treasury and economics

The treasury

• Government department responsible for developing the government’s public finance policy and economic policy

• monitors the public purse which sets departmental spending limits

• headed by the chancellor of exchequer, Rachel Reeves

• works closely with the bank of england to control financial markets

• delivers two annual economic forecasts - the pre-budget in autumn and the budget in spring

Chancellor roles

• oversees government’s spending commitments through management of fiscal policy; raising/lowering taxes and duties to fund public services

• to manage national debt

• to monitor and control inflation

• to manage and control unemployment

• head of the treasury

pre-budget report

• introduced by gordon brown in 1997 and reports on economy

• presented in a speech to parliament by the chancellor in late autumn

• forecasts government spending over the next year and predicts trends

budget main purpose

• annual financial statement presented in house of commons by the chancellor

• usually occurs in march following the autumn pre-budget report

• sets out how the government plans to finance its spending plans in the pre-budget report

• outlines taxation changes to fund public spending

• aims to control inflation, reduce unemployment, stimulate growth and encourage exports and investments

the budget process

• presented by the chancellor in the house of commons

• addressed to the leader of opposition who gives an immediate response and debates

• the chancellor carries the speech to the house of commons in a traditional red briefcase called the budget box

• proposals are laid down in the finance bill which most be approved by parliament, but is fast tracked through bypassing the house of lords

• finance bill received royal assent

Office for budget responsibility

• It is an advisory non-departmental body established in 2010 to monitor the public sector’s finances

• Provides independent and authoritative analysis and forecast as background to the preparation of the budget

• Twice a year it produces detailed forecasts for the coming five years

• assesses the likely impact of any policy decisions expected developments in the economy

direct taxes

• taken directly from individual or organisation and paid directly to the government

• easy to collect as it is collected from the source

• annual so it is reviewed each year at the budget

• ‘progressive’ - the more you earn the more you pay

• income tax and NI

indirect taxes

• taxes on what people spend such as VAT (currently 20% following coalition increase)

• collected through an intermediary such as a shopkeeper

• not always reviewed annually

• regressive - charged at a flat rate no matter how much you earn

inflation

• sustained rise in prices of goods and services

• the pound is worth less

• two ways of measuring it: consumer price index and retail prices index

• chancellor and bank of england try to control it through taxes and interest rates

CPI (consumer price index)

• the governments preferred measure of inflation as it excludes mortgage interest

• based on consumer goods in the ‘notional average shopping basket’ - this changes regularly to reflect changes in public’s buying habits and trends

Recession

• reduction in a country’s GDP over two consecutive quarters but generally a slow down in economic activity

• a severe recession is known as a depression

• generally means a rise in unemployment, increase in business closing etc

austerity

• a set of policies with the aim of reducing government budget deficits

• these policies may include spending cuts, tax interests, or a mixture of both