Spending reviews are a surprisingly modern invention. Whilst the Budget has been a fixture of government finance cycles since the eighteenth century, the first spending review took place as recently as 1998.
But for the public finances, that was a very different era.
Designed under Gordon Brown, spending reviews were intended to make sure Whitehall departments delivered sustained investments in the public services. Since then, our economic circumstances have changed and reducing the deficit, in part through spending cuts, is the priority.
The introduction of the spending review in 1998 also saw public spending split into two categories – Annually Managed Expenditure (AME) and Departmental Expenditure Limits (DEL). At present, each category amounts to about half of the government’s total spending.
DEL includes all of the government’s administration and public services like the NHS, education, and defence. Despite rows across the Cabinet table over departmental budgets, it is actually the easier part to plan and allocate at spending reviews for three-year periods.
AME is generally seen as more difficult to plan in advance, because it includes variable costs like social security. When more people are unemployed, for example, the social security bill goes up.
Just as DEL is relatively straightforward to plan, it is relatively straightforward to cut – at least on paper. The 2010 spending review by the Coalition Government cut DEL and the forthcoming review will cut it further as part of the government’s bid to reduce the deficit.
But AME has remained untouched – until now. In his March Budget statement, George Osborne promised to cap a ‘significant proportion’ of what he described as ‘Annually Unmanaged Expenditure’. Looking at the figures, it’s easy to see why.
The Office for Budgetary Responsibility forecasts an eye-watering rise in AME of £79bn over the next five years, from £350bn in the financial year just ended, to £429bn in 2017/18. That’s mainly driven by increases in the UK’s social security bill and the government’s debt interest.
Little wonder the Chancellor aims to bring it under more control. But how will he do that?
In all likelihood, Osborne will extend his mantra of ‘making work pay’ by tackling the social security bill. Welfare makes up the largest part of AME by far, expected to be £183bn this year. The next largest is debt interest at £47bn.
So a cap might mean that if the social security bill hits a certain limit, levers to restrain spending are triggered. Measures might include changes to eligibility rules for new claimants or policy decisions to help manage demand down.
This is not without international precedent; in the US, Congress alters eligibility rules for certain benefits to make ends meet.
Labour’s recent announcement to cap social security over three-year periods suggests there is political consensus in stemming the rise in AME. That is welcome. Whilst debates on welfare spending are sensitive and difficult, it is vital that the government – whichever party is in charge – faces up to the unsustainable growth in the social security bill driven by our ageing society.
Capping this one part of AME will bring a greater proportion of the government’s total spending under tighter control. But if the Chancellor is willing to change one element of the spending review framework, why not consider if the wider process is still fit for purpose? He could go further and rethink the DEL/AME split altogether.
The principles he is expected to apply to the social security part of AME could be adapted to other elements, effectively transferring AME into DEL. Ultimately, the division may become unnecessary.
That would be a further step in the government’s continuing journey of improvement in its financial management. Much has already been done in Whitehall under the auspices of its Financial Transformation Programme – to raise commercial awareness, improve processes, and promote a cost-conscious culture – but there is still much that can be done to make the best use of every taxpayer pound.
Because on the day of the Spending Review, and amid the wider debates on social security, it’s worth remembering: the battleground may be welfare spending, but the war is actually for affordable government.
