Abolish the annual Budget

At the IEA’s Budget briefing yesterday I called for the annual Budget to be abolished – or at least slimmed down to a very brief statement. This echoes calls made by Anthony Evans in City A.M. and also by three highly-regarded tax academics in a recent IEA publication.

To many this would seem an absurd proposition. What would be the advantages?

Firstly, uncertainty is not good for the economy. The Budget matters to people and businesses. Huge resources are put into predicting the measures in the Budget, analysing the Budget and understanding its implications. The fact that the measures are developed under a cloak of secrecy and all announced in one fell swoop creates ‘big event regime uncertainty’ for economic agents. This is damaging.

Secondly, the Budget increases the power of the Treasury and distorts economic policymaking. The Budget has become the big event in which all things are announced – including things that should be of peripheral interest to the Treasury. Yesterday we had announcements about the planning system, long-term pension reform and infrastructure finance and provision. In previous years, the Budget has announced reviews into these areas and others – often successive reviews under Gordon Brown’s tenure. These major issues have only a tangential relationship with the financing of 2012-2013 government expenditure. Statements and legislation should be brought forward by the minister concerned, after discussion with cabinet and after clearing any necessary fiscal hurdles with the Treasury. The Budget has become a statement of ‘everything you need to know about economic policy’; it should not be.

Thirdly, the Finance Act also leads to bad tax policy. Heavy whipping, guillotined debates and the combining of discussions about tax policy with discussion of tax rates and government finances leads to bad tax legislation. If tax policy has to change, this does not need to be done in the annual budget. It can be laid before Parliament – like any other legislation – discussed (at length if necessary), put before a select committee and (importantly) be discussed and amended by both the Lords and the Commons. Our Budget is, in effect, an annual replay of the Dangerous Dogs Act pertaining to some of our most important pieces of legislation.

Finally, Budget day is one of the most important political days of the year. The media reaction does matter. Though Chancellors of the Exchequer are not nearly as effective in influencing the media coverage as they might hope, the temptation leads to appalling attempts at obfuscation. For example, if you listened to George Osborne on Wednesday, you would have thought that higher rate taxpayers were receiving 25% of the benefit from the raising of personal allowances – because that is precisely what he said. What he did not say is that he was suspending the annual statutory indexation of the higher-rate allowance again. This will cost higher-rate taxpayers about ten times as much as the gain that George Osborne said that they would receive from the raising of the personal allowance.

When it came to age-related allowances, there was a similar sleight of hand. My personal view is that both the main age-related allowances should be abolished as was proposed in Sharper Axes, Lower Taxes – Big Steps to a Smaller State. However, George Osborne referred to National Audit Office (NAO) and Office for Tax Simplification (OTS) reports that called for simplification. What he did not say is that the NAO report described not withdrawing them as income rises as ‘the obvious simplification’: quite contrary to the impression that Osborne gave. In other words, the NAO was suggesting extending the allowances, not scrapping them. And the OTS suggested a number of different approaches to reform. Not only that, Osborne says that he is ‘doing away with the complexity of the allowance’ for those reaching 65. Well, he is, in a sense, because he is doing away with the allowance itself! But that is not the impression he was trying to convey

If the annual Budget only focused on the tax rates and allowances that were being set in order for the government to fund its spending – together with any necessary statements about borrowing – the much smaller number of announcements could be properly analysed.

So, what should we replace the Budget with? 

  1. All tax legislation should be brought forward to Parliament by the Treasury and debated fully by both Houses and the relevant select committees. Occasionally, temporary legislation may need to by-pass this route.
  2. There should be a statement of public spending that details the departmental spending limits and taxation rates and allowances necessary to fulfil public spending obligations in March each year. Any details of government borrowing and its financing should be dealt with in the same statement if necessary. No other departmental matters should be brought to the House at this time.
  3. Specific spending on welfare benefits should be a matter for the relevant department, within its Budget, and the relevant levels should be put to Parliament and debated at an appropriate time by the appropriate minister.

Even most tax expenditures do not need to form part of the Budget. If, for example, BIS wishes to introduce an animated film tax relief, this should be treated as a BIS spending item which BIS would bring before Parliament. It would have to find some other aspect of spending to reduce to finance the relief (or negotiate a higher budget allocation the following year). The key issue is that the Treasury’s job is to finance the pre-agreed level of spending within government. Both the global level of spending and the method of financing should be announced at the same time because it is important to keep a link between spending decisions and how they are financed. However, we should remember that there are over 20 cabinet ministers and it is not necessary for one of those ministers to usurp the roles of the others whilst trying to pull the wool over the eyes of the very people who are financing the government’s spending through the payment of taxes.

The title of this article led me to believe you were suggesting abolishing state spending! Which would have been a much better article. The state taxes too much because it spends too much. There is not much point quibbling about the particular date the spending is announced. It would be far better to focus on the fact that spending must be drastically curtailed.

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