The chancellor must reform spending reviews to ensure mission success

On Wednesday, the chancellor will set out the results of a one-year spending review – the first under a Labour government for 17 years. The build-up has not been easy: the fiscal context is looking very tight in the face of demands on public services coupled with Labour’s pledge to limit borrowing and avoid raising most of the major taxes.  

The past few weeks have seen cabinet ministers reportedly express their dissatisfaction with the money their departments have been allocated,  ¹⁹ Parker G and others, ‘Keir Starmer and Rachel Reeves face down cabinet revolt over spending cuts’, The Financial Times, 16 October 2024, https://www.ft.com/content/8f788cdd-d1e4-468c-a3d2-fcd9a2e0a844  a painful but predictable part of the process which Reeves knows is par for the course.

However, the chancellor has not been helped by the outdated spending framework she inherited. As shown by yesterday’s National Audit Office report – Lessons learned: a planning and spending framework that enables long-term value for money  ²⁰ Comptroller and Auditor General, Lessons learned: a planning and spending framework that enables long-term value for money, Session 2024-25, HC234, 2024, https://www.nao.org.uk/insights/a-planning-and-spending-framework-that-enables-long-term-value-for-money/  – and our previous work, the way that government decides how to allocate public spending is in need of reform.

The spending review process is not set up for success

The antiquated spending review process formally starts with the chancellor or chief secretary to the Treasury writing to each secretary of state asking them to set out their spending plans for the year or years ahead. Each department then attempts to construct these plans, building giant spreadsheets made up of desperate searches for efficiency savings and ambitious bids for additional spending.

Then follows a series of negotiations between the chief secretary and secretaries of state. The basis for negotiations should be a robust ‘baseline’ – a careful estimate of the spending needed to continue current policy. This is international best practice  ²¹ Wendling C, Pedastsaar and Shjeik Rahim F, ‘How to prepare expenditure baselines’, International Monetary Fund, 2022, retrieved 22 July 2024, www.imf.org/en/Publications/Fiscal-Affairs-Department-How-To-Notes/ Issues/2022/06/01/How-to-Prepare-Expenditure-Baselines-517869   ²² OECD, ‘OECD Spending Better Framework’, 2023, retrieved 22 July 2024, https://one.oecd.org/document/GOV/ SBO(2022)6/REV1/en/pdf#:~:text=Multi%2DYear%20Expenditure%20Baselines,-1.&text=Baselines%20 illuminate%20the%20multi%2Dyear,decisions%20to%20re%2Dallocate%20resources  and should allow a department and the Treasury to then discuss the spending implications of planned policy changes.

But the baselines used in UK spending reviews are opaque, crude and inconsistent, and frequently fail to reflect true spending pressures. Confidence in their robustness can be low, and without a shared understanding of the cost of delivering current policy, negotiations over spending cuts or increases are often detached from the reality of their implications for service delivery. As the NAO report finds, “government is prone to under-estimate on costs and over-promise on outcomes”.

This lack of realism and internal transparency – the NAO reports that departmental officials describe the process as a ‘black box’ – encourages negotiations to be combative, rather than collaborative, can mean evidence is side-lined in decision-making and ultimately results in poor value for money decisions being made.

The government has made a good start on improving the spending review process

Since coming into power, the Labour government has taken several positive steps to improve the spending review process.  

The government’s missions have started to help set clear strategic direction designed to guide the spending review process, while the chancellor’s announcement that a regular cycle of spending reviews will be enshrined in the Charter for Budget Responsibility has provided much needed certainty and stability. And running a one-year spending review first and a multi-year review concluding in the Spring has given the government more time to run a comprehensive process that can make better long-term decisions.

The government has said it wants spending plans to help deliver its missions.  ²³ Savage M ‘UK ministers warned to prepare for tough decisions on spending’, The Guardian, 11 August 2024, https://www.theguardian.com/politics/article/2024/aug/11/chancellor-rachel-reeves-treasury-budget-tough-spending-decisions  We have previously recommended the government provide a settlement for each mission, as publishing these in greater detail would make it clear which programmes came under each mission and outcome, give them greater credibility and improve accountability for delivering them.

But there is more the government can do to build on its early improvements to the spending framework and grasp this opportunity for further reform.  

The government should produce robust and independently scrutinised multi-year baselines

Ahead of negotiations for the multi-year spending review, the government should produce robust multi-year spending baselines for each department based on estimated costs and demand. These should be scrutinised by an independent body, such as the OBR, and made public.  

These independently scrutinised multi-year baselines can then form the basis for negotiations, helping to build trust in the process, ensuring that the expected outcomes of new spending settlements are realistic, and bringing benefits for both the Treasury and departments. For the Treasury, this would help counteract the perennial problem of business case gaming and encourage the systematic use of evidence in bids. And for departments, this would create a shared starting point for negotiations and help to open the ‘black box’ of spending decisions. Together, this would help put evidence at the heart of the process, lead to better spending plans and improve accountability for getting good value for money from them.  

Spending plans should be published in more detail

Other aspects of the UK spending review process also lack transparency and feature little external scrutiny compared to other countries.  ²⁴ Comptroller and Auditor General, Lessons learned: a planning and spending framework that enables long-term value for money, Session 2024-25, HC234, 2024, https://www.nao.org.uk/insights/a-planning-and-spending-framework-that-enables-long-term-value-for-money/   

The NAO have recommended that spending plans are published in greater detail, setting out how decisions have affected “allocations by department, priority outcome and strategic programme”. However, this valuable step towards a more transparent and credible process would be bolstered by an independent body scrutinising settlements, as the OBR has done for tax and welfare spending since 2010.  

Whatever approach the government chooses to take on Wednesday and for the multi-year spending review in particular, more transparency and greater scrutiny of baselines and spending plans would help set mission-led government up for success.