This Wednesday, the Chancellor is set to announce departmental spending for the next financial year in his spending review. With pledges on schools, further education, the NHS, defence and overseas aid, day-to-day spending on these public services is already set to be at least £9 billion higher next year than this year. The Chancellor will need to find a way to fund an extra £5 billion of spending next year, relative to plans published at the Spring Statement, just to avoid cuts to other public services. Increasing spending on other priority areas would require even greater funding.
This briefing note sets out our analysis in advance of the spending review.
- This Wednesday the Chancellor will allocate funding to departments for the next financial year, 2020−2021. This departmental spending (DEL) is £375 billion this year. Of that about £61 billion is capital spending, on which decisions have largely already been taken for next year (it is due to rise by nearly 5% in real terms). The remaining £314 billion is the day-to-day spending (resource DEL) which will be the subject of this week’s allocations. In addition the government spends £468 billion a year which it designates as Annually Managed Expenditure (AME) – on social security and debt interest for example. We do not expect this to be covered by Wednesday’s announcements.
- More than 70% of these day-to-day spending totals are “protected” or have been largely determined by announcements prior to the spending review. English NHS spending is set to rise by £4.1 billion next year, and schools spending by £1.8 billion while the government is committed to keeping defence and overseas aid spending to at least 2% and 0.7% of national income respectively.
- The government’s spending commitments to date (on the NHS, defence, aid, police, further education and schools) imply increasing day-to-day spending on those priority areas by around £9 billion next year (in today’s prices).
- Given these commitments, day-to-day spending next year will need to be between £4 and £5 billion higher than implied by plans set out in the Spring Statement simply to avoid further cuts in other areas. Given the OBR’s spring forecasts, this could be accommodated while staying within the government’s fiscal rule.
- Borrowing (cyclically adjusted) this year was forecast by the OBR at £29 billion in the spring and was due to be £19 billion next year, though borrowing is coming in above forecast so far this year. Borrowing of £19 billion in 2020−21 would be £27 billion below the maximum £46 billion consistent with the government’s fiscal rule which says borrowing should be below 2% of national income. However changes to accounting for student loans mean that headroom will in fact stand at about £15 billion next year.
- But the next set of forecasts from the OBR, due later this year, are likely to reflect a deterioration in the near-term outlook for the economy and public finances. This could mean the Chancellor’s £15 billion of apparent headroom shrinks. He may claim that he is keeping planned borrowing next year within 2% of national income but new OBR figures due later this autumn could suggest otherwise. That’s why OBR forecasts and significant fiscal events have been aligned up to now. The fiscal watchdog may get to bark too late.
- Keeping debt falling as a share of GDP would (on forecasts from the spring) be consistent with up to £22 billion of additional borrowing next year, rising to £25 billion by 2023 − But again, a worsening of the economic outlook would reduce the Chancellor’s space for tax cuts or additional spending.
- The potential change to economic forecasts in the event of a no deal Brexit are an order of magnitude greater. Recent OBR analysis suggested that even a relatively benign no deal scenario would push the UK economy into recession, make the UK permanently poorer and result in higher borrowing to the tune of £30 billion a year from 2020−21 onwards.