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The Charter for Budget Responsibility

In the Charter for Budget Responsibility, the Government sets out how its management of the public finances operates. This ‘fiscal framework’ includes:

  • the Government’s objective for manging the public finances and its targets for meeting the objective. The targets are often referred to as the fiscal targets
  • the frequency of Budget Reports, their broad contents and how parliament shall scrutinise them.
  • the role and remit of the Office for Budget Responsibility (OBR).
  • the Government’s objective for manging government debt.
  • how government debt is managed in the UK.

The current Charter was approved by the House of Commons in January 2017. On 10 January 2022, the House of Commons will vote on whether to approve a revised Charter, which was published alongside Autumn Budget 2021. 

Autumn Budget 2021: Revising the Charter

The Chancellor, Rishi Sunak, published a revised Charter alongside Autumn Budget 2021. It includes a new fiscal objective, revised fiscal targets and a new focus on assessing the affordability of public debt and the public sector’s balance sheet. It also makes some relatively small changes to the Office for Budget Responsibility’s role.

The Chancellor laid the revised Charter before Parliament on 5 January 2022. The House of Commons must approve the revised Charter, in a vote, before it officially comes into force. The vote is scheduled for 10 January 2022.

The fiscal targets

Fiscal targets in the current Charter

The current Charter (approved in January 2017) includes targets for government borrowing and government debt and a welfare cap.

If the Government wants to spend more than it raises from taxes and other sources of income, it borrows. The target in the current Charter is for government borrowing, once adjusted for the ups and downs of the economy, to be below 2% of GDP in 2020/21.

Government debt is, broadly speaking, the stock of the government’s previous borrowing. The target in the current Charter is for government debt to be falling, as a % of GDP, in 2020/21.

The welfare cap says that spending on certain items of welfare should be within a predetermined cap and margin set by the Treasury.

The targets on government borrowing and debt have effectively expired, as they have target dates of 2020/21.

Fiscal targets in the revised Charter

The revised Charter (published alongside Autumn Budget 2021) includes targets for government debt and a measure of government borrowing (the current budget). It also includes two spending caps – one is the welfare cap, while the other puts a limit on government’s investment spending.

The target for government debt is for debt to be falling, as a % of GDP, by the third year of the OBR’s forecast. The Government is targeting a measure of its ‘underlying’ debt, which excludes the Bank of England’s debt.

The target for borrowing focuses on the ‘current budget’ and says that the current budget should be in balance by the third year of the OBR’s forecast. The current budget excludes government investment (capital spending). If the current budget is in balance, the Government isn’t borrowing to fund day-to-day spending.

Government’s investment spending – which is largely on fixed assets, such as roads and buildings – will be capped at 3% of GDP a year, on average, over the OBR’s forecast.

The welfare cap is largely unchanged in the revised Charter in terms of how it operates.

The revised targets will only come into force once the revised Charter has been approved by the House of Commons. The vote is scheduled for 10 January 2022. The House will also vote on whether to approve a new level of the welfare cap. The Treasury proposed a new level for the cap at Autumn Budget 2021 and such a reset requires the House of Commons’ approval. The Library briefing The welfare cap has more on the cap.

The revised Charter

As mentioned above, as well as revising the fiscal targets, the revised Charter introduces a new focus on assessing the affordability of public debt and the public sector’s balance sheet. It also makes some relatively small changes to the Office for Budget Responsibility’s role. These changes will only officially come into force if the House of Commons approves the revised Charter in the vote on 10 January 2022. 

Affordability of public debt and the public sector’s balance sheet

The revised Charter includes a new section on the management of fiscal policy. It says that the Treasury will use a broad set of indicators and tools to assess the affordability of public debt and the strength of the public sector balance sheet.

Debt interest costs are at historical lows but spending on debt interest is now more sensitive to changes in inflation and interest rates than was previously the case. The Treasury will monitor the affordability of debt interest costs, including its sensitivity to changes in the wider economy, such as changes in inflation and interest rates. The Treasury will also monitor wider risks, including the proportion of government debt held overseas.

The public sector’s balance sheet includes its assets and its liabilities. UK fiscal targets have traditionally focused on a narrow measure of the balance sheet, which is public sector net debt. The Treasury say that looking into wider measures of the balance sheet will improve policy “by revealing the full nature of public assets and non-debt liabilities” and providing a fuller outlook to inform decisions.

The OBR’s role

The Charter includes key indicators that the OBR must forecast. To this list the revised Charter adds Public Sector Net Worth (PSNW), which is a wide measure of the public sector’s balance sheet. 

The OBR produces an annual welfare trends report that discusses trends and drivers of welfare spending. The revised Charter requires the OBR to produce the report biennially.

The current Charter requires the OBR to produce a public finances sustainability report each year and a fiscal risks statement at least once every 2 years. The Government is required to respond to the fiscal risks statement within a year of its publication date. In the revised Charter the OBR will no longer have to produce a fiscal risks report. The annual sustainability report will assess the risks to the public finances as well as their sustainability. The Government will respond to the sustainability report at a subsequent fiscal event, such as a budget or spring statement.

The OBR are currently required to produce long-term projections for the public finances and an assessment of the balance sheet at least once every two years. These are included in the sustainability report. In the revised Charter, it is for the OBR to judge whether long-term projections and an assessment of the balance sheet are required.


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