The Budget Burden

Annual Budget exercises are a tradition of British political life and are common across the many countries of the English-speaking world. Despite this universality, the practice of British-style Budget-making is a sign of misgovernment or, at any rate, of government failure. 

Whatever else may be said about George Osborne’s third Budget on March 20, it was not a masterpiece of concision. The main drama of the speech itself ran into a few thousand words, while the supporting cast of documents and analyses contained as much material as several doctoral theses. In a truly successful nation the finance minister ought to be able to give an identical statement year after year: “The plans I announced a year ago have been fulfilled more or less exactly. The budget is balanced and the public debt is under control. People complain about taxes, just as they complain about death. But — as Benjamin Franklin explained a long time ago — both are inevitable while governments and mankind exist, and governments spend money. The economy is expanding steadily and its growth is in line with that of public expenditure. I have no plans to change taxes in either their form or level.”

Indeed, in a nation enjoying genuinely high-quality political leadership and public administration, the citizens would be able to plan their fiscal arrangements ahead for decades. Everything would be so predictable that people would not have to bother themselves about recurrent tax upheavals. And dare one say that, unlike the current lot who label themselves Conservative with a big “C”, a government under truly conservative statesmen and women would say that this stability was itself a great achievement? 

The puzzle is to understand why an annual Budget of the British type, with all the political and media fanfare, is thought to be necessary. Of course civil servants need to keep records of public expenditure and tax revenue, and the information must be published. Of course. But is all the associated hullabaloo necessary? Why should a Chancellor of the Exchequer who is forever changing things be regarded as superior to a Chancellor of the Exchequer who presides over such stability that he needs to do next to nothing?

One source of the trouble is historical. When England was a divine-right monarchy in the 17th century, the king could not cover the cost of defending his realm except by calling Parliament and asking it to raise revenue. The debates over the annual Budget therefore gave Parliament a means to check the monarch’s power and bring the executive under control. Theoretically, the same set of forces is at work nowadays. In reality Britain is a constitutional monarchy, in which the Queen’s own personal expenditure is a fleabite in the larger macroeconomic picture, and the executive and the legislature are increasingly indistinguishable. 

An alternative, and more modern, rationale for the once-a-year theatre of Budget day is provided by Keynesianism. According to an extreme version of that doctrine, the private sector is inherently unstable and the expenditure and tax revenues of the state must be varied annually to offset that instability and keep the economy growing steadily. According to this narrative, annual Budgets produce a “judgment” — technically, a change in the cyclically adjusted public sector financial deficit — which constitutes the cleanest measure of “fiscal policy”. The stance of fiscal policy is then taken to be a key determining influence on the economy over the next 12 months, when another Budget judgment emerges from the Treasury. That subsequent judgment influences the economy over the following 12 months, and so on. 

At one time — say, in the 1950s or 1960s — many well-informed people thought that the annual Budget palaver could be justified on Keynesian grounds. But in the last 30 years fiscal policy has played second fiddle to monetary policy, with the Monetary Policy Committee at the Bank of England now taking the most vital decisions on the price and quantity of money, and hence on macroeconomic policy broadly understood. The demotion of fiscal policy in macroeconomic policy ought to have been accompanied by a de-emphasising of the Budget in the political calendar, but that does not seem to have happened. 

In short, there is no compelling reason for an annual tax-changing event. The huge amount of fuss and bother that attends this event tells us that something wrong with how our country is organised. The centrality of “the Budget” in the British political system arises from the inability of modern governments to deliver a stable, predictable and sustainable financial framework in which people can make long-term plans for their lives and businesses.

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