Opinion: Now is not the time for a three-year spending review

Heightened uncertainty around the economy and public services mean that the government’s decision to hold a three-year spending round is the wrong one and should be reversed writes Institute for Government senior economist Thomas Pope
Chancellor Rishi Sunak on Budget Day 2020. Photo Aaron Chown/PA Wire/PA Images

By Thomas Pope

31 Jul 2020

The Treasury has launched the Spending Review which is due to conclude in the autumn, at which point the chancellor will set out spending totals for every government department for the next three years.

Previous Institute for Government research has advocated for multi-year settlements such as these, and in normal times, firm multi-year spending plans allow departments, local authorities and other government bodies to plan their activities effectively over several years – taking a longer-term view of areas such as project planning and workforce management. But these are not normal times. Trying to plan so far ahead amid the current uncertainty could be counterproductive and is likely to lead to those plans being revised over the coming years.

We don’t know what an appropriate spending envelope will be for the next three years

The first stage of a Spending Review is for the government to set out the overall spending envelope – the total amount that it is willing to spend on public services over the next few years. But this immediately poses a problem. While it is appropriate for the government to run a large deficit this year to counter the economic effects of the coronavirus pandemic, this will not be the case indefinitely. This means that the amount that the government is willing or able to spend – especially in a few years’ time – will depend on how it expects tax revenues to evolve.

However, the current economic situation is extremely uncertain. The Office for Budget Responsibility’s possible scenarios for the UK economy and public finances over the next five years were based on the plans for public spending set out March’s budget. In one, the deficit in 2023/24 is projected to be 2.7% of GDP. In another, the deficit is 7.7% of GDP. That is a huge difference, and it is very difficult to plan a sensible spending envelope when uncertainty is so high.

When launching the Spending Review, the chancellor acknowledged that the situation now looks very different to the one at the budget, and that the provisional spending envelope set out then would therefore need to be reviewed. The economic situation is evolving so quickly that a new envelope chosen in the autumn could look just as out of date a few months after that. 

We don’t know how demands on public services will change as a result of the pandemic

The main task of the Spending Review is to allocate the available money among departments, and between day-to-day and capital spending within departments. The argument in favour of a multi-year spending reviews is that it allows departments to plan ahead, providing certainty over their budget. When run well, these plans clearly link funding to expected outcomes.

However, most of the major public services have been disrupted by Covid-19, and it is currently unclear when and if service delivery will return to normal or what the long-term implications of the pandemic for services will be. Even if civil servants can find time to prepare detailed departmental cases, with their focus understandably on the fallout from coronavirus, preparing those submissions will be very difficult.

Take the criminal courts system, for example: when will jury trials will be able to resume as normal? How big will the backlog of cases be? What has been the impact of holding some hearings online during the pandemic? Should that practice continue even when courts can return? These are fundamental questions about how just one service should operate over the next few years; without answers to them, deciding on a suitable multi-year settlement will be very difficult.

The government should run another one-year Spending Round

The economic outlook has rarely been as uncertain as it is now. This time next year the chancellor should have a better understanding of where the economy is heading and, as a result, the future of public service delivery will be clearer . Then, rather than now, would be a good time for a multi-year Spending Review.

Last year, the government abandoned its plan for a multi-year Spending Review due to heightened uncertainty – in that instance due to Brexit – and instead held a Spending Round setting budgets for one year only. That was the right decision in those circumstances, and it would be the right decision this year too.

Thomas Pope is the Institute for Government’s the senior economist and works across the Institute’s programme areas. He was previously an economist at the Institute for Fiscal Studies, working on tax and the public finances. This article was first published on the IfG website.

 

 

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