Implications of the 2020-1 spending round (5 September 2019)

05 Sep 2019

The Chancellor of the Exchequer, Sajid Javid, made a statement to Parliament on Wednesday which was overshadowed by votes on no deal and the next election (both of which the government lost). Key points from the announcement:

  • The only issue covered were the budget allocations to government departments for the 12 months from April 2020 to March 2021 (Departmental Expenditure Limits). The Chancellor said there will be a multi-year spending review in 2020. The Treasury promises this will involve a new set of outcome indicators to steer decision-making (the public value framework).

  • The independent Office of Budget Responsibility was not asked to update the official economic forecast for this statement. OBR only does this for a full statement. The next one is currently scheduled for the end of the year. In the absence of an OBR update, the Treasury worked on OBR's figures from March 2019 which said that the government's deficit (1.1% of GDP in 2018-9, forecast to be 1.3% in 2020-1) is below the government's fiscal target (that it should be less than 2% of GDP by 2020-1.

  • The Treasury anticipates a substantial accounting adjustment from the Office of National Statistics decision about student loans. This will add about £12 billion to the reported defict and left about £14 billion in fiscal headroom. In Wednesday's statement, the Chancellor allocated £13.4 billion to public services.

  • It is likely that OBR will revise its forecasts downward but the Chancellor said in his statement that he would set new fiscal targets. There is no particular magic about the current deficit target. 

  • The £13.4 billion allocation represents a 4.1% real-terms increase in departmental spending (on the assumption of a 2.3% inflation rate). This is the largest average increase in spending for a decade. The Conservative government's approach has shifted from austerity to boosterism. This has been coming for several years. Philip Hammond's last two budgets (2017, 2018) both involved a net giveaway.

  • The Treasury decisions broadly reflects the existing share of spending but the numbers differ a bit from the rhetoric. There are substantial increases for the NHS, education and the Home office. Every department gets a budget increase. This is a change from the the normal practice of seeking savings and provides a little bit of stability for civil servants. The budget increase for DfE is large (a budget increase of £3.8 billion ) is large but the increase is less than the departmental average (3.3% compared to 4.1%). The increases in percentage terms in education, health and defence are all less than average. The 16-to-18 increase is higher in percentage terms than the schools increase but also slightly below the departmental average and is a good settlement giving recent history and static demographics.

  • Treasury only publishes figures at a high level but it looks like a tight settlement for DfE's post-18/apprenticeship budget - a 1.6% cash increase (up from £12.6 billion to £12.8 billion) which is a small cut in real-terms. Government publishes lots of financial data but it is hard to work out what is going on. The actual changes from academic year are affected by underspends, carry-forwards etc. It is possible that DfE spending on an obscure budget line will go down and this will allow ministers to protect programmes, But, at a time of rising demand for apprenticeships, medical school degree places and adult education (from those on low incomes), the 2020-1 budget looks insufficient at first glance. Hopefully this is not the case.

  • DfE’s capital budget down from £5.0 bil to £4.5 bil (as indicated in last November 2018’s budget). Up to now, most of this budget has been spent on schools (more than £4 billion) but officials are working on FE capital spending plans.

  • All the focus has been on the schools and 16-18 announcements. Treasury have fixed the schools budget for three years which will leave more time in the coming months to think about the other parts of DfE budget, including apprenticeships, adult education and higher education. There is no response in this statement to the Post 18 review. If the OBR revises economic growth forecasts downwards, this will affect the apprenticeship levy budget. The recent NAO report identified a number of trends (rising numbers, higher costs associated with higher level standards) that suggest there will be an apprenticeship overspend in 2020-1.

Colleges have had years of underfunding and the main recent growth area (apprenticeships) is now in doubt. This year's budget round (2019-20) has been particularly tough for colleges. The funding decisions on 16-to-18 education are a good start but more work needs to be done to develop the further, technical and adult education system that the country needs.