When Rachel Reeves delivers her first Budget in the House of Commons tomorrow, the measures she announces will have a profound impact on our lives. But what gives the Chancellor the authority to hand down such decisions? From where does she derive that power; does our constitution explicitly grant it? And what about the parliamentary process under which the Budget measures are enacted? The clues lie in a series of power struggles which mirror the unseemly way in which our uncodified constitution has evolved. And they go way, way back.
A brief history lesson
Rachel Reeves is the latest in a long line of Chancellors of the Exchequer. The role can be traced back to a twelfth century reshuffle at the King’s counting house – the Exchequer. It was nominally overseen by the royal Chancellor, one of the senior members of the Household. But by the late 1100s, the complexities of the monarch’s finances had increased to such an extent that a clerk had to be appointed to carry out the principal duties. The role grew in importance, and by about 1230 it had become an independent appointment made directly by the Crown. The post we know today as Chancellor of the Exchequer was born.
The institution we now call HM Treasury, meanwhile, had seemingly already been around for some time. According to the department’s definitive history, written by Henry Roseveare in 1969, it can be traced back to William the Conqueror. Domesday Book refers to a royal servant based in Winchester called ‘Henry the Treasurer’. Whether an early example of nominative determinism or merely a job description, Henry was in charge of the place where the royal treasures were stored, literally, then, His Majesty’s Treasury.
Let battle commence.
Round one: Exchequer versus Treasury
In the twelfth century, the Treasury was effectively merged with the Exchequer. They had a troubled marriage for several centuries, but by the sixteenth century, the Treasury had emerged as the dominant entity. As the size of the state grew, so it became obvious that the institution needed to be organised more formally. Commissions were established in 1635 and 1667 which laid the foundations for the government department we recognise today.
The role and powers of HM Treasury and of the Chancellor expanded hugely in the eighteenth and ninteenth centuries. The concept of a speech to Parliament outlining the administration’s economic plans – the Budget – originated during Sir Robert Walpole’s government of the 1720s. Income Tax was introduced in 1798. Since then, as the state has become ever more complex and the economy expanded rapidly, the role and status of the Chancellor have grown inexorably. Despite, or maybe because, of that, our system does not confer unfettered power on the postholder, nor does the state meekly accept everything they wish to do.
Round two: Commons versus Lords
The two Houses of our Parliament have a long history of antagonism. It’s hardly surprising, then, that power over financial policy has been bitterly contested over the years. As early as 1678, the House of Commons passed a resolution shutting out the Lords from all bills relating to ‘aids and supplies’. Predictably, this was never a view shared by the Lords themselves. Things came to a head in 1909 when the upper House rejected David Lloyd George’s Budget. This led to the passing of the Parliament Act of 1911 which permanently restricted the power of Peers to block financial measures passed by MPs. Thus, the Commons assumed what’s become known as ‘financial privilege’; on the surface, the unassailable right to control the purse strings.
But, as so often, our extraordinary system has created its own checks and balances. Real power lies not with the Commons, but with the Government, which has the sole right to spend public money and raise taxes. Any attempt by the Commons to spend or tax more than the Government is proposing would be blocked by a device known as Standing Order 48. In effect, this means the Chancellor can pretty much guarantee that her Budget proposals will be safely enacted. Just the small matter, then, of actually putting together the package of measures.
Round three: HM Treasury versus the rest
When it comes to the contents of the Budget, the Chancellor does not have things entirely her own way. Delicate and complex negotiations have to be undertaken with Cabinet colleagues about the financial settlement to be received by each department. Here, politics crashes against economics. This year, several departments reportedly missed the deadline for agreeing their settlements amid arguments about the scale of fiscal tightening they were being asked to accept. Media reports suggested at least three Cabinet ministers appealed directly to the Prime Minister, over the head of Rachel Reeves.
This raises the question of how much discretion the Chancellor – any Chancellor – actually has when it comes to putting together the Budget package. The occupant of No. 11 Downing Street is, properly speaking, Second Lord of the Treasury. Second. The Prime Minister, as First Lord, clearly takes precedence and can have the final say.
As well as Cabinet colleagues and her boss potentially making things difficult, in recent times the Chancellor’s wings have been clipped by yet another player: the Office for Budget Responsibility. The OBR was established by the Coalition Government of 2010, partly to publish independent economic and fiscal forecasts alongside the Budget. The OBR’s role is, on paper, limited to five areas: forecasting, measuring performance against targets, analysing balance sheets, evaluating risks, and examining the costs of policies. But that’s a huge amount of potential scrutiny for the Chancellor to withstand, added to the requirement for the Budget’s proposals to be shared with the OBR two weeks in advance. And all this comes before Parliament has even heard the Chancellor’s plans, let alone approved them.
Finally, the Chancellor needs to be wary of the markets. As Kwasi Kwarteng discovered in 2022: if the City takes against your proposals, they can unravel very quickly. No amount of political capital is sufficient to ensure a Chancellor wins a battle against economic reality.
Round four: Government versus Parliament
As soon as the Chancellor sits down, Parliament immediately begins enacting their Budget proposals. This will eventually conclude, the Government hopes, with the passing of a Finance Bill, putting into law all its measures. But that’s a long, slow process, and so a series of short cuts has been developed.
Provisional collection of taxes
Before even the Leader of the Opposition has replied (an oddity of tradition; it’s usually the corresponding shadow minister who replies to any Government statement), MPs are asked to approve any changes which need to take effect straight away. These are typically measures like increases to the duties on tobacco and alcohol, which need to be imposed without delay to prevent stockpiling and loss of revenue. Thus, the Commons, without debate or division, is required to approve a single provisional collection of taxes motion to allow prices to go up at 6pm that day.
Budget resolutions
For any other measures the Government wants to come into force before the Finance Bill is passed, it needs the Commons to approve a series of budget resolutions. These are debated for usually four sitting days, with each day devoted to a particular policy area – health or education, for example. They’re known as ‘ways and means’ resolutions, which explains why the Budget and its debates are overseen not by the Speaker himself, but by his most senior deputy, the Chairman of Ways and Means.
Finance Bill
Once the Commons has passed the budget resolutions, the Government will at last introduce the Finance Bill to put all the provisional approvals on a statutory footing. The measures will receive scrutiny from the usual parliamentary quarters: the Commons; the Treasury Select Committee, which will hold hearings and call witnesses before producing a report; and the Lords. But remember the ‘financial privilege’ of the Commons; although the Lords can analyse and criticise, it cannot amend, reject or delay the Bill.
The Government is therefore almost guaranteed to get its full Budget package enacted, especially with such a large Commons majority. But danger lurks if something goes unexpectedly awry. Convention dictates that if a Government suffers defeat on a substantive matter related to taxation or spending, it constitutes a vote of no confidence and triggers a general election. It’s why we talk about ‘supply and confidence’ arrangements, when a coalition partner agrees to protect a Government by not voting down its budget proposals. In truth, however, there’s probably sufficient ambiguity in the conventions to allow a Government to wriggle out of any such defeat. So, despite all the hurdles, and unless you’re Kwasi Kwarteng, the Budget’s proposals seem certain to be largely intact when they hit the statute books, and our pockets.
Where are we now?
Tomorrow’s Budget, and the Chancellor’s powers to deliver their proposals, are rooted in history and tradition. As so often in our uncodified system, the constitutional position of the entire process is opaque. What’s clear is that the Budget statement remains, as it has for three centuries, one of the most important dates in the political calendar. And that fact brings with it a great many challenges for the Chancellor who, despite holding one of the Great Offices of State, certainly does not enjoy the unfettered power or discretion to do everything that he, or she, might wish.
Peter Heaton-Jones.
Peter Heaton-Jones was Member of Parliament for North Devon 2015-2019. He now works as a public affairs consultant.
The Constitution Society is committed to the promotion of informed debate and is politically impartial. Any views expressed in this article are the personal views of the author and not those of The Constitution Society.