The size of the Chancellor’s envelope: why does it matter?

Much of the Chancellor’s upcoming Budget (October 29) risks being made irrelevant by the culmination of Brexit negotiations in the following month. But we should be aware of one announcement that is likely to have a lasting impact on the shape of government spending – the size of the ‘spending envelope’. PEF economist Michael Davies writes.

The Chancellor of the Exchequer, Philip Hammond, has decided to move this year’s Budget a month forward to October 29 in order to avoid clashes with the final stage of Brexit negotiations. He will be also making his announcement on a Monday, rather than the traditional Wednesday, most likely because Wednesday 31 October is Halloween. Fair enough; the comparisons write themselves.

Given the severe uncertainty around the form – if any – that Brexit will take, there is concern that the Chancellor’s announcements risk being made out of date by the outcome of next month’s talks. The perfunctory economic forecasts, at any rate, are likely to be even less accurate than they have been in budgets past.[1] Brexit uncertainty should not be used an excuse for more austerity, as argued elsewhere on this blog by John Weeks; if anything, the opposite approach should be taken. Still, Brexit may necessitate an emergency budget to replace this one before the year is out.

Still, the Chancellor will be making one announcement of lasting importance. He will tell Parliament the size of the spending envelope – roughly speaking, the total amount the Government plans to spend in future years. This is the first step in a longer process through which the Treasury exerts control over the rest of government, and the Chancellor’s decision will have a profound impact on the UK economy.

The long arm of the Treasury: how does it work?

The department Hammond runs, HM Treasury, is arguably the most powerful across government: it controls how much money the others have at their disposal. It does this in part by setting budgets for departments at semi-regular intervals through Spending Reviews.

More specifically, government spending falls under two categories. The first, Annually Managed Expenditure (AME), covers spending that has to be managed on a year-by-year basis because of its unpredictable nature – social security payments, for instance. Spending that can be effectively planned years in advance falls under Departmental Expenditure Limits (DELs), and these are intended as hard limits on expenditure. Together, these two categories make up Total Managed Expenditure (TME). Spending Reviews focus on setting DELs.

 

Resource versus capital spending: a feminist issue

Departmental Expenditure Limits themselves are split up into Resource DELs and Capital DELs. These roughly correspond to current or day-to-day spending (RDELs) and investment (CDELs) respectively. Notably, money can be reallocated from resource to capital budgets once these limits have been set, but not vice versa, suggesting a sort of hierarchy between the different kinds of spending.[2]

 

The prioritisation of investment is understandable. The issue is that the government definition of investment covers physical infrastructure, but not social infrastructure – the health, care and education systems that our economy needs to function, just as much as it does bridges and roads.

Excluding spending on these systems from the implicitly more ‘worthwhile’ category of capital expenditure leads to neglect of social infrastructure, especially during a recession. Furthermore, since women are over-represented in social infrastructure industries and men in e.g. construction, this division reinforces a gender bias in economic policy-making.

 

The last Spending Review was in 2015 and set DELs for the fiscal years up to 2019/2020, but nothing has been finalised for 2020/21 onward.[3] These will be set in next year’s Spending Review, as announced by the Chancellor at the Spring Statement earlier this year. The spending envelope announced later this month sets the funding boundaries within which 2019’s review will take place.[4]

In the run-up to the Spending Review, ministers will compete with each other and negotiate with the Treasury to secure funding for their respective departments. From their perspective, the envelope represents the total amount of money up for grabs, and marks the start of a ministerial race for prominence.

How long a period will the Spending Review cover?

As mentioned above, the 2015 Spending Review set DELs up to 2019/20. This is normal: reviews are meant to be an exercise in planning for the (admittedly short-term) future. But the uncertainty around Brexit means that the Chancellor might opt for only finalising departmental budgets for 2020/21, and then undertake another review when more information comes to light.

There is precedent for this in 2013’s ‘mini-Spending Review’, which only set spending for the 2015/16 fiscal year – the Liberal Democrats and the Conservatives, then in coalition with each other, knew they wouldn’t agree on plans extending far beyond the 2015 General Election.

Of course, the Conservatives may no longer be in power by this point. If a Labour government were elected during the period covered by the 2019 Spending Review, one would expect they would carry out their own review to radically change the path of government spending.

Why does this matter?

The size of the spending envelope tells us how much funding the Chancellor plans to make available for public spending, possibly for up to 2023/24. As such, it will give us some indication of whether austerity is really over, as the Prime Minister claimed in her conference speech, or whether this was all just hot air. The New Economics Foundation have published an excellent report on the different paths the Chancellor could take with his upcoming Review.

Furthermore, departments are not allowed to overspend the expenditure limits (DELs) set in the Review. Though DELs are occasionally revised, often the government will announce a new programme or new area of spending without making any changes to the limits already imposed on departments by the Spending Review. As such, the money for these announced changes must be taken from existing programmes.

For example, in a report I worked on for the Centre for Labour and Social Studies (CLASS) and the Public and Commercial Services union (PCS), we showed how the government’s grand announcements to lift the public sector pay gap could only come at the expense of public services or reduced public sector employment. This is a prime example of how Spending Reviews constrain departments years down the line. Progressives should thus pay close attention to the size of the Chancellor’s envelope when he unveils it in a week’s time.

[1] (That being said, it will be hard to beat the Office for Budget Responsibility’s 2010 forecasts on this front, in which they massively underestimated the damage austerity would inflict on the UK economy – see p. 18 of their Oct 2016 Forecast Evaluation Report.)

[2] HM Treasury, Consolidated Budget Guidance 2016 to 2017, p. 9

[3] Except for 2020-21 RDEL budgets for the NHS, Ministry of Defence and the Security Intelligence Agencies – these were set by the 2015 Spending Review. Source: OBR March 2018 Economic and Fiscal Outlook, p. 129.

[4] The Spending Review itself will focus on setting Departmental Expenditure Limits (DELs) but the envelope is sometimes framed in terms of Total Managed Expenditure (TME).

Photo credit from previous page: Anthony Easton / Flickr

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