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ICAEW urges government ‘stability and clarity’ in budgets

Author: ICAEW Insights

Published: 28 Feb 2024

In a letter to the Chief Secretary to the Treasury, the Institute writes about the Spending Review scheduled for later this year, cost effectiveness in infrastructure delivery and public sector productivity.

Alison Ring, Director for Public Sector and Taxation, has written to Laura Trott MP, Chief Secretary to the Treasury, with a series of recommendations ahead of the Spring Budget 2024 next month and the Spending Review scheduled for later this year. 

This follows ICAEW’s formal Spring Budget 2024 submission to HM Treasury and the publication of its Manifesto: ICAEW’s vision for a renewed and resilient UK. Together, they set out recommendations to improve productivity, skills, sustainability, innovation, resilience, trust and trade, including the need to develop and communicate a long-term fiscal strategy for public finances and to put local government on to a stable funding base.

The Chief Secretary has overall responsibility for government spending and Ring’s letter relates the need for stability and clarity in budgets to ensure departments, local authorities, and other public bodies can plan effectively to obtain the best value for the money they spend on the public’s behalf, especially on capital investment.

The letter covers three main points: the timing of the three-year Spending Review and the risk that it might be delayed by the general election; the need to rethink how infrastructure projects are planned and delivered; and how public sector productivity improvements require upfront investment if they are to deliver sustainable cost savings.

Spending Review contingency plan

The general election puts the timing of the planned three-year review for 2025/26-2027/28 at risk and it is possible that a one-year spending round may be needed to plug the gap between reviews. This can damage capital investment programmes that span multiple years, so ICAEW suggests that any interim spending round should encompass at least two years of capital budgets.

It can be difficult to justify capital investment programmes without certainty of funding for the life of those projects, and three-year spending reviews have helped provide much greater confidence about both capital and operational funding, a key reason for their introduction.

However, the additional confidence gained through multi-year reviews dissipates in the second half of a spending review (i.e. now) and is exacerbated when spending rounds extend budget settlements by only a single year, as could easily be the case for 2025/26. The risk is that infrastructure projects, and the economic benefits they generate, will end up being deferred just at a time when the British economy needs all the help it can get.

In the longer term, ICAEW would like to see multi-year rolling spending reviews to provide sufficient budgetary confidence to departments, local authorities and other public bodies to plan their capital programmes, but this would require a significant change in how government works and would require lead time to implement. In the meantime, the Institute’s recommendation to the Chief Secretary is to ensure that if an interim spending round is needed, it covers at least two years of capital budgets.

Infrastructure delivery

Recent reports (most recently by Boston Consulting Group) have highlighted how much higher per unit infrastructure costs are in the UK than in comparable countries, as well as how much longer major infrastructure projects take to complete. While planning permissions are a key part of the problem, there is also a need for a fundamental rethink in how infrastructure projects are planned and delivered in the UK, the letter says.

ICAEW’s recommendation is to replace one-off bespoke approvals of infrastructure projects with a rolling programme of standardised infrastructure upgrades across the country. Such an approach would address a key weakness in how UK infrastructure projects are delivered – their ‘bespoke’ nature means expertise and experience is not transferred from one project to the next, planning applications are prepared from scratch and designs are not reused. 

One prominent example of how such an approach could have helped was the recent Edinburgh tram project, which was delivered five years late at nearly twice the original budget. Many of the problems could have been avoided if it had been part of a rolling programme of tram systems across the country able to leverage the expertise of a team that constructs such systems on a regular basis. A portfolio team would also be able to speed up delivery by, for example, being able to work on the planning application of the project after next and the design of the next project at the same time as constructing the current one.

Of course, such an approach wouldn’t prevent budget overruns – there are always things that can go wrong however rigorous the cost estimates – and so there is also a need to change the start-stop-start process of dealing with in-year project overspends. This sees departments, local authorities and other public bodies routinely halt, postpone or rescope projects to stay within budget in the current financial year, despite knowing that this will often waste money. As teams and subcontractors are demobilised and remobilised, overall costs become higher as construction cost inflation eats into budgets when projects eventually resume, deferring or reducing the economic benefits or service potential that was part of the original business case. 

The irony is that the government typically underspends its overall capital budget each year, but finds it difficult to move money between departments and agencies to manage its overall pipeline of infrastructure projects. A different approach is needed that provides a way of managing project overruns in a less damaging way, at the same time as ensuring cost discipline is not lost.

Public sector productivity

Productivity improvements do not happen by chance, the letter states. Delivering sustained cost savings while improving outputs rarely occurs without significant amounts of time, effort and money being put into transforming how products are made or services are delivered. 

Governments – particularly those seeking to constrain public spending – often appear to cut budgets first and only then try to work out how to make those cuts sustainable afterwards, hoping that innovation will emerge as public bodies seek to live within new constrained means.

This is of course an oversimplification and there are some good examples of where government has been able to improve the quality of public services at a lower cost, such as at the passport office and DVLA (admittedly after some false starts), the development of a common platform for government websites and through the Government Property Agency. However, there also many examples of cost savings being achieved by deferring maintenance expenditure – often at a much greater long-term cost – through pay erosion that ends up costing more in recruitment and lost experience as staff leave, through excessive inefficiency caused by not investing in basic IT and other equipment, and (as discussed above) in how infrastructure projects are delivered.

Significant upfront investment in both technology and people, as well as dedicated effort by ministerial teams, is required to deliver sustainable long-term savings at the same time as improving outputs. These investment strategies should be integrated into Spring Budget and Spending Review goals where possible

In theory, the Spring Budget 2024 should set out the spending envelope to be used for the three-year Spending Review later this year, but with the timing of the general election still uncertain, it is unclear whether this will happen or whether the Spending Review will still be going ahead.

Budget 2024

Read ICAEW's analysis of the Chancellor's announcements and register to attend free Tax Webinar reflection on the potential implications.

Houses of Parliament

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