How does the Budget process work and what was announced in this year’s Budget?
2.3.1 – The structure, role, and powers of the Executive
Last week saw the long-awaited first Budget of Andy Burnham’s government. On the whole, it did little to tackle the deeper spending and revenue problems facing the UK. Commentators have described it as a cautious Budget that eases the cost-of-living crisis around the edges. So how does the Budget work in the UK, and why have the Chancellor and Prime Minister settled on the policies they have?
What is the Budget?
The Budget is the UK government’s main annual statement on the public finances, delivered by the Chancellor of the Exchequer to the House of Commons. In a set-piece speech, the Chancellor sets out changes to taxes such as income tax, VAT, duties and business taxes, along with the government’s wider plans for the economy.
Tradition dictates that the Chancellor poses outside 11 Downing Street with the red despatch box before carrying it to the Commons. Until 2011, Chancellors used the same box that William Gladstone had carried in 1853, before it was retired because it had become too fragile.
Famously, the Budget is also the one occasion when the Chancellor is allowed to drink alcohol at the despatch box. Over the years, various tipples have been taken: William Gladstone favoured sherry with a beaten egg, Benjamin Disraeli brandy and water, Geoffrey Howe a gin and tonic, Nigel Lawson a white wine spritzer and Ken Clarke a glass of whisky. More recent Chancellors have tended to stick to water, as John Healey did.
What happens after the speech?
The Leader of the Opposition replies immediately; by long-standing tradition this falls to them rather than the Shadow Chancellor. Unusually, proceedings are chaired not by the Speaker but by the Chairman of Ways and Means, currently Dame Nusrat Ghani. This is a hangover from the days when the whole House debated taxation as the “Committee of Ways and Means”.
On the day of the speech, MPs vote on a motion allowing certain tax changes, such as changes to fuel duty, to take effect immediately. A debate of around four days follows, ending in votes on the full set of Budget resolutions. These are then turned into the Finance Bill, which puts most of the Budget into law and passes through Parliament over the following months.
How is the UK Budget different from most others?
It is a one-off showpiece shrouded in secrecy: In many countries, such as the US and Germany, budget negotiations are a very public affair, as different branches of government, and often different parties, argue them out in the open. In the UK, the measures are kept secret until the Chancellor announces them. Infamously, in 1947 the Chancellor, Hugh Dalton, revealed key details of his Budget to a journalist on his way into the Commons Chamber. They appeared in a London evening newspaper before he had finished his speech, and he resigned the following day.
It is almost never defeated: UK governments usually command a clear majority in the House of Commons, so they are almost always able to pass their Budget. This contrasts with the US, where failure to pass a budget (or a stop-gap “continuing resolution”) can lead to a government shutdown. The Budget is so central in the UK that a government defeated on it as a whole is treated as having lost a vote of confidence. This last happened in June 1885, when William Gladstone’s Liberal government was defeated on an amendment over increases to beer and spirits duties, and Gladstone resigned as Prime Minister.
The second chamber cannot block it: Most systems require both chambers of parliament to agree a budget, but the UK does not. By convention, the House of Commons has “financial privilege”, dating back to resolutions of 1671 and 1678 which declared that the right to grant money to the Crown belonged to the Commons alone. When the House of Lords broke this convention by rejecting Lloyd George’s “People’s Budget” in 1909, the resulting crisis led to the Parliament Act 1911, which limits the Lords to delaying money bills by just one month.
It is independently forecast on the same day: The Office for Budget Responsibility (OBR) publishes an official economic and fiscal forecast alongside the Chancellor’s statement. The government must share its plans with the OBR in advance, so the OBR can publish its assessment as soon as the speech ends. The OBR was set up in May 2010 by George Osborne, Chancellor in the Conservative–Liberal Democrat coalition, and placed on a statutory footing by the Budget Responsibility and National Audit Act 2011. Famously, in September 2022, Liz Truss’s government did not ask the OBR to publish a forecast alongside Kwasi Kwarteng’s mini-budget, which helped unsettle the financial markets. After Keir Starmer’s government took office, it passed the Budget Responsibility Act 2024, which requires any major tax or spending announcement to be accompanied by an independent OBR assessment.
What were the key considerations ahead of the Budget?
Before this year’s Budget, the government faced a number of key questions.
How much fiscal headroom was there? Fiscal headroom is the margin between the government’s forecast borrowing and debt and the limits set by its own fiscal rules. In effect, it is how much more the government can spend or borrow before breaking those rules. Former Chancellor Rachel Reeves is estimated to have left around £22 billion of headroom. However, rising inflation, driven in part by the conflict in Iran, has eaten into that buffer and limited how much the Chancellor could do.
What to do about rising borrowing and debt? UK government debt passed £3 trillion in September, and interest payments now cost around £100 billion a year, more than the government spends on defence. Borrowing more would push those costs higher still. It could also unsettle the bond markets, as the 2022 mini-budget showed: if investors demand higher interest rates to lend to the government, the cost of servicing the debt rises further and mortgage rates can follow.
How to help with energy bills? The energy price cap, set by the regulator Ofgem, limits what suppliers can charge households on standard tariffs for each unit of energy and for the daily standing charge. It is not a cap on the total bill. Cornwall Insight estimated the cap would rise by around 16% in January, taking a typical household’s annual bill to nearly £2,000. Andy Burnham has promised to tackle the cost of living, including through a cut to VAT on energy bills.
How to pay for defence? John Healey resigned as Defence Secretary in Keir Starmer’s government in June, saying it was not willing to spend enough on the military. The Defence Investment Plan published in May was left with a funding gap of around £4.7 billion. With growing concern about the threats posed by Britain’s adversaries, there is strong pressure for defence spending to rise sharply.
How to fund Burnham’s new pledges? On becoming Prime Minister, Andy Burnham made a number of significant pledges, including a new National Care Service and deeper devolution in England. A commission led by Baroness Casey is due to report next summer on how the National Care Service should be delivered, and Burnham has said a full plan will be put to voters at the next election. Large commitments like this may not take effect for years, but the government needs to start making provision for them now.
Would taxes go up, and on whom? Andy Burnham inherited Labour’s 2024 manifesto, which ruled out raising the three main taxes a Chancellor usually relies on (income tax, National Insurance and VAT), at least for working people. That left open the question of how Healey would raise extra revenue.
What was announced in the Budget?
The key announcements included:
- Forecasts: The OBR forecast growth of 1.2% this year and 1% in 2027, rising to between 1.6% and 1.8% a year from 2028. Debt interest costs are forecast to rise by £14 billion this year, and headroom against the fiscal rules stands at £15 billion in 2029-30.
- Energy support: A one-off £100 payment will go to 20 million households in council tax bands A to D to help with energy costs, at a cost of £2.6 billion.
- Standing charges: Gas standing charges will be abolished for 23 million homes.
- Energy VAT: The VAT cut on energy bills will be extended to July.
- Fuel duty: Fuel duty relief will continue, keeping taxes on petrol and diesel at the pump down.
- Minimum wage: The National Living Wage will rise by 3.9% to £13.21 an hour in April.
- Main taxes: There will be no change to income tax on earnings, National Insurance or VAT. However, tax rates on income from property and savings will rise by 2 percentage points from April 2027.
- Banks: The bank surcharge, an additional tax on bank profits, will double from 3% to 6% for 15 months from January.
- Defence cuts elsewhere: Government departments will be asked to cut their capital budgets by a further 1% to close the £4.7 billion gap in the Defence Investment Plan.
- Pensions: The Chancellor confirmed the changes to the pensions triple lock that Burnham announced at Labour’s conference in September. From April 2030, the state pension will rise by at least inflation or 2.5%, rather than the highest of inflation, earnings or 2.5%. The change is projected to save £15 billion a year by the end of the 2030s, helping to fund the National Care Service.
Why was the Budget so cautious?
Reaction to the Budget was mixed. The Leader of the Opposition, Kemi Badenoch, attacked it as lacking ambition. Speaking in the House of Commons, she said:
“Next year, under Labour, the tax burden will be the highest in our country’s history, and our benefits bill is going up by tens of billions of pounds because this Government have put welfare first. We are overspent, overborrowed, overtaxed and drowning in an out-of-control welfare system, and this is the Chancellor’s answer? It is simply not enough – not good enough, not strong enough, and not bold enough.”
There is no doubt that the Budget was cautious, but there may be good reasons for this.
First, money is exceptionally tight, and the manifesto limits what Healey can do about it. Some on the Labour left have called for a wealth tax on the very richest in society, and Burnham may yet prove willing to consider one. Doing so without a clear electoral mandate, however, would be extremely difficult.
Second, Burnham’s biggest decisions are not yet ready to be made. Plans for the National Care Service, defence spending and welfare reform all await reviews due in 2027, which made firm commitments difficult even if Burnham had wanted to make them.
Third, there is a sense that the current pressure on the economy may be temporary, driven by the international situation. This may explain the preference for one-off measures, such as the £100 energy payment, over longer-term spending commitments.
The real test of Burnham’s economic agenda, then, is likely to come not in this Budget but next year, when the Spending Review and the Casey Commission force the government to set out how it will pay for its ambitions. Commentators were carefully watching the Budget for signs of whether it suggested an early general election was likely. In reality, the Budget gave few clues of that. What it did not do, however, was discount the possibility completely.