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justice, and finance and central services. To guide aspects of budget processes, the Scottish Parliament adopted a Public Finance and Accountability (Scotland) Act in 2000.15 It provides a legal framework for public resources and finances (including payments out of the Scottish Consolidated Fund) and specifies the responsibilities of Audit Scotland and Accountable Officers. Most resources for the Scottish budget come from a block grant appropriated in the annual budget of the United Kingdom. The Scottish Parliament is solely responsible for the allocation of the Scottish budget, including making transfers to its councils (local governments). It also has the power to vary basic income tax rates in Scotland, although at least until 2004, it had chosen not to exercise this power.

A different situation prevails in Wales, which does not have full legislative authority, where the Assembly is only empowered to adopt secondary legislation needed to meet distinct Welsh needs. Thus, although the Assembly for Wales adopts an annual budget, it does not have a public finance and accountability law as in Scotland. However, it has adopted Local Government (Wales) secondary legislation.

Throughout the United Kingdom, local governments are run by locally elected councillors. In some cases there are a number of tiers of local government, each with different responsibilities. Local government acts and other United Kingdom legislation specify the statutory functions of local authorities. Local authorities prepare and approve their own budgets, which are funded in part by local property taxation and by other local incomes such as fees and charges for services. Education, social services and housing are the largest locally provided services. Since expenditure assignments are well in excess of local revenues, local authorities are heavily dependent on central government transfers, voted in the central government budget.

4. Legal provisions for each stage of the budget cycle

The financial procedures of the United Kingdom consist of three largely separate but connected cycles. First, the budget cycle which sets out the broad financial details, the management of the economy and the authorisation of taxation. This culminates in a finance bill, which combines changes in tax policies with those in the administration of the tax system. Its passage puts into law the elements that the Chancellor outlines in his/her budget material. It represents the culmination of the revenue side of the process. Second, the estimates, which follow the budget, culminate with the authorisation of public spending. The spending framework is embedded in the fiscal framework, with fiscal rules approved by the government determining the overall spending envelope. Third, the reporting cycle, which provides

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information to Parliament and the public on what public money has been spent on, and how effectively it has been used.

4.1. Budget preparation and presentation by the executive

There is no framework law for guiding budget preparation, where H.M. Treasury plays a crucial role. A draft budget is prepared by H.M. Treasury and forwarded to Cabinet for approval (via a sub-committee). The Chancellor of the Exchequer presents the budget to the House of Commons in a formal speech on “budget day”. The tax measures announced in the budget are traditionally introduced in the House of Commons in a single, comprehensive finance bill, which is published some time after budget day.

4.1.1. Institutional coverage of the budget

The expenditure estimates of the draft budget cover the use of resources and the cash needs of all central government departments (including agencies under departments), the two houses of Parliament, the NAO, the Ombudsman, the Electoral Commission, transfers to local governments (including to the devolved Assemblies in Scotland and Wales and local councils in England), hospitals and other healthcare organisations, and some NDPBs. The institutional units covered in the estimates are decided by H.M. Treasury, not by statute.

4.1.2. Extrabudgetary funds and earmarking of revenues

Unlike some countries, pension and social security funds are included in the budget. The annual supply estimates include the net resources for various unfunded public pension schemes, including those covering teachers, NHS workers, the judiciary, the armed forces, and civil servants. These schemes derive their funds from the Consolidated Fund. The detailed estimates include

– as “non budget” outlays – government expenditure funded from nonConsolidated Fund sources, especially the National Insurance Fund (NIF). The various regimes for social security benefits are governed by various laws, especially the Social Security Act 1986 (which provides the government with extensive powers to make regulations, including for contributions paid by employers and employees), the Contributions and Benefits Act 1992, and various pension acts. Thus, although the NIF has separate statutory authority, its resource needs are shown explicitly in the annual budget. These greatly exceed net cash needs from the Consolidated Fund, since most funding is from contributions paid into the NIF.

In contrast, the financing and accounting of trading funds is outside the system of resource estimates and accounting. It is expected that a trading fund will entirely cover its costs by charging for the service it provides (see Government Accounting, s. 7.2 for detail). For each department the annual

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estimates of expenditure also provide authorisation to retain certain income in aid of spending. This is known as “appropriations-in-aid” (see below). However, Parliament approves these net resources.

4.1.3. Definition of budget aggregates

Aggregate revenues, expenditures and fiscal balance are not defined in the law. Under the Finance Act, 1998 (s. 56), the contents of any documents that H.M. Treasury lays before Parliament must conform to relevant provisions of the Code for Fiscal Stability, which is also drawn up by the Treasury (s. 55). Thus, by law, H.M. Treasury is given full discretion to define the key budget aggregates. The annual financial statement and budget report (FSBR) and annual economic and fiscal strategy report (EFSR) show budget aggregates used by H.M. Treasury for budget preparation and monitoring of the overall fiscal situation. Total revenues and expenditures conform to revenues and expenditures as defined in national accounts – the ESA 1995 (EUROSTAT, 1996).

In budget reports such as the FSBR, a distinction is made between current and capital budgets, in part so as to be able to monitor the fiscal rules (see below). Key aggregates monitored closely are:

Current budget balance (= current receipts minus current expenditures inclusive of depreciation)

+ Net investment (= gross investment minus asset sales minus depreciation) = Net borrowing.

For expenditure control purposes, H.M. Treasury has defined various expenditure aggregates, which have varied over the past few decades (Parry and Deakin, 2003). Since 1998, H.M. Treasury has controlled expenditure by two main aggregates: the departmental expenditure limit (DEL) and annually managed expenditure (AME). DEL is spending that is planned and controlled for three years in biennial spending reviews. AME is expenditure that cannot reasonably be subject to firm, multi-year limits in the same way as DEL. It includes social security benefits, local authorities’ self-financed expenditure, central government gross debt interest, payments to EU institutions and some non-cash items.

Total managed expenditure (TME):

= DEL + AME = Current expenditures + depreciation + net investment.

4.1.4. Fiscal rules

Two fiscal rules have been defined and actively used by the government since 1997. Parliament has never adopted a statute to endorse the two rules, which are contained in the government’s 1998 EFSR (see www.archive.officialdocuments.co.uk/document/cm39/3978/chap3.htm#fiscal). The first rule is a “golden rule”: it requires over the cycle that the government will borrow only to invest

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and not to fund current spending. Second, the sustainable investment rule requires that public sector net debt as a proportion of GDP will be held at a stable and prudent level – currently defined as below 40% of GDP over the economic cycle. H.M. Treasury is responsible for defining and measuring the concepts, such as “investment” and “net debt”.

4.1.5. The timetable for budget preparation and presentation to Parliament

The timetable for the preparation of revenue and expenditure estimates, and the fiscal strategy is at the discretion of the Cabinet and H.M. Treasury. The only date written into an official document to guide Cabinet and/or the Treasury is that found in the House of Commons Standing Orders, namely 5 August. This is the last day on which the expenditure estimates debate in the House of Commons is to be concluded. In practice Cabinet approves the budget shortly before the Chancellor’s budget day speech, which in recent years has been held in March or April.16

4.1.6. Approval process within the executive

The budget approval process within the executive is not laid down in law. H.M. Treasury’s Budget Directorate sets the agenda and guidelines for technical discussion of departmental demands for money for the upcoming year. The draft budget is approved by the Cabinet Committee on Expenditure, which is chaired by the Chancellor of the Exchequer, then endorsed by the Cabinet as a whole. As from the 1990s, H.M. Treasury’s management and control of the public expenditure system (PES) became more formalised. Internal rules and procedures may be found in Government Accounting.

4.1.7. Documents to accompany the budget law

There is no legal obligation to present analytic budget documents to accompany draft annual budget laws, that is, finance acts, consolidated fund acts and appropriations acts. The adoption of these laws – at nonsynchronised times for revenues and expenditures – is a legal formality that endorses the government’s annual budgetary decisions. In contrast, the law requires H.M. Treasury to prepare documents to accompany the Chancellor’s budget speeches. The discussion below relates to these documents.

Medium-term macroeconomic framework and fiscal strategy. Under the Finance Act, 1998 (s. 156), for each financial year, H.M. Treasury (not the Chancellor of the Exchequer) is required to lay before Parliament a pre-budget report (PBR); and a debt management report. In addition, H.M. Treasury publishes the annual FSBR and EFSR. These are not required by the Finance Act.

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Under the 1998 Act, H.M. Treasury (not Parliament) decides on both the content of the documents and the occasions on which those documents are laid before Parliament. The CFS provides the framework for the Treasury (s. 155, Finance Act 1988). Technically, the code itself is not a law since it was not approved by the Lords (it formed part of the Finance Act 1998 which, as a money measure, was not considered by the Lords), although it was approved by resolution in the House of Commons. The CFS requires the government to state and explain its fiscal policy objectives over the life of the Parliament, in conformity with the principles of the code. These objectives, and the accompanying operating rules, shall be restated in each budget (s. 9, CFS). The code also sets out the conditions under which the government may change its fiscal policy objectives and operating rules (s. 11).

The code includes some details on the contents of the various reports. H.M. Treasury is required to publish the PBR at least three months before presentation of the main budget. Only one PBR is required each year, even if there is more than one budget. The PBR is consultative in nature – it provides proposals for significant changes in fiscal policy under consideration by the government. The PBR is also required to include an economic and fiscal projection and an analysis of the impact of the economic cycle on the key economic aggregates.

The FSBR must be published by H.M. Treasury at the time of the budget. Minimum requirements are specified in the CFS (ss. 18, 20-25). These include economic and fiscal projections and an explanation of significant fiscal policy measures introduced in the budget. The projection period is specified to be not less than two full financial years following the date of publication (which means two years beyond the budget year), as well as the publication of comparative data for key fiscal aggregates covering the two previous years.

The EFSR is also required to be published annually by H.M. Treasury, usually (but not necessarily) at the time of the budget. The CFS specifies that the contents of the EFSR include:

●The government’s long-term economic and fiscal strategy, including any long-term objectives for key fiscal aggregates.

●An assessment of recent short-term outcomes against this long-term strategy.

●The consistency of the short-term outlook and the long-term strategy with European commitments.

●Illustrative projections of the outlook for the key fiscal aggregates for a period not less than the next 10 years, based on plausible assumptions, so

as to shed light on the intergenerational impact and sustainability of fiscal policy.17

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●Analysis of the impact of the economic cycle on key fiscal aggregations, including estimates of the cyclically adjusted position.

For the debt management report, the CFS specifies that the government shall report annually on the structure and cost of government debt, giving sufficient information to allow the public to scrutinise the conduct of its debt management policy. The CFS also specifies that the government shall set remits for its agents in the annual debt management report, including a forecast of net funding through National Savings, the overall size of the gilts issuance programme, the planned maturity structure, the proportions of index-linked and conventional gilts, and the gilt auction calendar.

New measures versus existing expenditure policies. There is no law requiring a distinction between new and current programmes. No new service can attract resources without Parliament voting the resources through the supply procedure. The CFS requires the FSBR to explain significant fiscal policy measures introduced in the budget and, if necessary, how these measures restore the path of the public finances to a position consistent with fiscal policy objectives and operating rules, and European commitments.

Performance-related information. Neither statute law nor the CFS requires programme performance indicators to accompany budget submissions to Parliament. However, since 1991, each department has been providing Parliament with annual reports that outline not only recent past activity, but also short-term future expenditure plans. The new government of 1998 renewed the emphasis on performance, given the identified need to improve the provision of public services. The government required each department to prepare a public service agreement (PSAs) that lay out the aims and objectives of each department as well as performance indicators. The government’s review in 2000 resulted in revised PSAs. Emphasis was given to departmental outcomes, including executive agencies’ contribution to such outcomes. These are specified in service delivery agreements (SDAs), which are more detailed documents to support the outcome-oriented PSAs (Ellis and Mitchell, 2002). The PSAs and SDAs are not legally binding documents. As in other areas of budget management, H.M. Treasury plays a dominant role in providing oversight.18 The NAO is responsible for validating the data systems used to report progress against the PSAs.

Tax expenditures, contingent liabilities and fiscal risks. The CFS requires that the fiscal projections contain “an analysis of risk surrounding the economic and fiscal outlook, including government decisions and other circumstances that have still to be quantified with certainty, other material contingent liabilities and an indication of past forecast errors for key fiscal and economic aggregates”.