HM Treasury

UK economy

Fiscal Policy

Introduction 

The Government’s fiscal policy framework, together with the monetary policy framework, provide 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:

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.

The 2009 Pre-Budget Report set out details of how the Government is strengthening the fiscal framework through the Fiscal Responsibility Act.

Evolution of the Fiscal Framework

Since the establish the fiscal framework in 1997 The Government’s fiscal objectives have been:

The Government adopted two fiscal rules as a means to deliver these objectives, set over an economic cycle to give fiscal policy the flexibility to support monetary policy and smooth the normal fluctuations in the path of the economy:

Over the economic cycle from 1997-98 to 2006-07, the fiscal framework supported the Government’s delivery of its fiscal policy objectives of sound public finances over the medium term and supporting monetary policy in the short term, and the fiscal rules were met.

In response to unprecedented shocks, the Government adopted the temporary operating rule at the 2008 Pre-Budget Report to allow significant flexibility in the operation of fiscal policy during the recession. It facilitated an effective and necessary response to the downturn, while signalling a clear commitment to fiscal sustainability yin the medium-term.

With economic conditions beginning to normalise and the economy forecast to emerge from recession by the end of the year, the Government believes it is now appropriate to strengthen the fiscal framework. Therefore, the Government announced details of the new Fiscal Responsibility Act alongside the 2009 Pre-Budget Report.

Back to top