to the Treasury, empowering Ministers in Government to develop their policies and programmes independently with the Treasury taking an even more hands-off approach. In turn, much greater scrutiny would be placed on the decisions made by the Treasury itself, which are at present relatively under-scrutinised. Changes to tax might be treated like any other line of departmental expenditure, with organisations like the National Audit Office (NAO) assessing the value for money they offer to the taxpayer.

No Chancellor is likely to want to give up the power and platform of a Budget overnight – or bequeath his successor a radically diminished role. One smaller change others have suggested is to release the OBR’s latest economic forecasts several weeks before the Budget, at the same time as the Chancellor currently receives them. This would make it clearer for the public which changes in the public finances are the result of changes in the wider economy and which deliberate policy choices. It might also  prevent issues arising like the confusion after the most recent Autumn Statement where many people assumed that the Government’s easing on cuts to spending and tax credits were the result of changes to OBR forecast – when in reality it was largely down to deliberate decisions by the Chancellor to tax and borrow more. Whether the Government chooses to do this or not, it seems likely that future possible changes to the Budget will come from further gradual disaggregation, rather than a single big bang change.

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