24 July 2019

Ongoing budgetary uncertainty means Sajid Javid must quickly decide whether to attempt a full spending review this year, says Martin Wheatley.

The Government’s financial plans, agreed in the 2015 Spending Review, run only to the end of next March. This is not an accounting technicality. Councils, schools and most government departments don’t know how much money they will have to spend beyond that date. This has consequences, such as a reliance on agency staff because managers can’t commit to hiring people on permanent contracts. Budgetary uncertainty means decisions are now being taken which don't result in value for money for the taxpayer.  

So there needs to be a spending review this year. As recently as March, Philip Hammond restated his intention to run one “assuming a Brexit deal is agreed over the next few weeks.” How differently things have turned out, with Theresa May’s inability to unite her party resulting in her resignation, continuing uncertainty about Brexit, a leadership contest and Hammond quitting as Chancellor. Worryingly, the new Prime Minister’s grasp of the fiscal position looks shaky at best, with Boris Johnson making a series of extravagant spending and tax promises that make the daunting task of getting the sums to add up even more difficult.

Build-ups to spending reviews always see the Treasury battle hard to prevent public spending commitments, but things got off to a bad start ahead of the next review when Theresa May promised £16bn a year extra in real terms for the NHS by 2022–23. The string of commitments reeled off by Boris Johnson in Downing Street – police, hsopitals, GPs, schools, broadband – suggest No10 will be at least as a much of a source of risk to spending control as any of the big spending departments.

Is a proper spending review now feasible?

If the Spending Review had run on Philip Hammond’s timetable, then it would already be underway, but it now looks like a very tall order to complete a three-year spending review before an autumn Budget.

This is partly because of uncertainty about Brexit. Without knowing when and how it will happen, it is difficult to predict the economic and fiscal consequences – this makes decisions about spending across government departments ever harder to make.  

It is also about political head space. Can a new chancellor, a new chief secretary and new ministers in charge of most spending departments really sort out a spending review in only a few months? Do they even have the time to attempt it while Brexit still dominates their attention morning, noon and night?

There has been speculation that the Budget may be brought forward to September. This would make it impossible to undertake a spending review. So an early decision for Sajid Javid will be whether to defer the Spending Review to 2020 and instead attempt a much more limited exercise this year to patch up public service budgets for 2020/21.

The Chancellor needs to make sure work starts now to prepare the ground for 2020

Putting in place a one-year plan this autumn, and delaying the full three-year review until 2020, may be the only practical way forward for the new Government. But making plans for one year only, rather than three, is bad news for those planning and managing big public services. Managing resources well depends on having a clear medium-term view of income. The absence of a full spending review also removes an opportunity to make progress on all the domestic issues delayed by Brexit, like social care and future funding arrangements for local government. It looks likely that these difficult decisions will just be kicked down the road for another year.

The only positive that the Treasury can salvage from the wreckage of this year’s process is the chance to use this extra time to prepare. Civil servants need to make sure they have strong evidence and analysis on the big, difficult issues – and ensure that this is well understood by the ministers who will be making the decisions. Departments and public bodies will need to lead on gathering this evidence, and the Treasury needs to study it – and demonstrate that it cares – before doling out the cash. The Treasury then needs to figure out a way to conduct a process which results in a review that can actually be followed – in contrast to the 2015 Spending Review’s plans for ambitious savings which unravelled on contact with reality.

With the Brexit deadline fast approaching, Sajid Javid will be a key player in shaping Boris Johnson’s approach to taking the UK out of the EU. With the current deadline on the Government's financial plans not far behind, he also has some big and difficult decisions to make about public spending.