When it comes to presenting budgets can Britain learn from America's example?
Budget Statements: contrasting traditions in Washington DC and London
March is traditionally the month when the annual budgets of the UK Government and US federal government are presented. The British Chancellor of the Exchequer Jeremy Hunt will present his budget on Wednesday 15 March 2023 and on March 9 President Biden transmitted his administration’s Budget Message to Congress. The British Chancellor’s budget statement normally attracts more local interest and is surrounded by much political showmanship. Budget day still retains the feel of a national event analogous to Derby Day. By tradition the chancellor usually uses William Gladstone’s battered Victorian red dispatch box – in deference to the man generally accepted to have forged the central function of the office and the role of the financial statement, the political authority that goes with it in modern government. As well as Gladstone’s box there is the long tradition of absolute budget secrecy. Although breaching this convention forced the Labour chancellor Hugh Dalton to resign in 1947, this convention is often now more honoured in breach rather than observation. There is also the harmless speculation about the refreshment the chancellor will turn to during the budget speech. The budget statement is the one occasion when a minister can ask for something other than water. Several chancellors have announced support for the Scotch Whiskey industry and illustrated the point with the coup de theatre of drink from a tumbler of whiskey.
Some sourpusses disdain these theatrics and make the point that in strict economic terms budget statements in any one year rarely amount to much. Yet as Nigel Lawson pointed out in his memoirs there is some merit in engaging a nation’s attention once a year on the broad outline of the economic and financial choices it has.
The contrast with the reception of the President’s budget message could not be greater. Even when the president’s party controls both houses of Congress the level of interest in it is much more muted. When one or more houses of the Congress is controlled by opponents the ritual greeting is: dead on arrival. In many respects the lack of interest in the Office of Managements Budget documents is a pity. While unlike the British budget where the Chancellor’s party normally commands the confidence of the House of Commons and its broad details will be enacted in the Finance Act, the US federal budget documents offer a powerful insight into the function and purpose of the US federal government.
Political Vision and the Analytical Professionalism of the US Office for Management and Budget
The OMB budget documents are longer and more detailed than the Budget Redbook and Office For Budget Responsibility economic forecast paper that accompany the UK budget. President Biden’s budget message reads like a political vision with a programme of numbers attached to it. US administrations in these documents lay out a detailed analytical purpose and rationale that is simply not normally in a UK Budget Redbook. In UK budget documents analysis is opaque and arguments involving assertion and causation are often left hanging, if addressed at all. The Office of Management and Budget based in the White House benefits from the analytical work of the Presidential Council of Economic Advisers that supports the administration. The result is that US budget documents offer a much more analytical and cogent perspective on the financial policies to be decided than the British Treasury’s Budget Redbook and the economic forecast. A US citizen can get a detailed and clear purchase on the policy of the federal government if they are interested. Whether they like it or not is another matter.
The resources available to Congress when scrutinising the Executive’s Budget Proposal
When the Budget Message reaches Congress the legislature is equipped to interrogate it and challenges its premises in a way that the British Parliament is not. First since 1974 the bipartisan Congressional Budget Office supports Congress in its work scrutinising the president’s budget message. Second Congress has a powerful committee system that is supported on a different scale from the British House of Commons select committees. Not least the Joint Economic Committee of Congress and its formidable economic secretariat. Both the Congress and the UK Parliament benefit from post legislative scrutiny in the case of the House of Commons the Public Accounts Committee and the National Audit Office in relation to the US Congress it is the General Accountability Office.
Legislators and policy makers in Washington draw on a rich and variegated intellectual network
Both the Administration and Congress in Washington benefit from a rich network of academic and policy researchers based in think tanks that range from the American Enterprise Institute and the Brookings Institution to the Council on Foreign Relations and the CATO institute. These intellectual networks provide policy makers with a wide infrastructure of support that benefits from its variegation in intellectual interests. In contrast in London the economic think tanks that are close to the Treasury and contribute to framing public economic discussion around economic policy are much smaller and more parochial.
Given the depth of policy analysis in the administration, the strength of analytical resources at the disposal of the Congress and the wider community of economic and policy analysis that can be drawn there is an inevitable question that this invites. Why is the quality of fiscal and economic policy not better than it is in Washington? While it is an obvious question, answering it would go far beyond a note that focuses on the role of budget statements and the relative strengths and weaknesses of the UK and US federal budget statements.
So how should a budget statement and the measures laid out in its accompanying papers be assessed. What criteria should be applied in judging the policy merits of a budget statement and what are the broad principles that should be applied to analysing budget measures?.
What framework of principles should be applied to assessing the substance of budget measures and policy?
The starting point in assessing fiscal and budget policy in a modern economy is that the key issue in public finance is how much is spent. Public expenditure has a real resource cost and that cost is greater than its cash cost because of the distortion its financing involves. It is because of this deadweight or excess cost that for several years the OMB insisted on using a 25 percent deadweight loss assumption when it carried out cost-benefit analysis on federal spending programmes. There are diminishing marginal returns to public expenditure. Vito Tanzi, former head of the IMF’s fiscal division has shown that simply increasing spending on public objectives does not yield proportionate returns.
Provided debt service costs on public sector debt do not become a public expenditure problem in themselves, how public spending is financed between taxation and borrowing is a secondary matter and turns on the political preference about the timing of taxation. Likewise government borrowing that is financed by sales of debt to the private sector will have little or no implications for inflation given that their monetary consequences are effectively sterilised.
In framing tax policy several matters should inform policy makers. The first is the need to minimise the deadweight cost of taxation by using revenue from taxes that result in the least distortion. In practice this means using a broadly neutral expenditure tax such as a Goods and Services Tax used in Canada or a form of Value Added Tax such as the indirect tax regimes in the EU and UK. It is important to appreciate that income taxes while being buoyant sources of revenue receipts involve the double taxation of saving income that has malign long-term implications for saving and capital accumulation. Corporation taxes, capital gains tax and inheritance taxation all involve the aggravated double taxation of saving. Among the worst tax choices in terms of employment and wider losses of economic welfare are payroll social security taxes such as the UK’s national insurance contributions. When framing tax regimes the test criteria should be neutrality, simplicity, avoiding complexity and having as wide a tax base as possible matched by the lowest marginal tax rates necessary to raise the revenue receipts needed.
These broad principles are what ought to be borne in mind when setting about examining these budget statements from the US President and the British Chancellor of the Exchequer.
Warwick Lightfoot
12 March 2023.
Warwick Lightfoot is an economist was Special Adviser to three Chancellors of the Exchequer between 1989 and 1992, he is the author of America’s Exceptional Economic Problem