Balanced budget rule

Summary

• Government rules for managing the public finances – often described as fiscal rules – are fairly common across the world. Broadly speaking, they aim to constrain policy and promote discipline in the public finances.
• Fiscal rules can focus on different areas of the public finances such as debt, spending or revenues. Balanced budget rules focus on government borrowing/surpluses – the difference between government spending and revenues. There isn’t one single type of balanced budget rule. For instance, some allow for different types of spending or adjust for the economic cycle.
• The UK’s fiscal rules are set out in the Charter for Budget Responsibility. The Government’s overall objective for fiscal policy – its policy for managing the public finances – is to return the public finances to balance by the middle of the next decade. This would mean the Government spending no more than its income. The Government has targets to support it achieve this overall objective of reaching a budget balance, or eliminating borrowing. Chief amongst these is a form of balance budget rule (the fiscal mandate), a target for government borrowing, adjusted for the ups and downs of the economy, to be less than 2% of GDP in 2020/21.
• In the past, the UK has operated different budget rules with different characteristics. The 2015 Conservative Government – while George Osborne was Chancellor – targeted reaching an overall budget surplus in 2019/20. The Coalition Government’s target was forward looking, adjusted for the ups and downs of the economy and allowed borrowing for investment.