Fiscal rules and frameworks

The Chancellor is yet to confirm how much money will be made available to departments at the 2019 Spending Review. To meet his promise to end austerity, Phillip Hammond will need to find billions of extra funding.

English local government finance is part way through a series of major changes that will see its focus shift from being based on redistribution according to spending needs, towards more emphasis on providing financial incentives to tackle needs and boost local revenue-raising capacity. However, that does not mean that redistribution will cease to play any role in the local government finance system: abolishing it completely would see very large variations in different councils’ ability to fund local services.

The last 25 years have seen two periods of public expenditure restraint in the UK (the 1990s and the 2010s) and one period of increased spending (between 2000 and 2010). Over that whole time, the Treasury has been responsible for controlling government spending, setting fiscal rules and the overall control framework, and ensuring that other departments stay within their spending limits. In this report, we use data on spending plans and out-turns to see what they can tell us about the efficacy of spending control under different regimes.

The key backdrop to all fiscal events in the UK since the financial crisis has been the weak performance of the economy. At the time of the March 2017 Budget, national income per adult was around 15% lower than it would have been had output per adult instead grown by 2% a year (close to the post-war average) since the start of 2008. Despite this historically poor performance, weak growth was forecast to continue. The March forecast implied that, by 2022, national income per capita would be 18% lower than it would have been if it had grown at 2% per year since 2008. That is astonishing.