EVERYTHING YOU WANTED TO KNOW ABOUT THE BUDGET BUT WERE AFRAID TO ASK

OFF BEAT BUDGET FACTS

1. The word “budget” is from the Latin bulga, meaning a little pouch, the word "budget" began to be used in the 18th century as a word for “wallet”.

2. One chancellor, George Ward Hunt, forgot his speech at home. According to urban legend, he opened his despatch box at the Commons in 1869 only to realise it was empty.

3. Chancellor Sir Geoffrey Howe, named his dog Budget.

4. Controlling the supply of public money to the government has been one of the main functions of Parliament since its earliest days. The first version of Magna Carta, issued in 1215, made it illegal for the king to levy taxation without the “general consent of the realm”, to be obtained by summoning “archbishops, bishops, abbots, earls, and greater barons” to come together and decide whether to assent to it.

THE PROCESS…

WHAT WE ALL KNOW:

The Budget is a statement made by the Chancellor to MPs in the House of Commons, presenting the government’s plans for the economy. It is largely cantered on how to raise money through taxation, although does spend some time on spending plans.

WHAT FEWER PEOPLE KNOW:

The economic and fiscal outlook is published by the Office for Budget Responsibility (OBR) on the same day as the Budget. This is an independent analysis of the UK’s economic situation.

The Treasury also publishes a report alongside the Budget, with further detail on the rationale and the costing of measures announced.

Timeline

1.     Budget (on the day)

2.     OBR Report (on the day)

3.     Treasury Report (on the day)

4.     MPs asked to approve immediate changes (on the day)

5.     Ways and Means Approval & Finance Bill (A few days after)

After the Budget statement, MPs may be asked to approve immediate changes to some taxes.

That’s why some changes take place immediately.

There is then a debate in the Commons, normally lasting four days. After this, MPs are asked to agree to ‘ways and means’ resolutions to provisionally approve tax proposals. Finally, a Finance Bill to give permanent legal power to the tax proposals in the Budget’s proposals is introduced.

WHAT TO DROP INTO CONVERSATION

Income tax is a ‘temporary tax’. It was first introduced in 1799 by William Pitt the Younger as a temporary wartime tax to fund the Napoleonic Wars. It was abolished and reintroduced several times, always described as “temporary.” By 1842, Sir Robert Peel reintroduced it again as a temporary measure—yet it has remained ever since.

WHAT IS DIFFERENT ABOUT HOW WE DO BUDGETS FROM OTHER COUNTRIES?

The budget is a big drama and as a journalistic news event – it is great. As a way of organising the country’s finances or discussing how they should be organised, it arguably could be better to do away with the drama and haver a slower more discussive process. That is how they do it in some other countries.

In Britain, the budget is agreed within the government and then passes the House of Commons and the House of Lords. So, it comes to Parliament as a fait accompli. It is done and dusted and MPs have a binary decision: to accept it or reject it and probably see the government fall as a result. There is no discussion or room for negotiation.

This is so much part of the way we do things, it is not often mentioned that this is not the way everyone does it. While British budgets represent the end of months of negotiation, U.S. budgets are just the beginning.

American budgets are like a layer cake, according to a metaphor drawn by the Brookings Institute.

1: The top layer consists of partisan measures that stand “a snowball’s chance in hell of making into it law.”

2: The second layer of the budget cake contain areas for common ground and compromise.

3: The third layer has largely been agreed to and is expected to pass.

Whereas, the UK has a single Budget Day, the U.S. has a multi-month series of negotiations, gestures, threats, and deals. “Technocrats prefer the former; small-d democrats the latter” says the Brookings Institute.

Even the House of Commons library research paper claims that “Parliament does not perform well compared with international best practices when it comes to financial scrutiny”

THE BIGGEST MISUNDERSTANDING ABOUT THE BUDGET

Although the word ‘budget’ is barely ever out of the mouths of news reporters and newspaper columns, it does not do what most people think it does. In fact, it only does about half of what people assume.

People generally think the budget sorts out the all the government’s finances for the next year.  

In fact, it is only one part of that process and there are equally important events which receive much less attention.  

The Spending Reviews sets the government’s spending plans for the medium term. If we want to know what the government is prioritising, where it wants to spend money and what it wants to achieve for the people and the country, this is all contained in the Spending Review. The Chancellor intends to hold them every two years and they lay out the plan for spending for at least the next three years.

The usual process for a Spending Review is that the Chief Secretary to the Treasury asks all government departments to prepare bids for what they feel they need to complete their plans. Over the following months, departments negotiate with the Treasury to come up with a final allocation. Eventually, the Chancellor announces their decision of what gets money and what doesn’t in the Spending Review.

The Budget outlines how it will achieve/fund the goals of the Spending Review. The budget is held every year. So it focuses more on economic forecasts and taxation measures.

In practice there is however, some overlap and the Chancellor often announces some changes to spending, updating or changing plans set in the previous Spending Review.

One of the defining characteristics of the UK Budget process is, according to the House of Commons own research briefing that the “UK Parliament is unusual in having no role at all in shaping the Budget before it is officially presented.”

BUDGET LEAKS AND WHAT YOU NEED TO KNOW

There have been a huge number of so-called budget leaks. But this is almost certainly more organised than it appears. Leaks, I strongly suspect, are not actually leaks but authorised tests of public opinion. It would make sense, after all, for politicians who want to do something unpopular, to test what the reaction would be, if they indeed make the suggested policy change.

A few weeks ago, it was absolute orthodoxy that the government would break its election promise and raise income tax. I suspect strategically leaked proposals were sent out to check just how bad the reaction would be. As a result you could barely move for the news about a failing government and it appears that the government might well have reacted to that, and now all of a sudden as a result of other leaks, it is absolute orthodoxy that they won’t raise break their core election promise in any straught forward and obvious way.

The truth is that leaks can in this case, be a responsible strategy to prepare the nation and financial markets for what is to come. You might think of them as a replacement for formal debate and negotiation over the budget policies. Think of it as a Wikipedia type approach in which you put some ideas out there and they are then modified informally through the feedback of thousands of responses – the WikiBudget kind of approach.

Why I say that approach can be helpful is we can see what happens when the budget contains too many surprises. The Liz Truss/Kwasi Kwarteng budget debacle of 2022. Bond markets had their breath taken away by tax cuts that didn’t come with spending cuts and the suggestion there might have to be a big rise in borrowing.  The more considered approach is now not to scare the horses or spook the markets by preparing them with leaks and prevent dramatic and volatile reactions to the budget.

Small Beer Leaks

Whether part of a bigger plan or not, there certainly seems to be a huge rise in leaks. It certainly feels to me as if this is me of the most leaked/previewed budget of recent times. Compare that to what 2013 when the then Chancellor George Osborne, was reported to be embarrassed. because of the leaking of his bear duty cuts only 30 minutes before the speech, with the headline ‘Thing Can Only Get Bitter’ These days that leak would be small beer indeed, if you’ll pardon the pun.

SO WHAT IS GOING TO HAPPEN

If the budget doesn’t break any major election promises – it’s likely to be a creeping squeeze on taxpayers, tightening from all sides.

1: Tax Raid on Salary Sacrifice Schemes.

This is how the scheme works:

·      Instead of paying pension contributions from your take-home pay, you formally agree with your employer to reduce your gross salary by a chosen amount.

·      The amount you sacrificed is paid directly by your employer as an employer pension contribution.

·      Because your salary is lower, you and your employer both pay less NI.

The plan would reduce the amount of money people can sacrifice from their pay cheques to put in their pension pots without paying national insurance.

Around 5 million basic-rate taxpayers currently benefit from salary sacrifice schemes for their pension contributions and a cap could bring many of them into the potential Budget change, especially if it was set low. 

At the moment national insurance is charged at 15% for employers and 8% on earnings less than £50,270 and 2 per cent on income above that. Introducing national insurance payments on pension contributions could raise the cost of businesses and employees and could discourage people from saving more for their pensions.

2: Threshold Freezes.

They have been in place since 2021. You freeze the level at which people start paying more tax, That way, more people get pushed into higher tax brackets and you get more taxation from them without having to raise the actual tax rates. It’s called Fiscal Drag because people are dragged into higher tax brackets when their salary rises in line with inflation and they end up being out into a higher tax bracket even if their real income (inflation adjusted) is unchanged.  

3: Mansion Tax

There is widespread talk of a new property tax. There are roughly 160,000 homes in the UK worth £2million or over, according to Zoopla. This equates to 0.6 per cent of all homes. 

If there was a 1% annual tax on homes, that would mean owners of a £3million property would face a bill of £10,000 every year.

4: More Generous Child Benefit

There is a widespread expectation that the Chancellor will get rid of the two-child benefit cap first brought in by the Conservatives. In most cases, since 2017, parents have only been able to claim child tax credit and universal credit for their first two children, if they were born after April 2017. It's thought that this cap may now be removed.

5: Cut to Cash ISAs

There is talk that the Chancellor might cut the amount you can put into Cash ISAs to encourage more investment into the stock market. You can currently put £20,000 each year into a cash ISA and the talk is that this might be reduced to £10,000

6: More Tax for Electric Cars

As more people move to electric cars, the government gets less tax from petrol sales. The rumour is that to replace this lost revenue they might introduce a per-per-mile tax on EV drivers.

7: Rail Fares Freeze

In a move to please many commuters, it is rumoured that the government may freeze regulated   rail fares in England for the first time in 30 years. Rail fares and transport policy in Scotland and Wales are devolved matters to a significant degree.

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