Philip Hammond’s u-turn on proposed changes to National Insurance Contributions was the latest in a growing list of Budget measures to be withdrawn in the face of a parliamentary and media backlash. Jill Rutter and Alice Lilly argue that the exceptionalism of the Budget process makes it vulnerable to poor policy making. They propose a number of possible improvements, including the introduction of a Budget cabinet committee and greater support for parliament in scrutinising tax policy.
On March 8 Chancellor of the Exchequer Philip Hammond stood up to deliver his first – and last – spring Budget. He was in such a relaxed mood that he joked that the last Chancellor to claim a spring Budget was his final one (Norman Lamont) survived only ten weeks after his speech. Within hours, the government was reeling as their backbenchers and the press denounced a change to National Insurance Contributions for the self-employed, a measure that raised the fiscally relatively trivial sum of £400m and had been welcomed by the overwhelming majority of fiscal experts as a sensible minor reform.
The measure survived only a week before Hammond was forced back to the Commons to announce he was dropping the change – for this parliament at least. The Financial Times added the NIC u-turn to the ever-expanding list (£) of Budget rabbits that turned into hand grenades when unleashed – and exploded in the face of their instigator.
So why does the Chancellor, one of the most powerful figures in government, advised by people seen (not least by themselves) as the government’s crack policy troops, keep stepping on political and policy minefields – while finding their room for manoeuvre ever more constrained?
Victims of process
In our report, Better Budgets, produced in partnership with the Chartered Institute of Taxation and the Institute for Fiscal Studies and published in January, we argued that the ‘exceptionalism’ of the Budget process made it particularly vulnerable to poor policy making.
Chancellors – and the Treasury – revel in the rituals of Budget day. The photocall outside No.11 replete with battered box. The hour-long slot to pronounce – and then watch the underprepared opposition leader struggle to land punches as they respond. The acres of coverage and guaranteed headlines. Nigel Lawson declared it a ‘fun day’, Ken Clarke ‘a spectacular pantomime’. Both Gordon Brown and George Osborne used it to set the political agenda in a far more telling way (after all, they had money to spend) than the Prime Minister was given air time to do.
But there is a downside. Budgets are major political events, and there is an incentive to fill the space available and have a surprise to announce. But they are also opportunities to announce a vast range of measures. One of the issues in recent years has been the sheer proliferation of changes, leaving taxpayers baffled, and risking poor quality legislation.
What is notable about Budgets are how exceptional the processes are around them. They are exceptional both within government and within parliament. And within government, the normal checks that policies have to surmount to be agreed are absent:
There is no collective discussion…
Most significant policies have to be signed off collectively – through write-rounds or after discussion in cabinet committees. During the Coalition, there were discussions in the so-called Quad about the Budget. But there is no tradition of collective discussion of the Budget. The cabinet only hears what is in the Budget on the morning, with documents already printed and ready to go. In 2016 Iain Duncan Smith cited as the reason for his resignation the fact that a measure he had accepted – on reducing Personal Independence Payments – was presented by the Chancellor as being used to pay for tax reductions for the better-off. David Cameron reportedly considered offering more collective discussion of the Budget as an inducement to stay. It seems implausible that in an earlier, more extended discussion of the Budget with cabinet colleagues someone might not have raised the point on the conflict with the manifesto NIC commitment made by the BBC’s Laura Kuenssberg.
But there are wider implications, beyond avoiding Chancellorial embarrassment or ministerial resignations. Tax plays a key role in achieving non-tax policy objectives. What the Chancellor decides to do in the Budget can reinforce or undermine other objectives. Other departments have to subject their policies to collective scrutiny. We think there should be more collective consideration of the Budget – perhaps through a small Budget committee. We could go further. In New Zealand the Finance Minister makes an early presentation to Cabinet on what he is planning to do.
…and weak internal disciplines
One of the problems with Budgets is that the Treasury is policy promoter – not policy challenger. So the normal external scepticism the Treasury applies to other departments’ policies is muted in internal debate. But for all spending policies there is another check. That is the fact that Permanent Secretaries are independently accountable to parliament for their department’s spending, as Accounting Officers – and can object if they think spending is irregular, improper, infeasible or poor value for money.
But however much a tax relief may be a substitute for an equivalent spending policy, the Treasury insists that it is a matter solely for ministers – as ‘policy’ and therefore outside any Accounting Officer rules. When the National Audit Office dared to start scrutinising the Treasury and HMRC’s management of tax reliefs, they received a warning shot from the then permanent secretary to the Treasury, Sir Nick Macpherson, and Lin Homer, Chief Executive of HMRC. But the NAO has returned to the issue, opening the way for scrutiny by the Public Accounts Committee.
Many tax measures have big price tags, and often offer poor value for money on any declared policy objective. A simple comparison exposes the bizarre asymmetry between tax and spend. It makes no sense for the Permanent Secretary at the Department of Culture, Media and Sport to be required to account for the VFM of the under £20m annual grant her department gives to support the film industry, while the Treasury permanent secretary sees no similar accountability for the £300m+ annual cost of the film tax credit.
With few internal checks, there is clearly a big role for external scrutiny from parliament – to act as a countervailing discipline.
Parliamentary scrutiny is scant
There is little ex-post scrutiny of tax measures. There are no tax specialists in the NAO and only a couple of reports to date on the management of tax reliefs – compared with relentless scrutiny of departmental spending. Parliament rarely goes back and looks at whether tax measures have achieved their objectives – tax measures were exempted from the general principle that there would be post-legislative review of all policy measures after five years. We think this is an area where the House of Lords Economic Affairs committee could be usefully deployed – without infringing on the Commons primacy on tax matters.
The Treasury is guaranteed a slot in the legislative programme for the Finance Bill every year. The House of Lords has a brief debate on principles – but no say over the substance of Finance Bill legislation. That is the sole purview of the Commons. That might point to more rigorous processes in the lower chamber. Instead the reverse is true. Much of the Finance Bill is highly technical – and impossible for most members of the annual Finance Bill Committee to engage with. Not only this, but Finance Bills are very long – the 2017 Finance Bill has more words than the three volumes of Lord of the Rings. But there are usually a few high profile and highly contentious measures. There scrutiny falls down because tax is a party battle ground – and that limits the role that committees such as the Treasury Select Committee can play.
In our report we suggest that parliament needs more support on tax, that there should be better liaison between the various committees that look at tax issues and that the Finance Bill Committee should follow the practice of other public bill committees and start with oral evidence sessions, so members appreciate the big issues at stake in the legislation rather than focusing on the minutiae. There are more radical suggestions – for example the Office of Tax Simplification, an independent office within the Treasury, has suggested experimenting with a different way of writing and structuring legislation. The challenge to parliament is to work out how it can play a more effective role in making tax policy better – and we were very grateful to Treasury Select Committee chair Andrew Tyrie for coming up with ideas that we could include in our report.
Despite the ritual there have been reforms to the Budget process: 2010 saw the creation of the Office for Budget Responsibility and the commitment to a ‘New Approach to Tax Policy Making’ – which has continued the trend to more consultation. These have come at the behest of an incoming Chancellor. The latest change – to revert to a single principle fiscal event a year and hold it in the autumn – followed a recommendation we made in a letter to the new Chancellor.
But the simple message from our report is that we all have an interest in well-made tax policy and better Budgets, and the discussion of how to get there should not be the preserve of the Chancellor and his advisers. The current system is no longer fit for purpose. Parliamentarians, think tanks, civil society, academia, professional bodies and the public should all be engaged in a debate on how to make it better. Our aim is to start that debate.
Better Budgets: Making tax policy better was published jointly by the Chartered Institute of Taxation, Institute for Fiscal Studies and Institute for Government in January. You can read the full report at this link.
About the authors
Jill Rutter is Programme Director for better policy making at the Institute for Government and a former senior civil servant, including at the Treasury.
Dr Alice Lilly is a Researcher at the Institute for Government.