The next government must break its silence on departmental spending on day one

Slipped into the budget document was confirmation that the next spending review will not take place until after the general election. This was always to be expected: it does not make sense for the current government to commit to spending plans that may be ripped up by the next, while conducting a spending review would force the government (and the Labour opposition) into the politically inconvenient position of ripping up its fiscally fictitious plans.

It does beg the question, though, of when that election, and therefore spending review, will be. Previous spending reviews have never concluded later than November, so an election beyond this date would put the next government – and providers of public services – into uncharted territory. With the Autumn 2021 spending review – the most recent – setting departmental budgets up to the end of March 2025, government departments do not know how much they will have to spend from April 2025.

The later the election, the more urgent it will be for the next government to take decisions over spending. Until then, escalating uncertainty means increasing amounts of time and resource being devoted to preparing for contingencies across government.  

Any politician aspiring to become – or continue as – a minister after the election needs to engage with what the unspoken future might involve.

The spending review will be a reckoning for fiscal policy

The next government will face an unappealing set of major systemic challenges. Two of the most knotty relate to fiscal policy and public service performance. The spending review process is a crucial mechanism for making the necessary decisions and trade-offs to confront them.  

First, the fiscal picture. Debt has increased from under 40% of GDP in the 2000s to 86.1% of GDP in 2022/23 and is set to rise further over the forecast period to 94.3% GDP. Fantastical spending plans mean the government is forecast to (slightly) reduce debt in the final year of the forecast. The forecasts do not however account for the increases in spending necessary to deal with an ageing population and pressure to increase spending on economic infrastructure, overseas development and defence.

At the same time, the performance of public services in the UK is suffering. The IfG and CIPFA’s 2023 Performance Tracker shows that performance in most services is worse than before the pandemic, and much worse than it was in 2010. Problems are particularly acute in prisons, hospitals, general practice and adult social care. Pencilled-in spending plans beyond the current spending review period are not sufficient to deal with these issues. For example, they imply a demand-adjusted cut to prisons spending of 4.6% every year for three years. This will clearly not maintain the current level of services. Overall, this implies budgets being cut at about half the pace that they were cut between 2010 and 2015, but in a context where performance is much worse and scope for easy efficiency savings has been much reduced.

The next spending review will need to align with both the government’s overall tax strategy and its ambitions for the quality of public services. This will require some incredibly difficult decisions which, unsurprisingly, both Labour and the Conservatives are largely ignoring ahead of the election. In doing so both parties are only making life more complicated for whoever does take office.

Spending reviews are also crucial for implementing government strategy

Spending reviews can and should do more than just force governments to align their spending and tax plans. The first multi-year spending review of the parliament is the government’s opportunity to set in motion the key things it wants to achieve before going back to the electorate.

So what will the next spending review need to achieve? The Conservatives’ determination to cut taxes implies a reduction in the functions of the state: productivity and efficiency drives can help, but the cuts of the 2010s mean that these alone cannot be sufficient to get the tax burden as a share of GDP falling in a meaningful way: tax cuts must be accompanied by a reduction in the functions of the state. As things stand, even assuming the current implausible spending plans can be delivered, taxes are set to rise – not fall – relative to the size of the economy over the next five years.

The Labour party, meanwhile, has a set of ambitious missions, including on crime, net zero, and the NHS, which would need to be set out – with measurable outcomes – alongside a spending review.

A multi-year spending review cannot be achieved in a couple of months

Spending plans for 2025/26 need to be announced before November of this year. This provides departments with the time necessary to translate their overall departmental settlement into individual allocations for programmes and policies through their internal business planning processes. It would also allow central government to provide local government with a provisional finance settlement in December, which would enable local authorities to meet the statutory deadlines for finalising their budgets.  

Within these timing constraints, the next government will face a choice between providing departments with multi-year spending settlements, as is the norm, or ‘rolling over’ budgets for one year to buy more time to do a full multi-year settlement. It will be tempting to deliver a multi-year settlement as soon as possible, to demonstrate that the government is getting going on delivering its policy agenda from day one. Multi-year budgets also come with efficiency benefits as they enable departments to plan more effectively. 

But these advantages are outweighed by the risks they involve. There is a high probability that rushing such a multi-year settlement comes unstuck and needs to be topped up in subsequent years, while it is also unlikely to lead to the complex and difficult choices necessary to achieve the government’s objectives. For a government wanting to use the multi-year spending review as a big 'strategic moment', the process will take longer than a few months.  

There is also the possibility of an election – held in December or January – taking place after the spending review deadline. Then what? Setting budgets for the year ahead becomes only more urgent, and the current government may have to provide a provisional local government settlement ahead of the election. In an ideal – yet unrealistic – world, a cross-party agreement would be reached on a minimum budget for each department ahead of the election (and before November) for 2025/26.

Preparations for the spending review need to begin now

All of this points to the importance of preparing ahead of the election. It is welcome that the chancellor’s statement yesterday appeared to suggest that civil service preparations are underway, and ministers should provide their civil servants with cover to spend time on planning for the next spending review. This work may end up being completed by a different party, but it is crucially important for whoever wins the election.  

Both parties also need to do as much work as possible now to settle on a coherent set of priorities that can form the basis of a programme for government and spending review upon taking office. They may have little time to do so once they find themselves (back) in government.