UK budget 2023: What is it and what does it mean?

Each year the Chancellor of the Exchequer delivers a statement to the House of Commons known as the Budget or Financial Statement. This statement outlines the nation's finances, proposed changes to taxation, and includes economic forecasts from the Office for Budget Responsibility (OBR). On 15 March, the Spring Budget will be delivered by Chancellor Jeremy Hunt alongside a fiscal statement from the OBR. The Budget is anticipated to prioritize measures that support the government's economic plan of halving inflation, increasing economic growth, and decreasing public debt.

The Chancellor has said his economic plan will be based on four pillars: Enterprise, Education, Employment, and Everywhere. The government aims to create the most competitive tax regime of any major country in the long-term. The Budget is expected to offer insight into future business and personal taxes, innovation and R&D strategy, and measures to reduce labour market inactivity while boosting economic growth. In this article we will explore what the budget is, how often it is announced, how it affects traders and what happens after a budget announcement.

What is the Budget?

Parliamentary approval is necessary for governments to spend money and collect taxes. The budget, announced by the Chancellor in a speech to the House of Commons, lays out the government's plans for new and existing taxes, welfare policies, and provides an overview of the UK economy. Through the estimates process, the government presents spending proposals for each department to parliament for approval, which serves as the primary scrutiny of spending plans.

Traditionally, the budget was held in the autumn before 1998 and in the spring from 1998 to 2016. However, to align with most major countries, the budget was consolidated into one fiscal event per year by former Chancellor Philip Hammond and moved to the autumn. In 2019 and 2022, no budgets were presented, the first instances with no budget since at least 1900.

Is there a Budget Announcement Every Year?

Yes, as highlighted above, a year without a budget announcement is extremely uncommon. Budgeting is a critical aspect of any financial plan, whether it is personal finance or public finance. In the case of government finance, the budget plays a vital role in managing the country's economic health. Each year, the government presents a budget statement that outlines the country's financial plan for the upcoming fiscal year, which begins on April 6th. The budget statement details how the government plans to allocate funds, invest in public services, and raise revenue through taxation.

The budget statement is particularly important for two significant taxes, income tax, and corporation tax. These taxes are technically temporary and must be reapproved annually. If the government does not reapprove these taxes within the financial year, they will expire, and the government will have to reintroduce the taxes in the following year.

While it is theoretically possible to reapprove these taxes without a full budget statement, it has never been attempted before. The government can pass the necessary budget resolutions before the end of the financial year and pass a finance bill within seven months of those resolutions. However, this approach would be a significant departure from the traditional budgeting process and could have significant economic consequences.

How does the Budget Announcement Affect Traders?

The budget announcement can have a significant impact on traders, especially those who invest in stocks, bonds, and currencies, as they try to anticipate how it will impact the market and adjust their portfolio accordingly. The budget can influence the direction of the stock market and the value of the national currency, and it can also impact the performance of specific industries and companies.

Traders often closely monitor the budget announcement and try to anticipate how it will affect the market. For example, if the budget includes measures that are perceived as pro-business, such as tax cuts or infrastructure spending, traders may anticipate a rise in the stock market and enter into equity positions as a result. Conversely, if the budget includes measures that are perceived as unfavourable, such as increased taxes or regulations, traders may sell off stocks and pivot into other asset classes.

Traders may also pay close attention to specific industries and companies that are likely to be impacted by the budget. For example, if the budget includes increased funding for renewable energy, traders may add companies that specialize in that area into their portfolios. Similarly, if the budget includes cuts to healthcare funding, traders may sell off shares in healthcare companies.

What Happens After the Budget is Announced?

Aside from the market reaction, after the budget is approved it must be passed through parliament before it can be acted on. Passing a budget through parliament involves two main stages.

The first stage involves a series of votes and debates in parliament to provisionally allow the government to make changes to tax. This involves seeking provisional agreement from parliament for any changes to tax measures or new tax measures that the government wants to come into force before the finance bill is passed. This stage also includes a series of budget resolutions, which are usually debated by the Commons for four days and must be passed within 10 sitting days of the budget. During the debate on the budget resolutions, MPs are allowed to discuss any issues they wish related to the broader public finances.

The second stage of the process involves translating the budget into law in the form of a finance bill, which gives the provisional arrangements permanent effect. Finance bills move through parliament like other bills, with one major exception: the Lords is not expected to amend or vote down financial legislation due to the Commons' privilege on financial matters. The finance bill must receive its second reading within 30 days of the passage of the budget resolutions and become law within seven months.

These additional roadblocks will also be of interest to traders as they may be able to trade around the subsequent discourse if controversy is stirred up in the houses.