The breadth of what we expect from the public sector is such that expertise needs to be distributed around the civil service.
There are numerous costly initiatives, allocations, and activities fueled by state spending – all of them have advocates and skeptics, and hidden pitfalls and tensions.
Even if there was a single brain that had a grasp of everything, how would that person weigh up the costs and benefits of spending on lifesaving drugs against maintaining housing benefits? Or expanding school breakfast clubs against meaningful support for public libraries? Or properly maintaining research infrastructure against properly maintaining flood defences?
A spending review is an exercise in compromise – a search for the least worst answer – that almost by design disappoints nearly everyone. If there’s good news in one area of spending, there is pain coming elsewhere.
Where did spending reviews come from?
The idea of taking the time every few years to gather together all current public sector spending demands and assess the possibilities for savings feels like it has been around for ever.
In fact, the first multi-year spending review took place as recently as 1998.
Before this, UK spending and taxation was decided based on prevailing economic conditions – leading to accusations of short-termism in government thinking. After all it is difficult to plan sustainable programmes of spending with only one year of funding confirmed.
The first multi-year comprehensive spending review was a Gordon Brown innovation – coming off the back of two years with public sector finance (politically) constrained by the previous government’s last year of allocations, it represented (in the language of the time) an opportunity for a newish Labour government to demonstrate ongoing “prudence”.
As Brown put it:
By looking not just at what government spends but at what government does, the review has identified the modernisation and savings that are essential. The first innovation of the Comprehensive Spending Review is to move from the short-termism of the annual cycle and to draw up public expenditure plans not on a one year basis but on a three year basis. And the review‘s second conclusion is that all new resources should be conditional on the implementation of essential reforms, money but only in return for modernisation
Labour stuck a pattern of three year reviews throughout their last period of office – including another comprehensive spending review in 2007. Under Conservative-led administrations the pattern became more irregular (largely for reasons of political expediency, but also to respond to one off events like the Covid-19 pandemic). The last spending review was in 2021 – three governments (and three Prime Ministers) ago.
How a spending review works
The specifics may vary, but the review is a series of conversations conducted by the treasury (usually under the auspices of the Chief Secretary to the Treasury) and each department. Starting with officials modelling the impact of broad-brush cuts at various levels and arguing about what constitutes the work their department is required to do (the ambit) and what (for non-zero based spending reviews) the baseline funding should be, the process ends with ministers taking the argument directly to the treasury – or overhead to the prime minister and via carefully placed stories in the press.
Eventually – the key date this year was as recent as late May – ministers and the Chancellor will come to a final agreement over what will be allocated and what, in broad terms, it will be spent on.
Those who have been closely involved tend not to be enamoured of the process – former DfE adviser Sam Freedman recently described it as “demented” and “not a good or strategic way to make decisions about government spending”.
In 2024
The current iteration kicked off straight after the 2024 election, with the first part of it announced by Rachel Reeves alongside the autumn budget. Alongside some punchy political lines (that “£22bn black hole” for one) she confirmed the overall envelope for the spending review:
Day to day spending from 2024-25 onwards will grow by 1.5 per cent in real terms, and total departmental spending, including capital spending, will grow by 1.7 per cent in real terms.
We also got some broad promises on education spending – an extra £300m for further education, a £2.3bn increase in the schools core budget and a reform of special educational needs provision. However, the Institute for Fiscal Studies is warning that given other promises, most notably on defence and health, “unprotected” DfE recurrent spending (which would include spending on higher education) is likely to fall by around 3 per cent over the three years the review covers – and significant schools and FE spending (which the government is likely to want to protect) also appears within that bucket.
Higher education is by no means alone in facing a very tight multi-year settlement – but it suffers in terms of public salience. While, thanks to the efforts of universities and trade unions, there is a general consensus that the sector is struggling it is neither as totemic (NHS, schools, defence) or visible (local services, adult skills, social care) as the recipients of other public spending. There’s been a lot of work done in making the arguments for investment, but these arguments are never going to be as strong as they need to be.
That’s (flat) capital
What Reeves appears to be promoting in the run up to the review is the availability of capital. Traditionally, spending reviews have only addressed departmental expenditure limits (DEL) – recurrent funding that can reasonably be controlled by the department in question – involving capital spending only really started in 2020 and 2021. Changes to, for example, eligibility rules for benefits can also have an impact on recurrent annual managed expenditure (AME) and spending reviews have moved further in that direction in recent times.
Capital is more traditionally allocated and spent in fiscal events – it makes for big numbers and eyecatching infrastructure investments and doesn’t usually form a part of the spending reviews, but it was always in scope for 2024 to set capital budgets for at least five years.
And the big sector-focused news has been about research and development funding. While by no means all R&D funding goes to universities, a substantial proportion will end up there – and the news that the overall allocation for R&D will keep pace with inflation until 2029-30 is undoubtedly good in the context of a very tight overall recurrent settlement. As my colleague James Coe sets out elsewhere on Wonkhe, there are other calls on R&D beyond the traditional UKRI allocations (though we know UKRI allocations will be broadly stable this year): there are calls for increased spending in defence research, there will be small (£30m to each current mayoral strategic authority) regional allocations, and there will likely be funding streams attached to each of the government’s missions.
Recall also, the manifesto promise of ten-year funding settlements for some research activity. Five years of flat (inflation-compensated) funding represents exactly the kind of stable and predictable income that some parts of the sector have been asking for – if there are people unhappy with that, promising stability for ten years isn’t going to feel much different.
Teaching funding
Fans of the national accounts will know that the majority of funding allocated to teaching in higher education (the student loan outlay) is, in fact, AME capital. There has been some initial hope that the portion that isn’t (the recurrent DEL that is allocated via the grant letter to the Office for Students) would form a part of the long promised review of funding – but this looks less likely than a commitment to continue inflationary fee-cap uplifts alongside measures to improve efficiency in spending (rooting out fraudulent applications and suchlike, promoting shared services).
The parallel is with funding for 16-19 students – an extra £190m will push per-student funding up an inflation-busting 5.9 per cent next year, to £5,105. The recurrent funding simply isn’t there to do anything like that for direct higher education funding, but using an increase in capital spending offers a release valve via the tuition fee loan mechanisms.
Fee increases would be unpopular (a tax on aspiration, if you like) with young people and their parents. The temptation would be to favourably tweak the conditions of repayment, and there may be some headroom here – if you recall last year’s earnest and sporadically understood talk around PSNFL in the fiscal rules, one of the upshots was that loans count as assets, and the more loans we have the more (in the short-to-medium term at least) assets we have. While this could fuel a further expansion of the sector, the current policy weather suggests that this flexibility could instead be used to offer young people a better loan deal.
On the day
While a multi-year spending review is an exercise in demonstrating the long term planning capacity of a government, the event itself has to interface with the short-term news cycles. There needs to be some good news in there – and the pre-announced transport capital, R&D capital, and above-inflation settlement for health are part of that.
Good news could also take the form of announcing popular savings. Very few people will be disappointed in cuts to bureaucracy (at least in the short term, people do tend to become very upset when waiting times rise and services become less effective) and measures to address fraud. Here we’ve already heard a lot of mood music around fraud within the higher education funding system – the very high profile case of Oxford Business College suggests that ministers see the opportunity to better manage the current allocations of funding, and there is a consultation response ready to drop. We’d assumed this would come alongside the promised white paper, but I wouldn’t be surprised to see at least headline proposals sneak out earlier.
Finally we have the broader favourite that is “efficiency” savings. Universities have been very engaged with this agenda ever since the HE Reform letter – the conjunction of the Universities UK report, the release of TRAC data (slightly delayed over last year), and the spending review may not be entirely coincidental.
