A combination of Brexit and the Conservative leadership campaign has all but officially postponed the 2019 Spending Review. Beckie Smith and Richard Johnstone look at what impact the delay will have, and whether there are opportunities to be grasped in the extra time
When chancellor Philip Hammond set out his plans for a three-year Spending Review in his March Spring Statement, his warning that it could only go ahead if Theresa May’s withdrawal agreement was passed seemed little more than a footnote. The review would launch before the summer recess, he said, “assuming a Brexit deal is agreed over the next few weeks and the uncertainty that is hanging over our economy is lifted”.
Four months on, with the final vote on Conservative Party leadership to replace May as PM looming, the Brexit deal has been rejected three times. If anything, the fog of uncertainty this summer is thicker than it was in the spring, and a Spending Review delay is now almost inevitable.
It would, after all, be “an awful lot to demand of officials to get a full, comprehensive review completed across government in time for the autumn Budget, with presumably a new prime minister and chancellor using that Spending Review to set priorities”, according to Nicky Morgan MP, who chairs parliament’s Treasury Select Committee.
And although no formal decision has been made, few are still pretending that the exercise will kick off as planned. Last month, chief secretary to the Treasury Liz Truss admitted a summer start date was “unlikely”.
But some decisions will need to be made even if the full review is delayed. Government departments have capital budgets in place lasting up to 2020-21, but their revenue budgets – which govern day-to-day spending – will expire next March.
The Treasury could carry out a one-year Spending Review, as it did in 2013 under the coalition government with the 2015 general election approaching. Martin Wheatley, a senior fellow at the Institute for Government and former Treasury and Cabinet Office official, notes that this would be a “much more limited and non-strategic exercise” than Hammond had originally planned, to set budgets for 2020-21.
Another option would be to roll over departmental budgets’ existing allocations for another year.
This would be a “really quite frustrating lost opportunity”, Morgan told attendees at an event hosted by the IfG last month.
Having been education secretary during the 2015 Spending Review, the Conservative MP said preparing for the exercise had been “a really useful process for a department to go through to think about our priorities for the next spending period”.
Meanwhile, several departments are hoping for more cash to support services that have been squeezed under austerity measures that began in 2010, and there are some policy decisions that cannot be made without greater financial certainty.
The Spending Review is just one of a “a whole set of processes that are either underway or due to come to a head in the autumn” that the new prime minister and chancellor will inherit, according to former Treasury permanent secretary Lord Nick Macpherson.
Speaking at a Policy Exchange event in June on what the next prime minister’s economic priorities should be, Macpherson said the civil service needs to be ready to present information on the trade-offs of new policy ideas “very quickly” when they take office.
Tied to the Spending Review is the Treasury’s planned zero-based review of capital spending, which is expected to be published alongside the results of its infrastructure finance review in the autumn.
Truss has confirmed that if the Spending Review is delayed, the infrastructure funding strategy probably will be too. “The intention is to publish all those three things [the Spending Review, the zero-based capital review and the infrastructure strategy] together. I cannot commit as to whether it will happen exactly like that under a new prime minister, but it strikes me as sensible to be able to make progress on that basis,” she told the Lords Economic Affairs Committee in May.
However, there are some pressing decisions that must be made in the coming months – including whether to give the green light to construction on the HS2 high-speed rail project, a decision needed by December.
Speaking at the same event as Macpherson, Truss hinted at some of the infrastructure projects the Treasury could theoretically prioritise over HS2 in the zero-based review.
“It is certainly the case that we are not investing enough in our intra-city rail network. Leeds is the largest city in Europe without its own metro system and there was a recent study that showed that Birmingham could be 33% more productive if it had better cross-city transport.”
Delays to capital spending plans will also have an impact on policy well beyond big projects like HS2.
In her session in the Lords, Truss said the Treasury was looking at all projects in the capital budget, which she categorised as “economic infrastructure and social infrastructure”.
One area of social infrastructure that could suffer from any delay is health and social care. Although a five-year settlement for frontline NHS services was announced last year – a real-terms funding boost of 3.4% a year over five years – and was welcomed by many in the health service, crucial questions remain unanswered, particularly around capital allocations.
The NHS is in a “privileged position” compared to many public services thanks to the settlement, says Anita Charlesworth, director of research and economics at the independent charity the Health Foundation, but it needs to be certain of its investment plans for the next decade.
Capital investment, including equipment needed to improve cancer diagnosis such as MRI and CT scanners, could falter without extra funding, she says. Also pressing is the government’s long-delayed social care green paper, which was expected to be published as part of the Spending Review process.
The green paper will set out plans to overhaul social care funding – which are urgently needed as rising demand for services means the sector faces a funding gap of £4.4bn by 2023-24, according to the Health Foundation.
Urgent action is also needed to address the high rates of staff turnover in a minimum-wage sector that relies heavily on migrant workers, Charlesworth says.
CSW understands the Department for Health and Social Care is pushing to have the green paper published this summer irrespective of when the Spending Review happens. If it is, could there be a silver lining in allowing more time to develop legislation before funding is allocated?
No, Charlesworth says: “reform of social care is impossible without additional funding, so a green paper that doesn’t address funding will not be an effective answer.”
And past experience shows that policy pledges that aren’t tied to funding are unlikely to be delivered. One example Charlesworth gives is that the 2014 Care Act introduced legislation to cap an individual’s lifetime care costs at £72,000, which still hasn’t been enacted. The cap could cost up to £3.4bn to implement.
And because health and social care are “inextricably connected”, further delays to social care reform would make it impossible to fulfil the NHS long-term plan – which “made clear it could only deliver improvement if there was an effective social care system” when it was published in January, Charlesworth says.
She adds that a rollover of existing budgets would be “really problematic... because we’ve got a long-term plan for day-to-day spending but deep uncertainty about capital investment”.
“That pushes us to use the day-to-day spending badly. It’s the worst of all worlds, really – it’s pushing services to use money badly.”
Despite the ongoing confusion about whether the Spending Review will go ahead or not, details of the Treasury’s thinking have begun to seep out.
That includes Hammond’s own clarification that his promise that “austerity is coming to an end” will not mean a budget increase for all government departments. In a letter to the Treasury Select Committee in February, the chancellor said across-the-board budget rises hadn’t been the norm before austerity began in 2010 and expecting them now would be relying on a “poor definition of ending austerity”.
“Reform of social care is impossible without additional funding, so a green paper that doesn’t address funding will not be an effective answer”
Anita Charlesworth, Health Foundation
Instead, he said to expect an emphasis on value for money, looking at “how we invest most effectively in our economy through a renewed focus on delivering high-quality outcomes”.
It remains to be seen whether, following the inevitable reshuffle under a new Conservative leader, Hammond’s successor as chancellor will share his definition of “fiscal responsibility”.
As Robert Chote, chair of the Office for Budget Responsibility, has observed, fiscal discipline is no longer the “frontrunning topic of conversation” in political debate, as a desire to push down the national debt has been replaced by “austerity fatigue”.
“We’ve had a long period of relatively painful fiscal consolidation and clearly there is less political appetite to press on with debt reduction,” he said at last month’s IfG event.
But making his pitch to lead the country, prime ministerial hopeful and foreign secretary Jeremy Hunt, has said he wants to reduce the national debt through an “iron discipline” on public services. He has also promised to increase defence spending by £15bn a year. His leadership rival and predecessor at the Foreign Office, Boris Johnson, has said he would up secondary school funding and spend billions on improving access to superfast broadband across the UK. Both contenders have promised expensive tax cuts.
The leadership campaign highlights that “the new PM will want to show that he has ended austerity without throwing away a political dividing line with Labour on fiscal discipline,” says Nick Pearce, director of the Institute for Policy Research and professor of public policy at the University of Bath.
Such an approach could well suit the Treasury, he said.
“If Johnson is PM, the new chancellor will be a powerful figure in government, since Johnson is not likely to run a powerful, centralising No.10 operation, and is not known for his command of the details of policy.”
One arguable benefit of a Spending Review delay is that it could give departments more time to develop the policies of a new government and prime minister.
Although Wheatley warns that pushing the three-year review back to 2020 would “only make next year’s decisions – which will almost certainly be taken by a different cast of leading characters – even more difficult”, one positive that the Treasury may be able to “salvage from the wreckage of this year’s process” is that it would give departments extra time to prepare submissions. Civil servants must ensure their bids for extra funds are backed up by strong evidence and analysis, and an extra year would give departments and other public bodies more time to do this.
And, Wheatley adds, “the Treasury needs to figure out a way to conduct the process so it produces plans which can actually be followed, unlike in the 2015 review when so many plans for ambitious savings unravelled on contact with reality.”
An IfG analysis of 2015 Spending Review pledges found, for example, that the Ministry of Justice was unlikely to achieve its “very optimistic” goal of cutting spending by £500m by 2019/20, partly because of delays to a courts digitisation programme.
A delay could also give government departments more time to embed the Public Value Framework into their budget planning.
The framework is intended both to inform policy design and to be a diagnostic tool to determine how successfully projects and programmes achieve value for money. It does this using a series of questions relating to four core “pillars”: pursuing goals; managing inputs; engaging citizens and users; and developing system capacity.
In March, Truss said a revised version of the framework first proposed by former No.10 Delivery Unit head Sir Michael Barber in 2017 was to become “part of the culture” of government departments. She said they would be expected to embed the framework in their Single Departmental Plans.
At the time, Barber told CSW that it was a “great step forward” that the framework would, after years of pilot testing, “play a significant part in the forthcoming Spending Review”.
The document outlining the framework notes that it “remains a work in progress” – adding that “any and all engagement on how it could be improved is always welcome”.
Truss, tipped as a possible next occupant of No.11, has since expanded on what the framework could mean for departments. She told the Lords committee that the Treasury was seeking submissions on how departmental plans would boost human capital – part of the framework’s first pillar – which she defined “roughly as people being able to lead a good life”.
“We have asked departments to look at how all their programmes perform, whether that is the troubled families programme, primary school education or health visitors. We want to know how much that is contributing to helping people to live a better life,” she told peers.
“The fact is that governments carry out numerous programmes over the years, and some are more effective than others. A good government should look at which ones do not work, what we should stop and where we should put the extra money… Where do we put the incremental pound in to improve people’s human capital?”
This may lead to new approaches, but in the end it will all come down to Brexit, according to Pearce.
“If we crash out with no deal, then there will need to be some emergency Budget measures which will change the envelope for the immediate years ahead and dictate some priorities – like farmers affected by hikes in tariffs, as Hunt has pointed out, or support to exporters. No deal will also squeeze public finances through lower growth and weaker tax receipts.
“If the government secures a deal, there will be less change than the talk in the leadership election has implied: some increases to spending on schools, local government and policing, and the already agreed NHS increases, plus symbolic tax cuts largely offset by rises elsewhere. Capital spending may well be the big winner.”
“If Johnson is PM, the new chancellor will be a powerful figure in government, since Johnson is not known for his command of the details of policy” Nick Pearce, IPR
One way or another, as Macpherson warned in June, the shadow of Brexit is likely to linger beyond simply one Spending Review.
“This Europe business is going to go on for years. There will be a whole lot of posturing about it but, in the end, we will reach a new equilibrium,” he said.
Countries’ closest trading relationships are always with their neighbours, he pointed out. “We were never properly in the European Union, and I dare say we will leave it at some point, but at that point we will never be properly out of it.”