Week 6
Treasury – the department with the
power
The Chancellor of the Exchequer – the real Deputy
Prime Minister
Joy Johnson
Levers of Power
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Control of spending
Fiscal policy
Budget process
Comprehensive Spending Review
Independent Central Bank – Bank of England
Monetary Policy Committee
Office of Budget Responsibility
Office of Fair Trade
Privatisations
Private Finance Initiatives (PFI) – fund investment for infrastructure
projects
• Initially introduced by John Major
• Embraced by New Labour as PPPs (Public Private Partnerships to fund
schools hospitals etc – scandals now on how much they cost in the long
term)
Issues
• Cutting the deficit (number one priority for the
coalition government as stated in the coalition
agreement)
• Growth – flat lining (?)
• Public spending cuts
• Reform of the Banks – tensions with Chancellor and
Secretary Of State for BIS
• Unemployment
• Inflation
• Interest rates – tensions within the MPC over policy
Key texts
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Morrison – Public Affairs
Politics – Jones et al
Coalition Agreement
22 Days in May – Laws
If time various books on the financial crash;
inc. Larry Elliott the Gods that Failed; Vince
Cable, The Storm: The World Economic Crisis
and What it Means & Gordon Brown, Beyond
the Crash, the first crisis of globalisation
The real Deputy Prime Minister
Chancellor – George Osborne & his
Chief Secretary Danny Alexander
Chancellor and his team
• Chancellor of the Exchequer after the PM most
senior member of the cabinet
• Chief Secretary to the Treasury: Liberal Democrat
Danny Alexander (member of cabinet, in charge
of public spending, conducts bilateral meetings).
During coalition negotiations leadership wanted
to be tied into the cuts (David Laws)
• Financial Secretary to the Treasury: Mark Hoban
• Economic Secretary to the Treasury: Justine
Greening
Chancellor of the Exchequer
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No 11 Downing Street
Dorney Wood
Treasury – Whitehall
Responsibilities : overseeing government’s public
spending commitments by managing fiscal policy;
managing the national debt; promoting economic
growth; controlling domestic inflation and
unemployment
• Treasury select committee shadows the
department
Controlling the economy
• Fiscal policy and Taxation
• John Maynard Keynes
• 2 types of taxation – direct up front from
individuals and businesses and indirect i.e. VAT
• Income tax – progressive ability to pay
• Regressive tax i.e. Indirect taxes
• Corporation tax paid by companies on profits
• Capital Gains Tax (CGT) paid by the owners of
financial assets such as property
• Inheritance Tax – death duties
Managing the economy
• Highlight of the Chancellor and the
government’s year the Budget and the
accompany Finance Act
• Gordon Brown introduced a pre-budget
statement
• Comprehensive Spending Review (CSR) the
one last November fixed spending budgets for
each Government department up to 2014-15.
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Budget Process
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Finance Bill speaker designates it a ‘money Bill’
Budget is fast tracked through Parliament
Speech regarded as first reading
2nd reading must be heard within 30 days
Scrutiny at committee stage
3rd reading steamed through on same day as report stage then Royal Assent
Lords can’t interfere
Budget speech designed to forecast short to medium term movements in the
economy 1-3 years
Announces new taxes, tax breaks, and or benefits to finance investment
Other measures of help to low paid, the elderly etc likely to be in short supply in
the age of austerity
Leader of the Opposition responds (difficult Parliamentary occasion as there are
likely to be surprises)
Debate on the floor of the Commons
Business Innovation and Skills (BIS)
• Vince Cable Secretary of State for Business,
Innovation and Skills and President of the Board
of Trade
• Responsible for business and banking and
regulation (lost out on Rupert Murdoch and News
Corporation bid for BSkyB) tension with
Chancellor over banks (banking reform important
issue)
• David Willetts Minister of State for Universities
and Science (attends Cabinet)
• BIS select committee shadows department
Economic terms
• Fiscal Policy – taxation and economic policy of a
government
• Post war – mixed economy
• Thatcher years – privatisation – monetary policy
(economist Milton Friedman)
• New Labour adopted neo-liberal economics
• Fiscal rectitude – cutting public expenditure and
reducing the amount of government borrowing
Economic terms - globalisation
• Neo-liberalism theoretically makes trade
between nations easier.
• Freer movement of goods, resources and
enterprises
• Light touch or no touch regulation, tariffs,
restrictions on capital flow and investment
• The free market naturally balances
Economic terms cont
• The national deficit – the annual difference
between government spending and its
receipts (mainly taxation) – government has to
borrow to make up the difference
• The national debt the accumulation of these
annual deficits and the borrowing incurred to
make up the difference
• Lehman Brothers (September 2008) collapse
triggered meltdown in the financial system
Economic terms cont
• Banks too big to fail
• Bailed out by the government – nationalised 2
big banks
• http://www.telegraph.co.uk/finance/financet
opics/financialcrisis/3187946/Financial-crisisBanks-nationalised-by-Government.html#
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One view of the financial crash
• http://www.guardian.co.uk/business/video/2
008/sep/17/larry.elliott.hbos
Economic terms cont
• Gross domestic product (GDP) – total output of goods
and services
• Gross National Product (GNP) GDP + with net property
incomes from abroad
• Group of Seven finance ministers and central bank
governors of the leading Western economies
• Group of Eight
• Group of Twenty following banking crisis
Group of 8 grow to group of 20
Davos – talking shop of the most
powerful players in global economy
Independence to the Central Bank
• New Labour gave independence to the Bank of
England in the first few weeks following their
landslide first victory (1997)
• Established Monetary Policy Committee chaired
Governor of the Bank (currently Mervyn King
chair). Responsibility to set interest rates. Takes
the decision out of the political arena
• Created new regulation system Financial Services
Association (FSA)( (widely accused now to have
failed when it came to the global banking crisis)
Bank of England independence
• interest rates set by Bank’s governor and the
monetary policy committee – tensions within
Economic terms cont
• Inflation – rise in price levels which reduces purchasing
power
• Inflation used to be past scourge
• “No more ‘boom and bust’” - hubristic boast of Gordon
Brown then Chancellor of the Exchequer
• Low interest rates to help stimulate economy
• Now inflation going up
• Governor of the Bank of England has to write letter to the
PM saying why target of 2% has been overshot
• Fear of stagflation – combination of high price inflation,
high unemployment and low economic growth
Office of Budget Responsibility
• The Office for Budget Responsibility (OBR) was
formed in May 2010 to make an independent
assessment of the public finances and the
economy for each Budget and Pre-Budget Report.
• Shaky start chaired on interim basis, by Sir Alan
Budd.
• New chairman Robert Chote (formerly director of
Institute of Fiscal Studie (IFS respected
independent think tank)
Other Bodies & terms
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Office of Fair Trading (OFT
Confederation of Business Interests (CBI)
Institute of Directors (IoD)
Trade Union Congress (TUC)
Privatisation – selling government assets
Part Privatisation – hybrid
Nationalisation – government owned
Utilities – essential services i.e. Water, gas,
electricity
• Regulatory bodies i.e. Ofgas, Ofcom, Ofwat
Stock Exchange
• Shares in plcs traded on global stock market –
one of the biggest London Stock Exchange
• Limited Liability companies
• Private Limited companies
• Public Limited companies (plcs) – floated and
listed on the LSE
• Hostile takeovers (see Morrison for examples)
seminars
• Outline role of the Treasury and the mechanics of
the Budget
• Outline and explain important and relevant
economic terms associated with public finance
and economics
• Identify Government regulatory controls
• Role of the Bank of England and Monetary Policy
Committee – familiarise yourself with the new
regulatory body.
• Identify current issues
Next week
Disengagement with the Political system