Rachel Reeves must reset spending reviews to deliver on the government’s missions

After identifying a £22 billion ‘black hole’ in spending plans for this year, Rachel Reeves used her fiscal announcement to take some immediate action to reduce in-year spending – and implied that further spending cuts or tax rises might be announced at October's budget. While some of these costs were predictable, the scale of others was genuinely surprising. However, they are smaller than other pressures that are likely to emerge over the next few years, with the public spending plans both main parties committed to at the general election likely to be even less affordable than the Institute for Government and others suggested at the time.  

Reeves will face even more difficult and consequential public spending choices over the coming months, as many of these pressures will be ongoing and could grow over time. The multi-year spending review next year, some details of which were announced on Monday, will need to balance sustainable public finances with allocating budgets in a way that helps the government to meet its missions and other priorities. If the government fails to do this well, it will be difficult for it to succeed in any of its key areas.  

To deliver on Reeves’ ambition to achieve better value for money, the government will need to ensure it shakes up the process and prioritises spending that will fix underlying problems in the economy and public services, rather than patching them up with short-term sticking plasters. The early signs about this government’s approach to the spending review are positive that it means to make these changes.

The new rhythm of spending reviews will help to improve the quality of spending decisions

One of Reeves’ lower profile, but still significant, announcements was the new fiscal timetable, which closely follows what the IfG has recommended. She confirmed that she would hold only one major fiscal event per year – the first of which will be the budget in October. Sticking to this commitment will help slow down policy making and make it more strategic; but Reeves will need to resist the temptation that her predecessors have succumbed to of falling back into having two major fiscal events a year.  

She also announced that a multi-year spending review will conclude in the Spring, rather than attempting to announce spending plans for several years before the end of November. This is welcome, as it will allow the government time to clarify its missions and other priorities and ensure its spending plans align with them. Spring will come quickly, however, so the government will need to decide which areas to prioritise for deeper evidence gathering analysis.  

Finally, in another welcome move, the chancellor has confirmed that the timing of spending reviews will be set out in the Charter for Budget Responsibility, ending unnecessary uncertainty for departments and others over when they will be required to input into the process and ultimately have their future budgets confirmed. Furthermore, the new rhythm will be a spending review every two years, covering at least three years. That means departments and public bodies will never again be in their current situation, where they have no indication of what their budgets will be beyond March next year and so are unable to plan effectively.

Reforms are needed to ensure the multi-year spending review is ‘mission-led’

Beyond the timing, the chancellor’s statement revealed little about how the spending review will operate. However, she said it will be ‘mission-led’ and ‘reform-driven’, and also highlighted priority themes for the review, including “long-termism, prevention, managing demand, and increasing devolution and local integration of services”. These are welcome objectives, but the existing spending review process is not set up to deliver this outcome as effectively as it could be. A new IfG paper highlights how past spending reviews have too often lacked a clear government strategy to guide spending allocations and have failed to encourage cross-departmental coordination that will be critical for meeting some of the government’s missions.  

We recommend that the chancellor and chief secretary reform the spending review process. In particular, missions must be clearly articulated at the start, and incorporated into a reformed performance framework for departments. Cross-government collaboration should be encouraged by allocating cross-cutting budgets related to missions and holding negotiations with multiple secretaries of state at the same time, rather than bilateral negotiations that mean ministers tend to retreat to their own silos. Finally, the next few months provides an opportunity for the government to improve the evidence base underlying some of their key priorities, through the commissioning of policy reviews.

Reeves should prioritise prevention and capital spending to achieve value for money

The chancellor emphasised throughout her statement a commitment to ‘value-for-money’, both in her decisions to cut spending this year and in her approach to the next spending review. This included setting up the new Office for Value for Money. However, the chancellor must ensure she does not take too narrow an approach here.  

In the short-term, it is understandable that Reeves is looking for opportunities to save through ‘efficiency measures’ like cutting spend on consultants and reviewing lower-value capital programmes. But recent Institute for Government research shows that spending in areas like prevention and well-targeted public investment can reduce pressures on public services and help them to operate more productively. These are often areas that are easiest to cut when public spending pressures are highest, because it takes a while for the effects to be felt. But over the longer-term, these cuts can be a false economy and there is evidence that poor public service productivity now is in part a result of cuts to capital spending in particular over the 2010s.

The chancellor explicitly mentioned prevention as a key pillar of the ‘reform-driven’ approach to the next spending review, alongside a commitment to long-termism and increasing local integration of services, but she did not make as strong an argument for spending on capital. How much to spend in these areas will be one of several difficult decisions she faces in the Autumn and Spring.  

Designing the spending review so these decisions can be made well will be critical if this government is to turn around public services and address many of the pressures Reeves identified this year.