What to Look for in the 2020 Expenditure Review – Institute For Fiscal Studies
On November 25, the Chancellor will conclude the 2020 spending review. This will include an update on the amount of funding provided to public services in this financial year (2020-21) as well as a new set of departmental budgets for the next one (2021-22).
The decision to limit this year’s spending review to one year, rather than the usual three or four, is a good one. The uncertainties at the moment are too great to publish a credible set of cash spending plans three or four years from now: such plans would be for the birds, as they would inevitably have to be reviewed. That being said, a one-year settlement has its drawbacks. Setting budgets for only one year can deprive public service leaders of the certainty they need to plan effectively and efficiently, and arguably adds to the fog of uncertainty that already hangs over the economy in the sense large. It is therefore welcome that the government has indicated that exceptions will be made where multi-year budgets are most needed – notably for the financing of large investment projects.
While this spending review is more short-term in nature than usual, there are still a number of important things to watch out for.
What to pay attention to:
1. The overall generosity of the Chancellor’s spending plans
In the March budget – which came just weeks before the UK went into lockdown and well before any direct impact of COVID-19 on the UK economy had been factored into the plans – Rishi Sunak announced departmental (day-to-day) resource budgets would grow 4.4% above inflation between 2020-21 and 2021-22, to £361bn the latest year (in terms of cash). Capital (investment) budgets were set to increase by 12.5%, to £89bn in 2021-22. A key question will be whether the Chancellor decides to be more or less generous than he expected in March – and by how much. This will be particularly important in determining the funding environment for “unprotected” services not covered by pre-existing commitments.
2. What happens to previous commitments?
Decisions on large parts of public service spending have already been taken. NHS England already has day-to-day funding regulations until 2023-24; school spending plans in England already stretch to 2022-23. These regulations should be seen as a lower limit: schools will likely receive additional funding to enable “catch-up” learning, and the NHS budget will almost certainly be revised upwards. Whatever the overall increase in funding announced by the Chancellor, a huge share will go to the NHS and schools in England, with a corresponding amount allocated to Scotland, Wales and Northern Ireland via the formula Barnett.
The government has also pledged to devote 0.7% of national income to official development assistance (ODA or foreign aid) and at least 2% of national income to defense and national security. With the economy now expected to be smaller this year, a lower level of sterling spending is needed to meet the targets expressed as a percentage of national income. In the case of foreign aid spending, the government has said he planned to cut £2.9bn from the budget to avoid overshooting the 0.7% target, but a similar approach is highly unlikely to be adopted for defense spending. Next year, as the economy (hopefully) recovers, spending will also have to increase (unless, as is also possible, these targets are abandoned entirely).
Together, these commitments mean that the trajectory of around two-thirds of public service spending has been (more or less) predetermined. A major question for the expenditure review is what happens to the remaining third. Outside of health, real public service spending has been cut by 20% (25% per person) in the decade to 2019-20. A tight enough funding deal could leave some of these “unprotected” services – like the justice system, prisons or local government – facing another round of cuts.
3. How the Chancellor chooses to deal with coronavirus-related expenses
By the end of July, departments had received more than £70billion for daily utilities in 2020-21 as part of the pandemic response, a figure which has since risen. The ‘test and trace’ services alone have received at least £12billion. A crucial question is how far this should continue next year. One option for the chancellor would be to allocate departments a budget for their ‘basic’ or ‘business as usual’ services, and allow them to claim a separate ‘COVID reserve’ if needed. This would be similar in spirit to the previous use of a “special reserve” to fund military operations in Iraq and Afghanistan, rather than the core Department of Defense budget. But it may not be possible to draw such a clear distinction between “basic” and “COVID” spending. If additional ‘catch-up’ funding is needed to clear the backlog of NHS court cases or treatments, where would that fall? If it is now more expensive to provide social care or standard dentistry services due to the need for additional personal protective equipment, is this “essential” expenditure or exceptional COVID-related pressure?
4. What happens to public sector compensation?
In 2019-20, the UK’s General Government spent £204 billion to employ around 5.4 million people. A major pending policy question for the spending review is what now happens to their compensation. In the decade before the pandemic, wage growth in the public sector was very limited: despite wage allocations above inflation in recent years, average earnings in the public sector in the first quarter of 2020 were lower 1.5% in real terms to those over 10 years. previously. Compared to private sector compensation, public sector compensation had fallen to its lowest level in decades (Figure 1), likely compounding recruitment and retention challenges. This year, amid the COVID-induced recession, public sector earnings are expected to outperform private sector earnings – just as they did during and immediately after the Great Recession. Looking ahead, Rishi Sunak said that “in the interest of fairness, we must exercise restraint in future public sector wage allocations”. What this will mean in practice is unclear. The chancellor’s language suggests that a return to the politics of the mid-2010s, where public sector wage increases were capped at 1%, is a real possibility.
5. Investment and infrastructure plans
The government has promised a lot of investment and infrastructure. The spending review is likely to see more, with pre-existing investment plans tied to economic recovery, “building back better” and the “race to the top” agenda. One thing to watch out for is whether new funding is announced or future funding is brought forward. Detailed allocations and credible delivery schedules would make it more likely that these funds are actually spent and, above all, well spent. Additionally, alongside the spending review, the government may release several related documents, including a national infrastructure strategy, a review of Treasury investment rules (“Green Paper”), and a research strategy. and development. Together, these factors have the potential to influence and determine not only What the government is investing, but also or and how Good.
6. Brexit-related spending decisions
The imminent end of the transition period with the European Union will require some Brexit-related spending decisions. Over the past five years, the government has spent around £8billion on Brexit preparations. Some ministries, including the Home Office, the Ministry of Finance and Customs and the Ministry of Environment, Food and Rural Affairs, are likely to need additional funding on a more permanent basis to reflect the new post-Brexit responsibilities. HMRC, for example, will almost certainly need to employ tens of thousands of new customs officers. The Chancellor will also have to make many decisions about replacing existing EU spending done in the UK or on behalf of the UK. This includes things like agricultural grants, research grants to UK universities and regional support funds.
7. The broader outlook for taxation, spending and public finance
Alongside the spending review, on November 25, the Office for Budget Responsibility will release a new set of forecasts for the economy and public finances. These will include the OBR’s latest estimates on the post-pandemic recovery of economic output and, therefore, government revenue; the estimated cost of various government policy responses; labor market prospects; and the outlook for government borrowing and debt beyond this year, when government borrowing will be the highest the UK has seen outside the two world wars of the 20and Century. All of this provides extremely important context for post-pandemic fiscal policy decisions. In addition, the government could use spending review as an opportunity to make announcements on things other than public services – perhaps most notably, a decision on whether or not to extend the £1,000 per year increase in the standard allowance for Universal Credit.
Beyond next year
The short-term nature of this year’s spending review is necessary given the circumstances, and many important short-term decisions need to be made. Looking ahead, the government should carry out a “comprehensive” multi-year spending review as soon as possible, when some of the uncertainty over COVID-19, Brexit and the future of the economy unfolds. will be dissipated. At this point, when the worst of the pandemic is hopefully behind us, the Chancellor will have to deal with the many long-term challenges facing the country. Questions about the future size and shape of government, the role of technology in delivering public services, and how to achieve the government’s goal of net zero greenhouse gas emissions by 2050 are just a few that urgently need ministerial attention and policy guidance in the years to come.
Figure 1. Difference between average salaries in the public and private sectors, 1993–94 to 2019–20
Note: Difference controlling for worker characteristics controls for differences in age, education, experience, and region, all of which interact with gender, following the same methodology as in Cribb, Emmerson and Sibieta (2014).
Source: Author’s calculations based on Labor Force Survey.