Background to the 2019 Spending Round
On Wednesday 4th September the Chancellor will present the conclusions of the 2019 Spending Round to Parliament. This briefing provides background on Spending Reviews and lists the spending commitments that have already been made, as well as covering the fiscal rules that the Chancellor is operating within and showing the recent trends in spending.
The Spending Round is part of the financial planning cycle, and will set some of the spending limits for Government departments for financial year 2020-21. This is in place of the full three-year Spending Review that had originally been planned for this year, and which has now been postponed to 2020.
The Government has already made a number of spending commitments, for example in the areas of defence, international aid, and spending on the NHS. It is not yet clear what this means for areas which are not protected in this way, particularly given the fiscal rules which the Chancellor has said he will follow.
Two conditions must be met for the Chancellor to meet his fiscal rules for 2020/21. Firstly, the government’s deficit, adjusted for the ups and downs of the economy, must be less than 2% of GDP. Secondly, the debt-to-GDP ratio must be falling in the year. Meeting the first condition should be sufficient to meet the second. On the face of it there is scope for the Government to increase the deficit in 2020/21 to allow for extra spending and still meet its deficit target. The OBR’s last forecast gave the Government ‘headroom’ of around 1.2% of GDP below the 2% target.
However, forecasts are inherently uncertain, and the OBR’s last forecast came in March 2019. Since then, there have been tentative signs that the public finances may not be performing as strongly as was expected in 2019/20. Moreover, the official measure of the deficit will soon increase by around 0.5% of GDP when the Office for National Statistics changes how its accounts for the subsidy element of student loans. All this means that the Chancellor may be a little more constrained by the deficit target than first impressions might suggest.
Over the last Spending Review period, most departments have seen small real-terms increases in their spending, at least in terms of the spending totals that are the focus of the Spending Review. There have also been some decreases, the largest of which (in percentage terms) was MHCLG’s spending on local government.
There is no formal role for Parliament in the Spending Round, but the plans presented in it will form the basis for the Budget later in the year and the Estimates next year, both of which can be scrutinised and voted on by Parliament. Next year we can also expect the full Spending Review, and it is likely that a number of other policy decisions will be made alongside it.