What is a Spending Review? How will it affect you?

What is a Spending Review? How will it affect you?

On Wednesday the government will announce how much money it will spend on hospitals, schools and other public services over the next financial year, starting in April 2021.

This process, known as a Spending Review, will also include details of how the government plans to deliver on some of the promises it made during the last election campaign, such as improving the economy of less wealthy areas of the UK.

We will also get more detail about how badly Covid-19 has affected the economy.

The pandemic has brought tens of billions of pounds of extra costs, and cut the amount of tax coming in to pay for them.

So the Chancellor, Rishi Sunak, who conducts the Spending Review, has some uniquely difficult decisions to make.

A Spending Review determines how much gets spent on public services.

So anyone who ever visits a GP or an NHS hospital, or goes to school, or uses roads or any of the other services provided by government will be directly affected.

More money for the NHS should mean better treatment, delivered quicker.

The Spending Review is also expected to include details of how big a pay increase public sector workers such as nurses, police officers and teachers will get next year. It is possible many of them will not get a raise at all.

If the Spending Review helps government deliver its plan to bring greater prosperity to places such as the north of England, it should make life better for people who live there.

And the chancellor’s decisions will affect how much the government borrows next year, and in future years. And the cost of paying back those debts, or at least paying the interest on them, will fall on future tax payers for years to come.

Usually a Spending Review would cover a period of three or four years to give government departments enough certainty to make long-term plans.

The coronavirus pandemic disrupted so many aspects of life this year that long-term planning is particularly difficult.

So the government has decided that this Spending Review will only cover one year, from April 2021 to April 2022.

Normally the amount of money a Chancellor would allocate in a Spending Review would be strictly limited by how much he or she would be prepared for the government to borrow.

But this year the pandemic has caused government borrowing to skyrocket.

With businesses closed and workers on furlough, government is taking less money in taxes. And it’s spending more than planned on measures to fight the virus and support the economy.

Before the pandemic, the government expected to borrow around £55bn this financial year.

Seven months in, the government has already borrowed £215bn, and it’s expected to exceed £370bn by the end of the year.

The government can’t keep borrowing that amount of money for very long.

So the chancellor must decide whether to prioritise cutting the amount the government has to borrow – which would mean spending less money on public services.

Alternatively he may decide that it’s worth borrowing even more money to fund the NHS and support the economy.

From 2010 to 2019, the amount of money spent on public services has been falling – the longest sustained fall on record, according to the Institute for Fiscal Studies think-tank.

Before the pandemic struck, government had already made plans to bring that squeeze to an end, increasing spending this year and next.

It was planning an increase of 4.4% in day-to-day departmental budgets for 2021-22.

The amount available to departments for longer-term investment was set to grow even faster, by 12.5%.

The pandemic forced the government to spend tens of billions extra on health, and supporting jobs and the economy.

It is likely to have to spend more than it planned next year, too.

Some elements of the Spending Review have already been announced:

The Spending Review may also give more detail on how the government plans to meet its other long-term goals.

The government hopes to improve the economy in poorer areas of the UK, known as “levelling up”. It has also set out plans to fight climate change by cutting the UK’s carbon dioxide emissions to net zero by 2050.

The chancellor may also need to set aside money for new arrangements for when the UK is no longer bound by EU rules in the new year – such as more customs agents.

The Spending Review this year will also see the release of a new set of economic forecasts from the Office for Budget Responsibility, which keeps tabs on government spending.

These forecasts will estimate how much damage the pandemic has done to the economy, how quickly it is likely to recover, and how many people will lose their jobs.

They will also predict how tax will be raised, and how much the government will have to borrow in future years.

The numbers will reflect that 2020 saw one of the most severe recessions on record.

That will present the chancellor with a stark choice in coming years – cut spending, raise taxes, or allow government to keep on borrowing.

How does the Spending Review affect Northern Ireland, Scotland and Wales?

Many parts of the Spending Review will only apply to England.

Much of government activity elsewhere in the UK is controlled by the devolved administrations – the Scottish government, Welsh government and Northern Ireland Executive.

If the chancellor spends extra money on a service which is covered by devolution, such as education, the devolved administrations get extra money too.

The idea is that a £100 increase in spending per person in England on education, should be matched with an extra £100 per person for each of the devolved administrations to spend as they choose.

The way money gets allocated is set out by the Barnett formula, named after Lord Barnett, the politician who devised it in the late 1970s.

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