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| Budget - April 2002 | |||||||||||
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| Budget FAQs By David Turner and Emma Jacobs Published: March 15 2002 12:14GMT | Last Updated: April 16 2002 15:26GMT |
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What is the UK Budget? The government's Budget acts much like a household budget, weighing up the government's spending plans against its revenue. The chancellor presents the Budget in a general statement to the House of Commons in the spring. He reviews the government's income and expenditure over the past year, estimates them over the next few years and discusses the country's economic prospects. This balancing of the government account is not a simple task. Government revenues from taxation, national insurance, royalties and the like have generally not been high enough to cover its expenditure. This forces the government to borrow money and the measure of these borrowings is also outlined in the Budget package as public sector net borrowing or PSNB.
The chancellor can use the Budget to lay out the modifications of national insurance contributions, taxes on companies and income as well as duties on items such as alcohol and petrol. As changes to tax and national insurance affect voters, the party's political agenda as well as broader economic factors are key influences on every Budget.
The UK economy was the star performer among the Group of Seven leading powers last year, and is expected to repeat the feat this year. As feats go, this one is not particularly impressive: the rest of the G7 flirted with recession in the second half of the year. In the final three months of the year, the UK shared a similar fate to its competitors. The economy stopped growing for the first time in almost a decade, though Sir Edward George, governor of the Bank of England, recently suggested this marked the low point for the UK. Growth over the year as a whole came to 2.2 per cent, pretty much a post-Second World War average for the country. Why has Britain's economy done so well, at least in relation to everyone else's? We can thank two sources. The consumer has propped up domestic demand by heavy borrowing and spending, and the government has upped spending to finance its ambitious plans for public-sector services.
UK public debt is low, at least in relation to the size of the economy. It is, for example, well below the level set under the Maastricht treaty for eurozone member states. But the chancellor expects total spending in the current fiscal year to exceed revenue in future years. This is not in itself a problem, since Gordon Brown's self-imposed rules allow him to borrow in order to invest. The real worry is over what is known as current spending, which excludes long-term capital investment in railways, hospitals and so on. This must, according to the chancellor's rules, be no higher than revenue over the economic cycle as a whole. According to last autumn's pre-Budget report, the Treasury will achieve a current surplus in the years leading up to 2003-4 - the period covered by the most recent Comprehensive Spending Review - without raising taxes or cutting spending. Analysts are less confident the circle can be squared in the years after that. Will the chancellor raise taxes? The government has staked its reputation on improving the quality of public services. To do this, it has so far felt it necessary to spend more money. If it increased public spending in line with the expected growth in national income in 2004-5 and 2005-6, independent analysts estimate it would have to increase taxes by about £5bn. Increasing spending in these years by the same rate as projected for 2000-1 to 2003-4 - by 4.3 per cent a year - would cost £7bn. These calculations assume that Mr Brown will want to bolster his reputation for prudence by keeping the same margin for error as in the previous two Budgets - a medium-term current surplus of about 0.7 per cent of gross domestic product.* Having concentrated on milking further tax revenue from business in its first term, the government is likely to look to households during this term. The chancellor has pledged not to raise the basic and higher rates of income tax. One likely tax-raising device would be to abolish the upper earnings limit for national insurance contributions - currently set at about £30,000. Making everyone earning above this limit pay national insurance too would raise about £6bn. An alternative - raising workers' existing national insurance contributions by 1 percentage point to 11 per cent of earnings - would raise about £3.3bn.
The Treasury has so far been pretty tight-lipped about how it would raise taxes, but comments by government officials suggest a careful preparation of public opinion for tax increases. The chancellor's proposals are contained in the Budget resolutions, which are tabled after his speech. These are discussed over several days in the House of Commons. Once agreed, they form the basis of the Finance Bill, which will bring them into law. As with any other piece of legislation, changes can be made to the initial proposals before the Bill is passed. Resolutions which vary or amend existing taxes can be given immediate effect, as is often the case with changes in excise duties. Isn't April 17 late for a Budget? This is the latest Budget since 1961. Mr. Brown's absence from the Treasury following the death of his baby daughter combined with an early Easter, meant the Budget, normally in March, would be held later. While Budgets have more recently been held in March there is no reason why the Budget cannot be held after the start of the financial year. Since 1950 there had been 21 April Budgets and before 1978 it was usual practice to hold them in April. How does the Budget differ from the pre-Budget statement? The pre-Budget statement is given in the autumn (last year on November 27) and acts as a preview to the actual Budget, enabling feedback on proposals to the Treasury. Ideas laid down in the pre-Budget statement do not necessarily find their way into the Budget document. The pre-Budget reviews the progress of the government's long-term economic and fiscal strategy and objectives. But hasn't there always been an autumn financial statement? Traditionally, yes. In the past the government gave an autumn statement on public spending figures and a Budget for taxation in the spring. In 1993 the Conservative chancellor Norman Lamont combined the two statements into a unified Budget intended to be delivered late in the year. The relative merits of different systems are periodically debated, but broadly the movement is towards simplification and greater transparency. A green Budget is any Budget that is drawn up as part of a consultation process. Gordon Brown's first pre-Budget statement in November 1997 was a green Budget. The most famous independent green-Budget in the UK is drawn up by the IFS (Institute for Fiscal Studies) and is often inaccurately referred to as the green Budget. Not to be confused with an environmentally-friendly Budget. By tradition the chancellor of the exchequer carries the Budget Statement to the House of Commons in the famous red leather briefcase. He also has his photograph taken in front of 11 Downing Street. William Gladstone was the first chancellor to use a red leather case in 1860. The case was used for the next hundred years until James Callaghan requested a larger one. In 1997 Gordon Brown had a new one made by four trainees at Rosyth dockyard in Scotland. Where does the word 'Budget' come from? The term "budget" was in circulation in the mid-1700s and is derived from the French for "little bag". Cartoonists of the time often depicted politicians as quack doctors, plucking pills and potions from their "budgets" as they tried to convince the public that they knew how to cure the economy. What traditions are associated with the Budget? By tradition, chancellors may indulge in an alcoholic tipple during Budget speeches. This is the only occasion that alcohol is allowed in the chamber of the House of Commons and this privilege does not extend to any other member. John Major and Gordon Brown appear to be parliamentary teetotallers, having chosen to drink water during previous Budget speeches. Sir Geoffrey Howe chose a gin and tonic, whilst Denis Healey preferred brandy and water. Kenneth Clarke opted for straight Glenfarclas whiskey. How many chancellors have gone on to become prime minister? Nine to date, including Harold Macmillan who likened Budget Day to school speech day - a bit of a bore. *Figures based in part on calculations from the Institute for Fiscal Studies
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