Budget and the spending review

Chris Smith

Tomorrow’s budget is a key moment in the UK’s fiscal framework. The Chancellor, Rishi Sunak, may announce one or more spending pledges from the despatch box. However, budgets (usually) sit within the context of an overarching spending review. But what are spending reviews, and how do budgets and the Government’s fiscal rules relate to them?

What is a spending review?

Spending reviews set out the Government’s long-term plan for some of its expenditure. They usually take place every two to four years and set limits on departmental spending, and block grants to the devolved administrations, for the following few years. The Institute for Government (IfG) has said that they ensure “there is a set of plans for departments which fit within the total amount of spending that the Government decides it can afford, which is a vital part of the Government’s economic management”.

Spending reviews take the form of discussions over several months between departments, HM Treasury and ministers. They may also include external engagement. However, they are not part of the legislative process, and Parliament has no formal role in them.

What does a review cover?

Spending reviews generally cover only expenditure which can reasonably be planned in advance, known as ‘departmental expenditure limits’ (DEL). DEL makes up about half of total government expenditure. This would exclude spending that is less predictable, for example social security payments and student loans, known as ‘annually managed expenditure’ (AME). The Institute for Fiscal Studies (IFS) has noted that there is precedent for the spending review also to cover some elements of AME, for example social security spending.

Spending review cycles

The first review in current form was in 1998. It covered expenditure in the years 1999 to 2002. The then Prime Minister, Tony Blair, called it a “new, strategic approach to public spending”. Since then there have been eight further spending reviews, or more limited exercises known as spending rounds, in:

2000, covering 2001 to 2004;
2002, covering 2003 to 2006;
2004, covering 2005 to 2008;
2007, covering 2008 to 2011;
2010, covering 2011 to 2015;
2013, covering 2015 to 2016 (spending round);
2015, covering 2016 to 2020; and
2019, covering 2020 to 2021 (spending round).

Where are we today?

When originally announced, the 2019 review was to cover three years. However, on 8 August 2019, following the change of Prime Minister, the then Chancellor, Sajid Javid, announced that the full “multi-year review” would be postponed until 2020. He said that an “accelerated exercise” would take place to set limits for day-to-day spending in 2020/21, which would otherwise not have been covered by any plans. The results were published less than a month later as a spending round, on 4 September 2019. More recently, the Government has stated that the 2020 review will cover three years.

The IFS suggested that the Chancellor may choose to set the overall totals for the spending review (the “envelope”) in tomorrow’s budget, with details of departmental allocations to follow at a further budget in the autumn. However, the Financial Times reported that there may be a total of three fiscal events this year: tomorrow’s budget, the conclusions of the spending review published separately and finally a further budget.

How do budgets, spending reviews and fiscal rules interact?

Budgets and spending reviews operate within the context of the Government’s fiscal rules. According to the December 2019 Queen’s Speech and the Conservative Party’s 2019 general election manifesto, the budget will introduce a new forward-looking rule. This would require the current budget (day-to-day spending excluding investments, compared to revenue) to be in balance by “no later than the third year of the forecast period”. This rolling target means that fiscal policy must always be set so that the Office for Budget Responsibility’s (OBR) forecasts, taking into account this policy, must show a balance or surplus three years in the future.

The projections of spending in the review, once incorporated into OBR forecasts, will be key in determining whether this rule can be met.

The Chancellor has also said that the coronavirus (COVID-19) will have an impact on the budget. He committed to taking “whatever action is required” across a range of scenarios to support the NHS, other public services, businesses and vulnerable individuals.

Discussions

The IFS said that the budget and spending review were likely to increase spending substantially, but that this would largely be concentrated in areas such as health, education and overseas aid. It argued that the current state of the public finances means that the Government will be forced to either raise taxes, “entrench austerity” or break a fiscal rule. As our earlier blog reported, another alternative is to loosen the fiscal rules further. However, the IFS argued that this could “undermine any credibility attached to fiscal targets set by this government”.

Meanwhile, the IfG has considered the process around spending reviews generally. It identified some possible improvements, including:

More emphasis on strategy, and less on inter-departmental “jostling”.
Better independent scrutiny and validation.
A greater role for finance professionals.
Improved focus on performance and the outcomes of spending, rather than spending itself.

However, the IfG said that once reviews were complete, “by international standards, the UK has a good track record of sticking to the spending allocated to each department”.