Fiscal policy in the UK

Introduction
Key documents on the fiscal framework
Fiscal policy analysis
Long-term fiscal policy
Trend Growth
European Fiscal Issues
Links to Outside Organisations Relevant Publications
          International Monetary Fund
          Institute for Fiscal Studies
          National Audit Office

Introduction

The Government has taken significant steps to strengthen the framework for fiscal policy since taking office.  Fiscal policy is now directed firmly towards maintaining sound public finances over the medium term, based on strict rules. Where possible fiscal policy supports monetary policy over the economic cycle. This approach, together with the new monetary policy framework, provides the platform of stability necessary for achieving the Government's central economic goal of high and sustainable levels of growth and employment.

Central to the fiscal framework are five principles of fiscal management:

• transparency in the setting of fiscal policy objectives, the implementation of fiscal policy and the publication of the public accounts; 
• stability in the fiscal policy-making process and in the way fiscal policy impacts on the economy; 
• responsibility in the management of the public finances; 
• fairness, including between generations; and 
• efficiency in the design and implementation of fiscal policy and in managing both sides of the public sector balance sheet.

These principles were enshrined in the Finance Act 1998 and in the Code for Fiscal Stability, approved by the House of Commons in December 1998.  The Code explains how these principles are to be reflected in the formulation and implementation of fiscal policy.  In addition, the Code requires the Government to set out its fiscal policy objectives and the rules by which it intends to operate fiscal policy over the life of the Parliament.

As set out in Budget 2004, the Government’s fiscal policy objectives are:

• over the medium term, to ensure sound public finances and that spending and taxation impact fairly both within and across generations.  In practice this requires that:
• • the Government meets its key taxation and spending priorities while avoiding an unsustainable and damaging rise in the burden of public debt; and
  • those generations who benefit from public spending also meet, as far as possible, the costs of the services they consume; and
    
• 
  over the short term, supporting monetary policy, by:
• • allowing the automatic stabilizers to play their role in dampening variations in economic activity (e.g. other things equal, when the economy is growing rapidly there will be higher tax receipts and lower social security payments.  These will help to moderate economic upturns and, therefore, stabilize the economy); and
  • where prudent and sensible, providing further support to monetary policy through changes in the fiscal stance.

The Government has also specified two key fiscal rules that accord with the principles. These are:

• 
  the golden rule: over the economic cycle, the Government will borrow only to invest and not to fund current spending; and
  
• 
  the sustainable investment rule: public sector net debt as a proportion of GDP will be held over the economic cycle at a stable and prudent level.
  

The fiscal rules provide benchmarks against which the performance of fiscal policy can be judged.  The Government will meet the golden rule if, on average over a complete economic cycle, the current budget is in balance or surplus.  The Chancellor has stated that, other things equal, net debt will be maintained below 40% of GDP over the economic cycle, in accordance with the sustainable investment rule.

In setting fiscal policy, the Government takes a deliberately cautious approach. This prudent approach is implemented, among other things, by basing public finance projections on cautious assumptions for a number of key variables including the economy's trend growth rate, levels of unemployment and oil and equity prices.

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Key documents on the fiscal framework

The following documents are available in Adobe Acrobat Portable Document Format (PDF). If you do not have Adobe Acrobat installed on your computer you can download the software free of charge from the Adobe website.

For alternative ways to read PDF documents and further information on website accessibility visit the HM Treasury accessibility page.

PDF file of Core Debt: An Approach to Monitoring the Sustainable Investment Rule (April 2002) (84KB): from Budget 2002 on, the Government will publish figures for a measure of public sector net debt excluding cyclical fluctuations.  The concept is called 'Core Debt' reflecting the fact that its evolution is determined primarily by borrowing for long-term investment rather than as a result of cyclical movements in the economy.  This paper sets out the details of how core debt is defined, together with an explanation of the methodology used to calculate it.

PDF file of Maintaining Economic Stability: Convergence Programme for the UK (December 2001) (289KB): report on macro-economic policy submitted in line with the Stability and Growth Pact

Reforming Britain's Economic and Financial Policy (2001): HM Treasury book, edited by Ed Balls and Gus O'Donnell, with foreword by Gordon Brown, setting out how the Government has reformed the macroeconomic policy framework in the UK.

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PDF file of Planning Sustainable Public Spending: Lessons from Previous Policy Experience (November 2000) (82KB): the history of public expenditure control in the UK has highlighted a number of problems with the way in which governments have traditionally approached the planning and management of resources. This paper describes these previous problems and how the new system, introduced in 1997, has learnt from them.

Analysing UK Fiscal Policy (November 1999): this paper describes the objectives of fiscal policy, the institutional framework to deliver them and analyses the interpretation of the main fiscal aggregates.

PDF file of Fiscal Policy: Public Finances and the Cycle (March 1999) (166KB) : this paper forms part of an ongoing assessment of the effects of the economic cycle on the public finances.  It updates earlier Treasury analysis and takes a more detailed look at Treasury estimates of potential output and the output gap.

PDF file of Fiscal Policy: A New Framework for Public Investment (December 1998) (54KB): this paper looks at the role of public investment and how it supports the government's strategy for stability and long term growth.

The Code for Fiscal Stability (November 1998): the Code for Fiscal Stability is designed to address past weaknesses in the fiscal policy framework.  In particular, it strengthens the openness, transparency and accountability of fiscal policy.  It improves the quality of information given to the public, the lack of which in the past was an important factor underlying policy mistakes.     
 
PDF file of Delivering Economic Stability: Lessons from Macroeconomic Policy Experience (November 1998) (106KB):  reviews past macroeconomic policy experience and draws lessons from this experience to inform the development of the new macroeconomic framework, which is designed to deliver economic stability. Economic stability helps businesses and people as well as Government to plan for the long term. It contributes to achieving the Government’s central objective of raising the economy’s trend rate of growth and achieving rising prosperity through creating economic and employment opportunities for all.

Fiscal Policy: Current and Capital Spending (June 1998): this paper discusses the rationale for the Government's two fiscal rules in the light of trends in current and capital spending and their interaction with the fiscal policy framework.

PDF file of Fiscal Policy: Lessons from the Last Economic Cycle (November 1997) (86KB): this paper sets out the key lessons that the present Government learned from the conduct of macroeconomic policy during the preceding economic cycle and outlines the ways in which these lessons contributed to the design of the current fiscal framework.

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Fiscal Policy Analysis

End of year fiscal report (December 2003): first published alongside the 2002 Pre-Budget Report, is central to the Government’s retrospective reporting and analysis of fiscal issues and builds on the information already published in the Pre-Budget Report and the Budget. this year’s report looks at trends in the public finances and fiscal policy in 2001-02 and 2002-03, analysing:

• performance against he fiscal rules and fiscal policy objectives; and 
• differences between forecast and fiscal outturn for the year-ahead forecasts published in Budget 2001 and Budget 2002.

Long term Fiscal Policy

Long term public finance report – Fiscal sustainability with an ageing population (December 2003): this report provides a comprehensive analysis of long-term economic and demographic developments, and their likely impact on the public finances.  The Government believes sustainable public finances are a pre-requisite to achieving high and stable rates of economic growth, which in turn is essential in guaranteeing that everybody shares in the growing prosperity of the country.

The Long-Term Public Finance Report : this report provides a comprehensive analysis of long-term economic and demographic developments, and their likely impact on the public finances. This report was first published with the 2002 Pre-Budget Report and it is intended that the Report will continue to be published annually with the Pre-Budget Report.

PDF file of Country Fiche on UK Pensions Projections (October 2001) (174KB): this paper describes the UK pension system and measures which have been taken to ensure its long term sustainability.

Trend Growth

Estimates of trend growth are important in many areas of government economic policy making.  They allow the government to monitor how effective policies are in raising the level of the trend output and the trend growth rate.  Trend growth is also central to the government’s fiscal rules.  These papers set out the framework used by the Treasury to determine the trend rate of economic growth and discusses the important role it plays in the conduct of macroeconomic policy. Using more recent data and an improved methodology the April 2002 paper concludes that the neutral estimate for trend growth in the UK economy is 2³/₄ per cent.

PDF file of Trend Growth - Recent Developments and Prospects (April 2002) (386KB)
Trend Growth - Prospects and Implications for Policy (November 1999)

European Fiscal Issues

Stability and growth pact – a discussion paper (March 2004)

Links to Outside Organisations’ Relevant Publications

International Monetary Fund

PDF file of United Kingdom 2003, Article IV Consultation (March 2004)
Experimental Report on Transparency Practices: United Kingdom (1999)
Code of good practices on fiscal transparency (1998)
Manual on Fiscal Transparency (1998)

Institute for Fiscal Studies

PDF file of the IFS green budget (January 2004)
PDF file of The IFS Green Budget Chapter 3: 'Improving Public Services?' (January 2002)

National Audit Office

PDF file of the NAO audit of assumptions for Budget 2004
PDF file of the NAO audit of assumptions for Budget 2003
PDF file of the NAO audit of assumptions for Budget 2002
PDF file of the NAO audit of assumptions for Budget 2001
PDF file of the NAO audit of assumptions for Budget 2000

PDF file of the NAO audit of assumptions for Pre-Budget Report 2003
PDF file of the NAO audit of assumptions for Pre-Budget Report 2002
PDF file of the NAO audit of assumptions for Pre-Budget Report 2000
PDF file of the NAO audit of assumptions for Pre-Budget Report 1999

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