Treasury and Economics

What is the Budget?

• takes place in autumn to allow major tax changes to take place before the start of the fiscal year, with a spring statement in March

• Its purpose is to manage and control the economy by controlling inflation, reducing unemployment, stimulating economic growth and encouraging exports and investment

Annual budget speech accompanies a Finance Act.

What is the Budget Speech?

• forecasts short-to-medium-term movements in the economy over 1-3 years

• reviews its performance in the preceding 12 months + government’s economic strategy

• Announces rises/cuts in tax, public spending + prioritisation of particular areas over others

• Announces new taxes, benefits to finance investments and/or help low-income groups

• Gives chancellor platform for political grandstanding

• Usually followed by shadow chancellor/leader of opposition speech and debate in Commons.

What is the Finance Act?

• Swift passage into law – same day as speech

• Designated a ‘Money Bill’ by Speaker – not challenged since 1911

  • Speech itself considered First reading

  • Second reading must be heard within 30 days but committee stage may be split

  • Third reading steam-rollered through, usually on second day of report stage

• can fail- In March 2017 Philip Hammond was forced into an embarrassing climbdown on increased National Insurance payments. The policy was reversed a week after the budget.

What are national contacts for the Budget?

• Institute for Fiscal Studies (think tank promoting effective economic/social policies)

• Joseph Rowntree Foundation (lobby group for social change dedicated to identifying and eradicating causes of poverty and injustice)

• National charities – eg Age UK

• Unions, academics

• Business leaders, eg Federation of Small Businesses or Confederation of British Industry

What are local contacts for the Budget?

• Local MPs / parliamentary candidates

• Leader of local council (if impact on local spending)

• Pensions adviser/pensioners’ groups

• Different social groups – single people, young marrieds, families, elderly

• Shopkeepers – eg increase in VAT

• Business community – eg chamber of commerce, regional office of CBI

What is the Treasury?

• HM Treasury is the government’s economic and finance ministry.

• A ministerial department headed up by Rachel Reeves as chancellor from 2024, supported by 17 agencies and public bodies

• Maintains control over public spending, setting direction of UK’s economic policy, raising revenue through taxation and working to achieve growth based on balancing taxation, borrowing and spending

Describe the Office for Budget Responsibility

• OBR introduced to provide independent, authoritative analysis of UK’s public finances

• Produces five-year forecasts for economy and public finances twice a year

• Uses public finance forecasts to judge gov’s performance against its targets

• Scrutinises Treasury’s costing of tax and welfare spending measures

• Assesses long-term sustainability of public finances in annual fiscal sustainability report

Describe the types of taxation

• Direct = up-front – Actively taxes people and businesses based on how much they earn e.g. income tax, corporation tax, capital gains tax, inheritance tax

• Indirect = ‘Hidden’ taxes on spending on goods, services etc. – e.g. VAT, insurance premium tax, excise on cigarettes and alcohol

• Regressive (no relation to ability to pay – can punish poor people disproportionately e.g. alcohol excise on poor drinkers) v progressive (more you earn/gain, more you pay)

• Excise – extra cost on things that are bad for us (cigarettes, alcohol) and which damage environment – eg landfill, airport taxes, fuel duties

Describe the Bank of England

• founded to “promote the public good and benefit of our people”

• Privately owned by stockholders until nationalised in 1946

• Became independent public organisation in 1998, wholly owned on behalf of the gov

• Independently sets monetary policy

• responsibility expanded after financial crisis

  • Financial Services Act 2012 established Financial Policy Committee (FPC – prudential regulator and subsidiary)

  • BoE’s Monetary Policy Committee has devolved responsibility for managing monetary policy

What is the role of the monetary policy committee?

• Sets interest rates to achieve target inflation rate of 2% and influence spending in the economy

• 9 members

• Each member serves a fixed term and is independent

• Minutes published to explain thinking and decisions

What is the public sector net cash requirement?

• Difference between the total ministers intend to spend on public service each year and amount available from tax. (If income exceeds borrowing, this will be the public sector net cash surplus).

• Govs historically favoured loans to finance costly public expenditure to avoid tax rises or spending cuts. Often referred to as the budget deficit

What is inflation?

Sustained increase in general level of prices over time – as a result the value of money and people’s spending power falls.

How is inflation measured?

• Calculated by RPI or CPI – monitors fluctuations in values of notional ‘baskets’ of household goods

CPI: Consumer Prices Index

• Gov’s preferred measure – charts movement in value of basket of 700+ goods without including mortgage payments – therefore tends to be lower.

  • Compiled by the Office for National Statistics (ONS)

  • contents are updated once a year to reflect changing shopping habits and social trends

RPI: Retail Price Index

• Preferred by economists – includes mortgage payments. In July 2017 the ONS reintroduced another index, the CPIH, which includes the housing costs of owner-occupiers.

What does high inflation lead to?

A high level of inflation will lead to a drop in demand for goods/spending, which may lead to a rise in unemployment. Hits pensioners and fixed income earners the hardest + savings making nothing. Exports may be hit if inflation relatively high. UK buys more foreign goods as they’re cheaper = more unemploymen

What causes inflation?

Demand pull – Major increase in demand for goods, P rise (like Xmas) Cost push – cost of production rises, price rises Rise in money supply – gov consistently spends more than it raises in taxes

What is deflation?

Lower prices and also leads to unemployment as consumers defer spending in the hope that prices will fall further. Good for savers.

What is a recession?

Rapid economic slowdown, business cycle contraction or negative growth; a period of two successive quarters of shrinking economy.

• consumers have stopped spending, sales have dwindled, manufacturers reduce production

• Govs usually respond by increasing money supply, increasing gov spending and/or decreasing taxation

• Fears were growing in Spring 2022 that the UK could be plunged into recession by rising energy costs and the impact of the war in Ukraine

What is Gross Domestic Product? (GDP)

Total profit from all goods and services generated in Britain – irrespective of which state benefits from them (eg Nissan at Sunderland).

What is Gross national product (GNP)?

Total profits irrespective of where they are physically produced – but only ones Britain profits from (e.g. Eastern call centres owned by BT or Virgin)

What is balance of payments?

• Difference between imports and exports – includes goods and services – ie ‘visible’ (cars) and ‘invisible’ (financial services) + financial transfers and debt payments to foreigners

• More imports than exports = deficit. Vice versa = surplus