Budget Responsibility Bill

The Budget Responsibility Bill was introduced to Parliament on 18 July 2024. The bill is due to have its second reading on 30 July.

The bill, together with its explanatory notes and delegated powers memorandum, are available on the Parliament website: Budget Responsibility Bill. Related draft text to be included in a revised Charter for Budget Responsibility has also been published.

The government is introducing the bill with the aim of ensuring that when they announce ‘fiscally significant’ measures, they are subject to an independent assessment by the Office for Budget Responsibility (OBR). The government calls this a ‘fiscal lock’.

The bill applies to England, Wales, Scotland and Northern Ireland.

The bill is expected to be certified as a money bill. The Speaker can certify bills as money bills if their only purpose is to impose or alter taxes or spending, or if they are about connected matters. Money bills cannot be amended by the House of Lords.

This briefing explains the background to the bill and what the bill would do.

What does the bill do?

The bill would fulfil the 2024 Labour manifesto commitment to make significant changes to taxation or spending subject to a forecast from the Office for Budget Responsibility.

It contains two clauses:

• Clause 1 amends the Budget Responsibility and National Audit Act 2011 to establish the fiscal lock. It would require the government to request a forecast from the OBR before it makes fiscally significant announcements. It would require the OBR to produce an assessment of the impacts of fiscally significant measures if the government failed to request a forecast. The fiscal lock would not apply to measures that are temporary in response to an emergency.
• Clause 2 provides the bills short title, territorial extent and commencement.

The bill says that further details about the fiscal lock can be included in the Charter for Budget Responsibility (the Charter). The Charter would say what constitutes fiscally significant measures and how temporary measures and an emergency would be defined.

What is the Office for Budget Responsibility?

The Office for Budget Responsibility (OBR) provides independent analysis of the UK’s public finances. It is often described at the UK’s public finances watchdog.

The OBR was established within days of the Coalition Government coming to power in May 2010, with the aim of improving the credibility of forecasts and public finance (fiscal) policy. It was established under the Budget Responsibility and National Audit Act 2011 (BRNAA).

The OBR’s role includes:

• producing the economic and public finances forecasts used by the Chancellor
• scrutinising government cost estimates of new fiscal measures

What is the Charter for Budget Responsibility?

The government sets out how it will manage several aspects of the public finances in the Charter for Budget Responsibility (the Charter). The Charter includes details about the OBR’s role and how it carries it out. The Treasury is required to publish the Charter under the Budget Responsibility and National Audit Act 2011. 

The Charter also includes the government’s objective for managing the public finances and its targets for meeting the objective. The targets are often referred to as the fiscal targets or fiscal rules.

The government proposes that an updated Charter would define fiscally significant measures. The government has published a draft that defines these as measures costing the equivalent of at least 1% of GDP during any financial year in the five-year forecast period. The Charter would say a measure is temporary if it is intended to end within two years. The Treasury would have to explain why a situation is an emergency and the OBR can trigger the fiscal lock if it “reasonably disagrees”.

Why is the bill being introduced?

Labour originally proposed introducing something like the fiscal lock following the Truss Government’s ‘mini budget’ in September 2022.

In the mini budget, the then Chancellor, Kwasi Kwarteng, announced permanent tax changes which would have reduced Treasury revenues by over 1% of GDP. He didn’t ask the OBR to produce a forecast or to scrutinise the measures.

Financial markets reacted negatively to the mini budget. One of the reasons given for the adverse market reaction was the lack of OBR forecasts, which contributed to a lack of investor confidence in the plans.

The government says the measures in the bill are intended to:

preserve market stability and public trust in announcements on fiscally significant measures, by ensuring there is independent and transparent scrutiny of the Government’s fiscal plans.

What is being said about the bill?

The Chair of the OBR, Richard Hughes, says the bill upholds the principle that major spending and tax decisions should be based on an up-to-date view of the economy and public finances. He says the bill would address a gap in the 2011 Budget Responsibility and National Audit Act and would “serve to strengthen the legal foundations for fiscal management.”

Leading economic think-tanks have welcomed the commitment to transparency but say that, ultimately, the change is relatively small.