What future for the UK’s medium-term budgeting system?

In bringing down its 2010-11 budget, the British government has been subject to strong criticism for failing to back its targets for medium-term fiscal consolidation with specifics on which areas of public spending will be cuts in order to achieve these targets. Critics say that the government should have conducted its triennial Spending Review – due this year – in order to flesh out these details. This raises a key question: what is the future of the UK’s system of fixed MT ministry budget ceilings?

Under the British medium-term budgeting system, which has operated throughout the tenure of the Labour government, ministries have been told every three years what budgets they would receive for the coming three years (other than in respect to a subset of uncertain expenditure covered under the so-called Annually Managed Expenditure). The distinctive feature of this system has been the commitments given to ministries about medium-term funding. This differs from predominant international practice in medium-term budgeting, in which medium-term ministry ceilings are purely indicative, and subject to confirmation (and variation) in each annual budget. However, in recent times the UK approach has won over more countries, including France and Austria.

The last British Spending Review was conducted in 2007, and one is due this year. In one sense, the criticism of the government is unjustified. The Spending Reviews in 2007 and 2004 were conducted after the budgets in those years. This is logical, because they cover the three subsequent years (e.g. the 2007 covered the years 2008-09 to 2010-11). It is equally true, however, that credible fiscal “exit strategy” from the crisis demands specifics about tax and spending measures. Politically, of course, no government facing an election within a couple of months is going to outline the specifics of where the pain will fall.

The big question is, therefore, what will happen to the current MT budgeting system after the election. The Labour government’s system was introduced and operated in extraordinarily easy fiscal times. The main decisions in the early years were about how to allocate big increase in spending. Now that has all totally changed. The question is mapping out severe cuts. Will the system survive? The question remains completely open.

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