United Kingdom

II - Changes to the Budgetary Process

Budgetary process   
II.1
Describe the main characteristics of the budgetary process (cycle, actors, instruments, etc.) in the United Kingdom.

Institutional Actors[1]

  • The Chancellor of the Exchequer
    • The Chancellor’s responsibilities cover fiscal policy, monetary policy and ministerial arrangements. This means he frames the budget, sets limits of departmental spending and sets the inflation target which the Bank must set interest rates to meet.[2]
  • The Prime Minister
    • Often the Prime Minister is also First Lord of the Treasury and plays an important role in economic and budgetary policy.
  • The Treasury
    • The Treasury oversaw regulatory developments and produced various statutory instruments under the Financial Services and Markets Act 2000. It held the FSA to account through, for example, commissioning the National Audit Office’s review of aspects of the FSA’s work, and commissioned its own periodic reviews of aspects of regulatory policy. 
  • Bank of England
    • Following the Bank of England Act 1998, its main role was to manage monetary policy. It had a statutory objective to ensure stability of the financial system. It mainly fulfilled this role by producing periodic reports on macro‐economic developments and on the activities of financial institutions that might have implications for financial stability.
  • Financial Services Authority
    • The FSA is an ‘integrated regulator’: it regulates all financial institutions carrying on a wide range of investment business, including banking, dealing, and managing financial instruments, and giving financial advice, and it regulates both the manner in which they conduct their business and their financial soundness.

Budgetary cycle

The British budget is set annually as some taxes such as income tax are annual and need to be renewed.

The main stages in the British budgetary process are:[3]

  1. In the autumn, six months before the financial year begins, the Chancellor of the Exchequer makes an autumn statement on the state of the economy to MPs. This is an opportunity for the government to have a mini-budget where the government makes certain proposals on budgetary policy and discusses the economic situation.
  2. A Supply and Appropriations (Anticipation and Adjustments) Bill is passed. This authorises the Vote on Account for the next financial year which allows the House of Commons to vote to allocate to the government an amount of money up to a certain limit for the early months of the financial year until the Supply and Appropriation (Main Estimates) Bill is passed, setting a new limit. It also votes in adjustments if the government has already overspent. This bill is not debated.
  3. The Chancellor makes a Budget Statement to the House of Commons on a Wednesday in March, ahead of the beginning of the fiscal year on 1st April. This sets out plans for how to spend the money that will be authorised by the Commons in the coming financial year.  This contains all the revenue legislation for the year. This will be debated for four days in the House of Commons and for one day in the House of Lords.
  4. After the Budget Statement, proposals for tax changes and tax continuations contained in a Provisional Collection of Taxes motion must be approved. They may come into effect immediately.
  5. Within 10 sitting days a series of Ways and Means Resolutions must be passed for each provision imposing a new tax, renewing an annual tax, increasing or widening the burden of an existing tax, or for other provisions that need to be in operation before the Finance Bill is enacted.
  6. The Finance Bill is introduced. This gives a permanent legal basis to the Resolutions and the Provisional Collection of Taxes Act 1968 provides the necessary interim authority for taxes to be collected before it is passed. It must have a second reading within 30 days. Then, the non-controversial measures will go to a public bill committee and the rest to the Committee of the Whole House.
  7. The Finance Bill goes to the Report stage and third reading on the same day.
  8. Around the time the Finance Bill comes out of Committee there is a day to debate the estimates of each department on what it thinks it will spend in the coming year. Supply resolutions voting the main estimates are voted through at the end of the day.
  9. Finance Bill usually goes to the House of Lords in July, it is given a second reading debate and then is passed without a vote and without further debate on the same day­
  10. The Supply and Appropriations (Main Estimates) Bill is introduced and passed without debate or going through committee which authorises the government to spend the amount as decided in the main estimates.

General change         
II.2
How has the budgetary process changed since the beginning of the financial/Eurozone crisis?

The Labour Government in 2010 began to put in place a plan to reduce the deficit in the UK.[4]

The Labour government proposed, what later became the Fiscal Responsibility Act[5] in 2010. The aim behind this according to Alistair Darling (then Chancellor of the Exchequer) was to introduce rules and objectives to govern fiscal policy. He claimed frequent changes in monetary policy targets had led to an overall lack of coherence. In the Second Reading in the House of Commons Mark Harper MP (Conservative) commented that the EU had called on the UK to reduce its budget deficit below 3% or to half the level proposed by the Government. In response, Mr Darling stated that “The Commission can make recommendations, but as we are not in the euro, we are not obliged to follow them. We have no plans to change our current policy on that issue. The measures that I have announced in the pre-Budget report and before are sensible and, at this stage and when there is still so much uncertainty as countries emerge from the global recession, it is sensible to reduce the deficit in a way that does not damage our economy.”[6]

The Fiscal Responsibility Act placed obligations on the Treasury to ensure that public sector borrowing as a percentage of GDP reduces annually and is less than half the level in 2010 by 2014. It also placed an obligation on the Treasury to report on progress to Parliament when an Economic and Fiscal Strategy Report, or a Pre-Budget Report are laid before Parliament. The Act also gave Parliament the power to vote on the government’s medium term fiscal plans including proposed borrowing and debt totals. Thus new stages were added to the budgetary cycle.

This has now been replaced by a Budget Responsibility and National Audit Act 2011[7] . This Act introduces a number of new measures. Firstly, the Act sets up the Office of Budget Responsibility. This is an independent financial watchdog and fulfils many of the requirements regarding forecasting contained in Directive 2011/85/EU. Secondly, the Treasury is to create a Charter of Budget Responsibility. This has been done and includes debt management objectives and the fiscal mandate. Finally, the Act also introduces a new stage to the budgetary process: an annual Financial Statement and Budget Report.

There are a number of overlaps between the Budget Responsibility Act 2011 and the Six Pack legislation, but the changes are not directly attributed to the EU measures and in some instances pre-date them.

Institutional change         
II.3
What institutional changes are brought about by the changes in the budgetary process, e.g. relating to competences of parliament, government, the judiciary and independent advisory bodies?

The three main institutions that from 1997 were responsible for the management and regulation of the UK’s financial system were the Bank of England, HM Treasury and the Financial Services Authority (FSA). The Tripartite arrangement, as it became known, was in operation during the 2008 financial crisis and subject to much criticism.[8]

With the crisis came the decision to alter the institutional arrangements. The FSA faced criticism for being too weak. In particular it faced criticism for failing to prevent the collapse of Northern Rock and in not foreseeing the extent of the financial crisis. With the advent of the coalition government in May 2010, wide-ranging and radical reforms were proposed.

In this regard, the decision was made to give the regulatory role of the FSA to the Bank of England. The Financial Services Act 2012 will create an independent Financial Policy Committee (FPC) at the Bank of England. The FPC will have responsibility for preventing credit and asset bubbles and ensuring overall financial stability. The FSA will cease to exist and will be replaced by the following: a Prudential Regulation Authority (PRA) part of the Bank of England, focussing on prudential issues; and a Financial Conduct Authority responsible for business and market conduct.

The appointment of leaders of financial institutions has also come under question. A private members’ bill was introduced to Parliament which would require the approval of any Bank of England governor being subject to the House of Commons Treasury Select Committee.[9] This follows the change introduced by the Budget Responsibility and National Audit Act 2011 which requires the Chancellor of the Exchequer when appointing the chair to the Office of Budget responsibility to seek the consent of the Treasury Committee of the House of Commons.

The Budget Responsibility and National Audit Act 2011 led to the creation of the Office of Budget Responsibility. This has four main roles:

  • Producing five-year forecasts for the economy and public finances twice a year. The forecasts accompany the Chancellor’s Budget Statement (usually in March) and his Autumn Statement (usually in late November) and they incorporate the impact of any tax and spending measures announced by the Chancellor.
  • Judging the Government’s performance against its fiscal targets.
  • Scrutinising the Treasury’s costing of tax and welfare spending measures.  
  • Assessing the long-term sustainability of the public finances:

Change of time-line
II.4
How has the time-line of the budgetary cycle changed as a result of the implementation of Euro-crisis law?

Section 5 of the European Communities (Amendment) Act 1993 requires that the Government, “shall report to Parliament for its approval an assessment of the medium term economic and budgetary position in relation to public investment expenditure and to the social, economic and environmental goals” as set out in the convergence report. The UK’s Convergence Programme itself does not require Parliament’s approval, but it must be based upon an assessment of the economic and budgetary position which has been reported to Parliament by the Government for its approval. [10] Thus, a debate needs to occur before the submission of the convergence programme.

At times, the UK Convergence Programme is sent to the EU before its approval by Parliament. For example, in 2011 it was deposited with the EU on 28 April 2011 but only approved by Parliament on a deferred Division on 4 May 2011. Mr Hoban noted that the agreed deadline is 30 April for submission of both Convergence Programmes and National Reform Programmes. In such instances, the Commission is advised that the document must be regarded as a draft until parliamentary scrutiny procedures are completed. This has been established practice in recent years where parliamentary debates on the Government’s economic and budgetary assessment have not taken place at the time of submitting the Convergence Programme to the EU.

Miscellaneous
II.5
What other information is relevant with regard to the United Kingdom and changes to the budgetary process?

Not applicable

[1] Some of this is take from J. Black, ‘The Credit Crisis and the Constitution’, in D. Oliver, T. Prosser, and R. Rawlings (eds.), The Regulatory State. Oxford: Oxford University Press, 2010, p. 92-128.

[2] https://www.gov.uk/government/ministers/chancellor-of-the-exchequer; http://www.parliament.uk/documents/commons-information-office/Chancellor.pdf

[3] http://www.parliament.uk/Templates/BriefingPapers/Pages/BPPdfDownload.aspx?bp-id=SN00813

[4] This closely follows McEldowney, J.F. ‘The Constitution and the Financial Crisis in the UK: Historical and Contemporary Lessons’ in Contiades (ed) Constitutions in the Global Financial Crisis (Ashgate, 2013)

[5] Fiscal Responsibility Act 2010 http://www.opsi.gov.uk/acts/acts2010/ukpga_20100003_en_1 

[6] HC Hansard, 5 Jan 2010, Col 65-66 http://www.publications.parliament.uk/pa/cm200910/cmhansrd/cm100105/debtext/100105-0011.htm

[7] http://www.legislation.gov.uk/ukpga/2011/4/pdfs/ukpga_20110004_en.pdf

[8] This closely follows McEldowney, J.F. ‘The Constitution and the Financial Crisis in the UK: Historical and Contemporary Lessons’ in Contiades (ed) Constitutions in the Global Financial Crisis (Ashgate, 2013)

[9] See Bank of England (Appointment of Governor) Bill (as introduced) http://www.publications.parliament.uk/pa/bills/cbill/2012-2013/0008/2013008.pdf and accompanying Research Paper http://www.parliament.uk/briefing-papers/RP12-35 .

[10] HC Hansard, 23 May 2011 : Column 356W http://www.publications.parliament.uk/pa/cm201011/cmhansrd/cm110523/text/110523w0001.htm