UK Government

HM Treasury: Fiscal Responsibility Bill

Press Release   •   Dec 10, 2009 11:47 GMT

The Government is today announcing details of the Fiscal Responsibility Bill which is being introduced to Parliament alongside the 2009 Pre-Budget Report.

Legislating for Fiscal Responsibility

The Government’s fiscal objectives are:

· over the medium term, to ensure sound public finances and that spending and taxation should impact fairly within   and between generations; and

· over the short term, to support monetary policy and, in particular, to allow the automatic stabilisers to help smooth the path of the economy.

In order to ensure delivery of these objectives, the design and operation of the Government’s fiscal framework needs to respond to changing economic circumstances. 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 in 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.

This is in line with moves other governments around the world are also seeking to take. The IMF has set out that strengthening medium-term fiscal frameworks, including through fiscal responsibility laws, should help to support fiscal adjustment following the financial crisis.

The Fiscal Responsibility Bill

Therefore, in the light of changing economic conditions, the Government is enhancing its framework through the new Fiscal Responsibility Bill.

The Bill requires the Government to set out at all times a legislative fiscal plan for delivering sound public finances, to be approved by Parliament, and places a binding duty on the Government to meet that plan.

The legislation gives Parliament a clear, central role in both setting and monitoring the Government’s medium-term fiscal plans. In particular, Parliament must approve fiscal plans before they become law. This is a significant enhancement to Parliament’s current role in setting medium-term fiscal policy, giving it a new opportunity to scrutinise the Government’s plans.

The Bill sets out a clear procedure for reporting on progress and determining compliance with targets in the plan. The legislation includes a clear definition of success in meeting fiscal targets and a means for allowing Parliament and the public to monitor progress at each Budget and Pre-Budget Report. If its plans are not achieved, the Government must set out why they were not met. The Government would then set out actions to remedy the situation. Given its role in voting on future fiscal plans, Parliament would be the judge of plans to rectify any slippage.

These measures provide a specific focus for Parliamentary accountability and represent a significant evolution of the extent to which the Government is held to account for its medium-term fiscal policy.

Finally, the Government will publish an updated Code for Fiscal Stability, setting out the requirements the Government must meet in the publication of its fiscal plans and projections, in the New Year.

The Fiscal Consolidation Plan
The Bill sets out the Government’s first legislative fiscal plan, the Fiscal Consolidation Plan (FCP). It also enables the Government to add further duties to the FCP through secondary legislation.

Budget 2009 set out the Government’s plans for consolidation and this Pre-Budget Report confirms these. The Fiscal Consolidation Plan incorporates the Pre-Budget Report fiscal judgment.

The FCP extends from 2009-10 to 2015-16, requiring that the Government:

· halves public sector net borrowing as a share of GDP over four years from its forecast peak in 2009-10. The Government is setting a target in secondary legislation enabled by the Bill, for borrowing to be 5.5% of GDP or less in 2013-14;

· reduces borrowing as a share of GDP in each and every year from 2009-10 to 2015-16; and

· ensures that public sector net debt is falling as a share of GDP in 2015-16.

These are binding targets with clear milestones that cannot be changed except with the approval of Parliament through new legislation. This demonstrates the Government’s commitment to delivering consolidation, and the importance it places upon action to ensure sound public finances in the medium term.

Notes for Editors

1. Details of the Fiscal Responsibility Bill have been announced in today’s Pre Budget Report. The Bill and the Explanatory  Notes are available at www.parliament.uk.

2. The Government is also today publishing secondary legislation in draft, setting out its target for borrowing to be 5.5% of  GDP or less in 2013-14. This is available at www.hm-treasury.gov.uk.

3. Debt is a key indicator of the sustainability of the public finances. The Fiscal Consolidation Plan targets debt and the main   measure of the deficit – public sector net borrowing. It is the overall level of borrowing which determines the path of debt.   Targeting this simple measure of borrowing enhances certainty on the scale of adjustment the Government is undertaking.   The Government will continue to consider cyclically-adjusted measures of the public finances as a key indicator of the   fiscal position. But given uncertainties over the structural position of the public finances at present, and the need to set   clear and simple targets to which it can be held to account, deficit targets under the Fiscal Consolidation Plan will not  cyclically-adjusted.

4. As set out in Annex B of the Pre-Budget Report, the Fiscal Consolidation Plan will target borrowing excluding the  temporary effects of financial interventions. This will ensure that temporary distortions to the public finances are excluded  while any permanent costs to the taxpayer are captured in full. The independent Office for National Statistics will report on  “PSNB ex” in outturn and are today publishing a technical note on its derivation. It is consistent with the parallel measure of  public sector net debt excluding the temporary effect of the financial interventions, which was announced at Budget 2008.

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This Press Release and other Treasury publications are available on the HM Treasury website hm-treasury.gov.uk

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