Put the magic back, Mr Brown

For a long time Budget day was a great parliamentary occasion. People queued to bag their seats, and put on special hats. And of course because those Budgets were virtually solely about tax, people would come away grinding their teeth at the iniquitous increases announced.

Those were the days when spending didn’t get so much attention. But now total fiscal balance, how we spend, how we save and how we tax has become, rightly so, much more important.

The question is how we decide these things and how they are announced.

Ideally – as any competent finance director knows – you make decisions about spending and income at the same time. Not so governments.

We got used to a situation in which spending decisions were taken and announced in the autumn – hence the so-called ‘Autumn Statement’. Tax decisions and an appraisal of the overall fiscal situation took place in the spring.

In effect therefore spending drove taxation and borrowing, not the usual practice.

This feature, added to the consultations of which the Treasury are so proud, led to calls for a ‘green Budget’ – green in the exposure sense rather than the environmental sense – in the autumn, to be firmed up in the spring.

The arrival of the full Budget
And then in the late 1980s Norman Lamont adapted this notion so there was a full Budget in the autumn which tried to do what any commercial company would do, which is to look at tax and spending and net borrowing together, leaving open the option in the next spring to adjust – implicitly by not a very great deal – to reflect say change to economic circumstances.

When he came to office, however, Gordon Brown abandoned this and went back to the dual system. Spending is announced, or confirmed where three-year planning is used, in the so-called pre-Budget report, which comes out around November.

The spring Budget then comes out with changes in taxation (and indeed some changes in spending too) so as to aim at the required fiscal balance.

So we are back to the situation where spending comes before tax, the blank cheque approach for spenders.

And there are other issues to consider.

To start with, the distinction between taxation and spending is getting blurred. The working family tax credit, for instance, shifts some social security benefits – previously classed as spending – into negative taxation.

Other such set-offs can be found and we shall see more.

Hypothecation is in the air which can again blur the difference between taxation and spending. The involvement of the private sector, and particularly off-balance sheet deals like PPP and PFI need to be catered for, more so now because the Treasury will be aware of the Enron-like tendencies of some of their accounting policies.

The impact from 11 Sept
And the fallout from 11 September will have shaken the Treasury’s complacency about being in control of things, and may call itself for adjustment as the global or domestic economy may dictate.

So where does this take us? Notwithstanding these complications, ideally tax plans and spending should be brought together. But timescales can be seriously different. Thus for public sector managers being given more money to spend as much notice as possible is required so it can be planned and spent properly.

On the other hand to avoid ‘forestalling’ – something which used to obsess the Treasury – decisions on a number of changes (such as increases in tax on beer or cigarettes or petrol) ought to come into effect as quickly as possible after they are announced. And there is the public out there and their advisers who have their dispositions to make, sometimes involving similar issues.

This year we have had another dimension, which is bringing the Budget forward from the usual date around the middle of March to yesterday. The reasons for this – Gordon Brown’s family tragedy – is certainly very sad.

The timing of the Budget
We shall have to study how this shift of Budget from a couple of weeks before the end of the old tax year to a couple of weeks into the start of the new tax year is handled; has Gordon Brown taken a ‘that’s just tough’ stance to people who might have benefited by swift action in 2001-2002, or has he devised some means of grace?

We saw some measures announced in advance but was that all? (Incidentally Gordon Brown’s decision to delay the Budget for around four weeks will have cost money in that any instant dispositions, likely to be net tax takers, will start yielding tax four weeks or so later than might have been the case – though it will also have given the Treasury and others more breathing space at what is always a pretty fraught time).

There is yet another development since this government came in, which is the change in Budget and pre-Budget documentation in terms of style and political contact. Budgets used to be accompanied by a rather thin little red book, and the autumn statement an equally thin little grey book.

Now we have pretty substantial tomes – the last Red Book and pre-Budget report were more than 200 pages each. While they do contain tax and spending matters, and the mandatory twice-yearly economic reports, most of the bulk is taken up with a very substantial degree of other political, economic, industrial, social and environmental discussion.

It may be doubted perhaps how much these are actually read by the general public. But they are a step towards openness and a chance for fuller discussion of things that may not hit the headlines immediately such as pensions, productivity, and the balance of payments. So that has to be accommodated too.

The answer might be to stick with two main economic occasions a year but to rebalance them substantially, so the principle one is an autumn Budget, dealing with spending and taxing for the upcoming financial year (though with immediate effect for ‘forestallable’ measures). A Budget in the spring would be (or indeed any other time of year) the occasion for refining and amending, as need be, the decisions announced in the autumn Budget.

This could give the right combination of strategic direction and flexibility, marry up the tax and spending decisions more effectively and, indeed, provide a better basis for consultation and planning throughout the economy.

  • Sir Peter Kemp is a member of the ICAEW and a former civil servant.

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