The primary purpose of the Spending Review announcement tomorrow by the Chancellor will be to set out the UK Government’s departmental spending plans for the 2020-21 financial year that starts on 1 April 2021, but there is a lot more going on than that.

Before going further, it is important to distinguish between the one-year Spending Review that will be presented and the three-year Comprehensive Spending Review (CSR) that was originally planned. The CSR has unfortunately been deferred until next year because of the uncertain economic outlook following the arrival of the coronavirus, with the Chancellor Rishi Sunak choosing to set department budgets for only the coming financial year. These budgets will have been based on bids submitted by each department that will have been pared back following extensive negotiations across Whitehall.

The process for establishing multi-year departmental budgets has now been deferred for the third year running, with the calling of the General Election last year resulting in Sajid Javid’s one-year Spending Round in 2019 and Brexit-related uncertainty resulting in one-year departmental spending allocations within Philip Hammond’s 2018 Budget. Although perhaps understandable on each individual occasion, the lack of medium-budget certainty for several years is far from ideal in terms of good financial management!

An important innovation last year was the setting of departmental capital budgets for two years rather than just one to provide greater certainty around capital programmes with long lead times. We are anticipating this will also be the case this time, although ICAEW has suggested extending capital budgets a further year in our letter to the Chief Secretary to the Treasury (the minister within HM Treasury with responsibility for public spending) in order to provide more certainty for long-term infrastructure projects.

Another exception to the shorter time horizon for this year’s Spending Review is the multi-year settlement for the Ministry of Defence announced last Thursday, which provides an additional £4bn a year over the next four years on top of the existing commitment to increase the defence budget by 0.5% in excess of inflation. This will underpin the Integrated Defence & Security Review expected to be published in early 2021.

Although headlined as a spending announcement, tomorrow’s statement will also constitute one of the two annual fiscal events where the Office for Budget Responsibility (OBR) is required by law to publish its Economic and Fiscal Outlook (EFO) containing financial forecasts for the next five years. These are not expected to be very pretty, with the coronavirus pandemic spreading red ink across not only the public finances this year, but also dragging down expected revenues and increasing spending in future years. These forecasts will also be much more uncertain than is normal, which might be one reason the Chancellor has not chosen to describe this event as an Autumn Statement.

The EFO will cover not only planned spending by central government departments – known as departmental expenditure limits (DEL) – but also welfare, interest and other types of expenditure driven by economic conditions – known as annually managed expenditure (AME). Combined with expectations for tax and other receipts in 2020-21, it will roll these forecasts forward a further four years to 2024-25 to provide a five-year forecast for the fiscal deficit (the shortfall between receipts and spending) and public debt. There will be even greater caveats than normal not only in the forecasts but also in the estimate for the remainder of the current financial year.

This is not a full-blown Budget and so we do not expect to see many permanent tax changes beyond a few that were announced last week, although the Chancellor could take this opportunity to extend some temporary tax measures in addition to the extension of £1m Annual Investment Allowance temporary cap to the end of 2021. For example, he is likely to be considering whether or not to extend relief from business rates currently scheduled to end in March 2021 into the next financial year. There could also be an announcement about National Insurance thresholds for next year.

Fiscal events are often accompanied by other publications, with the long-delayed National Infrastructure Strategy anticipated to set out how the Government plans to deliver the ‘Ten Point Plan for a Green Industrial Revolution’ announced by the Prime Minister last week. Making the Government’s ambitious infrastructure investment plans a reality will take a lot more than just allocating money in a Spending Review spreadsheet; it will also be critical to have a clear strategy, faster decision making, strong delivery capabilities, and the right framework for attracting private sector investment. ICAEW’s response to the Infrastructure Finance Review last year addressed many of these issues.

Other updates are likely to include a revised remit for the Debt Management Office (DMO) to raise funds over the course of the rest of the financial year and progress reports on HM Treasury projects such as the Balance Sheet Review.

In summary, Wednesday’s announcement will still be very important despite the delay in the Budget until the spring and the deferral of the CSR to next year.

Terms explained