what does the budget mean for public services?...treasury spending review (various), hm treasury...

Ben Zaranko

IFS Spring Budget 2020 briefing

12 March 2020

What does the Budget mean for public services?

WiFi Network: The Building Centre(Open Network)

@TheIFS #Budget2020

Budget spending announcements

The Chancellor set his overall Spending Review ‘envelope’

• SR 2020 will conclude in the summer, not alongside the autumn Budget

‒ resource (day-to-day) budgets: three years from 2021−22 to 2023−24

‒ capital (investment) budgets: four years from 2021−22 to 2024−25

‒ other spending (e.g. social security spending) not in scope

Big promises on investment


The big picture: the size of the state is set to stabilise after 2022−23, at above the pre-crisis level

0

200

400

600

800

1,000

25%

30%

35%

40%

45%

50%19

55–5

619

58–5

919

61–6

219

64–6

519

67–6

819

70–7

119

73–7

419

76–7

719

79–8

019

82–8

319

85–8

619

88–8

919

91–9

219

94–9

519

97–9

820

00–0

120

03–0

420

06–0

720

09–1

020

12–1

320

15–1

620

18–1

920

21–2

220

24−2

5

£ bi

llion

(201

9−20

pri

ces)

Perc

enta

ge o

f nat

iona

l inc

ome

% of GDP (left axis)Real £ billion (right axis)

Source: Author’s calculations using OBR Public Finances Databank.

40.8% of GDP


The Chancellor announced that day-to-day spending on public services will grow by 2.8% per year in real-terms between 2020−21 and 2023−24

+2.6%

+4.0%+4.8%

+3.9%

+1.7%

-2.1%-2.7%

-0.8%

+4.1%

+2.8%

-4%

-2%

0%

2%

4%

6%

8%

SR 1998 SR 2000 SR 2002 SR 2004 SR 2007 SR 2010 SR 2013 SR 2015 SR 2019 SR 2020

Plan

ned

aver

age

annu

al re

al %

gro

wth

in R

DEL

Spending ReviewNote: Figures denote the planned average annual real growth rate in day-to-day spending on public services (Resource Departmental Expenditure Limits excluding depreciation). Labour figure is average increase between 2019−20 and 2023−24 implied by their manifesto commitments. Source: Author’s calculations using HM Treasury Spending Review (various), HM Treasury Budget 2020, OBR’s March 2020 Economic and Fiscal Outlook, Labour party 2019 election manifesto.

Labour Party 2019 manifesto: +7.0%


Spending Review plans are front-loaded

Note: Figures denote real annual growth in Public Sector Current Expenditure in Resource DEL (PSCE in RDEL) adjusted for historic discontinuities, relative to the previous financial year. Source: OBR Economic and Fiscal Outlook, March 2020, supplementary expenditure tables.

-1.3% -1.3%

-0.1%

0.3%

4.3% 4.2%

3.4%

1.9%2.1%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

2015−16 2016−17 2017−18 2018−19 2019−20 2020−21 2021−22 2022−23 2023−24

Real

-ter

ms

annu

al g

row

th

Spending Round 2019

Spending Review 2020


The raw figures suggest that real-terms public service spending per person will return to its 2010 level by 2025

70

75

80

85

90

95

100

105

11020

09-1

0

2010

-11

2011

-12

2012

-13

2013

-14

2014

-15

2015

-16

2016

-17

2017

-18

2018

-19

2019

-20

2020

-21

2021

-22

2022

-23

2023

-24

2024

-25

Real

spe

ndin

g (2

009−

10=

100)

Note: All figures denote public sector current expenditure in resource DEL (PSCE in RDEL), adjusted for historic discontinuities. Source: Author’s calculations using OBR Economic and Fiscal Outlook March 2020 and various HM Treasury Public Expenditure Statistical Analyses.

Day-to-day spending on public services

Day-to-day spending on public services excluding Health

Real-terms: 9% higher in 2024−25 than in 2009−10

Real-terms per person: The same in 2024−25as in 2009−10

Real-terms: 7% lower in 2024−25 than in 2009−10

Real-terms per person: 14% lower in 2024−25 than in 2009−10


The raw figures do not tell the full story, however

The nominal RDEL total in 2023−24 is part-funded by £11.3 billion of direct savings from EU contributions we will no longer pay

• But the EU would have been expected to undertake approx. £7−8 billion of day-to-day spending in that year either in the UK or on our behalf (e.g. on overseas aid)

• If the Government replaced all of that spending, this would come out of the DEL settlement

‒ so approx. £7−8 billion of spending in 2023−24 would not be ‘new’ money or available to allocate to other public services; including it overstates the ‘true’ generosity of the settlement

Raw figures from 2019−20 onwards also include approx. £5.5 billion extra spending per year in relation to a change in employer pension contributions

We adjust for these actors to obtain a more consistent series over time


On this adjusted measure, day-to-day spending per person will not return to its 2010 level by 2025

70

75

80

85

90

95

100

105

11020

09-1

0

2010

-11

2011

-12

2012

-13

2013

-14

2014

-15

2015

-16

2016

-17

2017

-18

2018

-19

2019

-20

2020

-21

2021

-22

2022

-23

2023

-24

2024

-25

Real

spe

ndin

g (2

009−

10=

100)

Note: All figures denote public sector current expenditure in resource DEL (PSCE in RDEL). Source: Author’s calculations using HM Treasury Budget 2020, OBR Economic and Fiscal Outlook (March 2020 and March 2019), various HM Treasury Public Expenditure Statistical Analyses, Spending Round 2019, Department for International Development Statistics 2018.

Day-to-day spending on public services (adjusted)

Day-to-day spending on public services excluding Health (adjusted)

Real-terms: 5% higher in 2024−25 than in 2009−10

Real-terms per person: 4% lower in 2024−25as in 2009−10

Real-terms: 12% lower in 2024−25 than in 2009−10

Real-terms per person: 19% lower in 2024−25 than in 2009−10

Raw (unadjusted) figures


Our adjusted figures imply that day-to-day spending on public services will in fact grow by 2.1% per year in real-terms between 2020−21 and 2023−24

+2.6%

+4.0%+4.8%

+3.9%

+1.7%

-2.1%-2.7%

-0.8%

+4.1%

+2.1%

+2.8%

-4%

-2%

0%

2%

4%

6%

8%


Plan

ned

aver

age

annu

al re

al %

gro

wth

in R

DEL

Spending ReviewNote: Figures denote the planned average annual real growth rate in day-to-day spending on public services (Resource Departmental Expenditure Limits excluding depreciation). Source: Author’s calculations using HM Treasury Spending Review (various), HM Treasury Budget 2020, OBR’s March 2020 Economic and Fiscal Outlook, Labour party 2019 election manifesto.


No spending department is facing a real-terms cut between this year and next

+£14bn

0

2

4

6

8

10

12

14

16

NHS England Schools inEngland

Everything else Total 'adjusted'increase

Replace EUfarm subsidies

Total 'raw'increase

Real-terms spending increase, 2019−20 to 2020−21

Real

£ b

illio

n (2

019−

20 p

rice

s)

Note: Total increase denotes the real-terms increase in public sector current expenditure in resource DEL (PSCE in RDEL), adjusted for historical discontinuities. Source: Author’s calculations using HM Treasury Budget 2020, OBR Economic and Fiscal Outlook March 2020, various HM Treasury Public Expenditure Statistical Analyses, Spending Round 2019.



+£11bn

+£14bn+£3bn

0

2

4

6

8

10

12

14

16




Total 'raw'increase


Real

£ b

illio

n (2

019−

20 p

rice

s)




+£11bn

+£14bn

+£4bn

+£2bn

+£5bn

+£3bn

0

2

4

6

8

10

12

14

16




Total 'raw'increase


Real

£ b

illio

n (2

019−

20 p

rice

s)



Spending settlements outside of Health still look extremely tight over the next Spending Review period

+£25bn

0

5

10

15

20

25

30


Scotland,Wales and N.

Ireland

Defence andoverseas aid

Remainingbudgets

Total'adjusted'increase

Replace otherEU spending

Total 'raw'increase


Real

£ b

illio

n (2

019−

20 p

rice

s)

Note: Total ‘raw’ increase denotes the real-terms increase in public sector current expenditure in resource DEL (PSCE in RDEL), adjusted for historical discontinuities. Total ‘adjusted’ increase also adjusts for estimated resource spending previously done by the EU, that reflects a transfer from AME to DEL rather than a genuine increase in departmental budgets. Scotland, Wales and N. Ireland refers to Barnett consequential of NHS and schools spending only. Source: Author’s calculations using HM Treasury Budget 2020, OBR Economic and Fiscal Outlook (March 2020 and March 2019), various HM Treasury Public Expenditure Statistical Analyses, Spending Round 2019, Department for International Development Statistics 2018.



+£21bn

+£25bn+£4bn

0

5

10

15

20

25

30



Ireland


Remainingbudgets



Total 'raw'increase


Real

£ b

illio

n (2

019−

20 p

rice

s)




+£21bn

+£25bn

+£12bn

+£4bn

0

5

10

15

20

25

30



Ireland


Remainingbudgets



Total 'raw'increase


Real

£ b

illio

n (2

019−

20 p

rice

s)




+£21bn

+£25bn

+£12bn

+£3bn+£3bn

+£1bn

+£4bn

0

5

10

15

20

25

30



Ireland


Remainingbudgets



Total 'raw'increase


Real

£ b

illio

n (2

019−

20 p

rice

s)




+£21bn

+£25bn

+£12bn

+£3bn+£3bn

+£1bn+£3bn

+£4bn

0

5

10

15

20

25

30



Ireland


Remainingbudgets



Total 'raw'increase


Real

£ b

illio

n (2

019−

20 p

rice

s)



Includes the police, local government, social care, and areas likely to have considerable new post-Brexit responsibilities (e.g. customs authorities)

Day-to-day public service spending: a summary

The Chancellor announced 2.8% annual real increase over the SR 2020 period

• But much of the increase will simply be to cover new post-Brexit responsibilities

• The settlement is less generous than it seems

On a consistent basis, budgets are set to grow by approx. 2.1% per year

Over the SR period, areas outside of NHS, schools, defence and overseas aid are facing tight settlements

• Extra money for priority areas like police or social care, plus post-Brexit spending pressures on (e.g.) immigration and customs possible cuts elsewhere

• …unless the Chancellor finds the money to make top-ups later in the year


Government investment spending over the next 5 years is planned to average 2.9% of GDP, versus an average of 1.4% over the past 40 years

Source: IFS calculations using OBR public finances databank. Forecasts for PSNI do not incorporate any assumed underspend.

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%19

78-7

9

1980

-81

1982

-83

1984

-85

1986

-87

1988

-89

1990

-91

1992

-93

1994

-95

1996

-97

1998

-99

2000

-01

2002

-03

2004

-05

2006

-07

2008

-09

2010

-11

2012

-13

2014

-15

2016

-17

2018

-19

2020

-21

2022

-23

2024

-25

Per c

ent o

f nat

iona

l inc

ome

Public sector net investment as % GDP

40-year average = 1.4%

Average over next 5 years = 2.9%


Capital spending by departments is planned to grow by 5.2% per year in real-terms between 2020−21 and 2024−25

+11.3%

+14.9%

+9.5%

+6.4%+4.5%

-8.2%

1.2% 1.3%

+7.4%

+5.2%

-10%

-5%

0%

5%

10%

15%

20%


Plan

ned

aver

age

annu

al re

al %

gro

wth

in C

DEL

Spending ReviewNote: Figures denote the planned average annual real growth rate in departments’ capital budgets (Capital Departmental Expenditure Limits). SR 2020 figure does not account for the OBR’s assumed underspend; the figure once assumed underspends are accounted for is 3.9% per year. Source: Author’s calculations using HM Treasury Spending Review (various), HM Treasury Budget 2020 and OBR’s March 2020 Economic and Fiscal Outlook.


The challenge: delivering investment on this scale

Treasury plans to increase departments’ capital budgets by 5.2% per year over the 4 year period from 2020−21 to 2024−25

The OBR assumes that 8% of total capital budget will go unspent each year

• Departmental capital spending is ultimately expected to grow by 3.3% per year, rather than 5.2% per year, as a result

• Plans are front-loaded: likely to exacerbate underspending in the near term

‒ 13.0% growth in first year of SR plans versus 1.4% growth in final year

Promising big on investment is one thing; delivering big is another

• Over-optimism on timelines, lack of sufficient civil service expertise, shortages of suitably skilled construction workers all pose challenges


The government tends to undershoot its capital spending plans: no reason to think this time is different

0

10

20

30

40

50

6019

92-9

3

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

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-03

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-04

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-05

2005

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2007

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2008

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2009

-10

2010

-11

2011

-12

2012

-13

2013

-14

2014

-15

2015

-16

2016

-17

2017

-18

£ bi

llion

Financial year

Successive forecasts

Out-turn (pre-1999)

Out-turn (pre-2010)

Out-turn (post-2010)

Note: Figures pre-1999 are public sector net capital expenditure (PSNCE); figures post-1999 are public sector net investment (PSNI). Out-turns are adjusted for classification changes and so are not consistent with the most recently published figures. For further details, see Crawford, Johnson and Zaranko (2018). Source: Author’s calculations and Crawford, Johnson and Zaranko (2018), ‘The planning and control of UK public expenditure, 1993-2015’, IFS Report R147.


‘Levelling up’

The Chancellor announced a review of the rules that govern which investment projects receive funding

• Explicitly placing greater weight on regional equity would be one way of rebalancing government investment away from London and the S. East

• But we shouldn’t expect regional differences to disappear entirely

‒ financial returns to investment still likely to be greater in densely populated, highly productive areas

Levelling up needs to be about more than just investment

• Complex, deep-rooted regional inequalities will take time to address


Final thoughts

The Chancellor’s Spending Review envelope is less generous than it appear at first glance

• Part of the funding increase required just to replace EU spending

• Some areas are likely to face tight settlements

• Setting an overall ceiling in advance a useful negotiating tool for the Treasury

‒ but Chancellors have continually “re-opened the envelope”

The scale of the government’s ambition on investment spending is striking

• Defining challenge for this Government will be delivering on these promises


The Building Centre, London

12 March 2020

Spring Budget 2020: IFS Analysis

WiFi Network: The Building Centre(Open Network)

@TheIFS #Budget2020

what does the budget mean for public services?...treasury spending review (various), hm treasury...

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