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Wednesday, 20 November, 2002, 17:48 GMT
What is the pre-Budget report?

Published each autumn, the pre-budget report is the Treasury's chance to explain in advance its approach to the full budget the following spring and to update its economic forecasts.

When Chancellor Gordon Brown introduced the idea of a pre-budget statement in 1997, he heralded it as a measure that would add predictability and stability to government, while reducing uncertainty for business and the markets.

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Increasingly, however, it has been used as an opportunity to launch new policy initiatives and to make the odd political concession where deemed necessary.

But this year, the slowdown in the UK and world economy and the future direction of public spending are likely to be at the centre of the pre-Budget debate.

New policies

In previous years, major new policies such as the minimum income guarantee for pensioners and the 10p starting rate of income tax were first revealed by Mr Brown in the autumn.

The report effectively marks a new twist to the old autumn statement beloved of chancellors in years gone by, when governments announced in advance their spending plans for the next year.

That was abolished by the last Conservative chancellor, Ken Clarke, who sought to combine the Budget and the autumn spending statement in a single presentation to Parliament.

But unlike the autumn statement, it is less about public spending (which is now supposed to be decided in the Comprehensive Spending Review every two years) and more about the future direction of tax policy.

Budget battle ahead

This year there will much more focus on the long-term question of taxes and spending, as the huge budget surpluses enjoyed by the government in the past few years are set to disappear.

The UK has escaped the worst of the world economic slowdown which is affecting the United States, Japan and much of the eurozone, but many economists warn that government tax revenues are falling fast, and the Chancellor will almost certainly have to revise his over-optimistic economic forecast.

Under the government's spending rules, it can borrow money now and set it against the earlier surpluses (the golden rule which says it should balance its budget over the economic cycle as a whole.)

But the Chancellor will want to guard his reputation for prudence.

He has already announced a big tax increase in National Insurance contributions, from 1 April 2003, to help pay for increased spending on health and education.

But he may warn that if the economy continues to under perform, he may have to raise taxes again.

He could also reveal more details about the possible costs of a prolonged war in Iraq, which could add pressure to next year's budget settlement.

Tensions with business

The government is facing a more difficult time with both trade unions and the business community.

Business is angry that the tax burden on companies is rising while their profits are falling.

The public sector unions want better pay for their members and an end to the privatisation of public services.

But with less money in the kitty, the Chancellor will have a more difficult time of satisfying them all.

And he has an added problem - the growing crisis in the pensions system as more and more companies pull out of occupational pensions.

This will be the subject of a separate green paper - but no less than Tony Blair called it the biggest problem the government is facing in the longer term.

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