Our forecasts for departmental spending are constructed by taking the plans set out by the Treasury in Spending Reviews and applying our own forecast for how much departments will underspend relative to those plans to get to a forecast for actual spending. In years for which plans have not been set, we ask the Treasury to specify a policy assumption for the amount that it will spend and show what that would imply for plans, underspends and actual spending. The forecast process involves the Treasury attending challenge meetings and providing evidence on departments’ spending and their own in-year forecasts to allow the Budget Responsibility Committee to reach a judgement about underspending in the year in progress. The Treasury also provides evidence on pressures on departmental budgets in future years that informs the BRC’s judgements about underspending across the forecast period.
The amount of departmental spending is largely at the discretion of the Treasury, so unlike most of our fiscal forecasts, our DEL spending forecasts are not produced via one or more forecasting models. Instead, the starting point is the total budget for departmental spending – and how this is split across departments – that was set at the most recent Spending Review and any subsequent changes to those plans. The latest detailed departmental plans for the years 2016-17 to 2019-20 were initially set at the 2015 Spending Review, and then revised by policy changes in the Government’s 2016 and 2017 Budgets and the 2016 Autumn Statement. We report on these changes in each EFO. For the years that have not yet been covered by the latest Spending Review (i.e. 2020-21 and 2021-22 in our latest forecast), the Government sets the overall current and capital DEL spending totals in each Budget or Autumn Statement. Within those totals, some budgets for 2020-21 were initially set in the Spending Review, including all capital DELs plus RDELs for the NHS, the Ministry of Defence and the Security Intelligence Agencies.
Our DEL spending forecasts are produced top-down, rather than bottom-up – i.e. we do not forecast education spending by forecasting how many school pupils there will be and the average cost of teaching them. Indeed, with the exception of our in-year forecast, during which we consider Treasury information about pressures on individual departmental budgets, we typically do not look at the allocation of DELs across departments. Instead, we start with the totals for RDEL and CDEL plans, provided to us by the Treasury, and make a top-down assumption about the aggregate degree of underspending we expect against these budgets. This judgement is based on historical trends, the latest in-year data and the absolute level of DEL spending over the forecast period. For the current year and the following year, we also consider any effects from changes in the levels of underspend carried forward from previous years, which can add to spending pressures. We also consider information from the Treasury on any additional spending pressures that may lead to claims on the Treasury’s central reserves.
In autumn forecasts, our current year underspends forecasts are measured against initial plans for the year, as set out in Public expenditure statistical analyses (PESA). (The PESA plans specify any additional spending carried forward into the current year – for example, under Budget Exchange – and also set out the Treasury’s central reserves.) In spring forecasts, these initial plans have been superseded by final plans set out in Supplementary Estimates (usually published in February). Those final plans will include underspends that are surrendered for the current year, and any allocations from the Treasury’s central reserves. At that closing stage of the year, we will also know departments’ own forecasts of spending against their final plans, which they submit to the Treasury in February. We still express underspends against the initial PESA plans, but our forecasts are now informed by the final plans and the latest news on likely underspending against those plans.
When explaining changes to our DEL forecasts, we separate them into three types to try to make it clear when the changes are the result of Government policy decisions. We distinguish between:
- forecast changes: this constitutes any changes to our assumptions about the degree of underspending that we expect to see against the latest departmental plans, excluding the effects of any DEL policy changes;
- classification changes: any statistical changes that move spending between the PSCE/PSGI elements and the non-fiscal element that does not affect the deficit, any switches between DEL and AME, and new spending items included in our PSCE/PSGI DEL forecasts; and
- policy decisions: any changes to DELs that the Government chooses to make that are not covered by either of the two categories listed above, including any changes we make to underspending assumptions in response to those policy changes. We also include Government decisions to allocate more or less DEL spending to the PSCE/PSGI elements or to other parts of DEL, since these decisions affect the deficit.
The direct contribution of departmental spending to GDP
The spending forecast is compiled both in terms of the control framework of DEL and AME, and also in terms of its economic components, such as consumption, net social benefits, current grants within the public sector, gross domestic fixed capital formation (a measure of investment) and so on. These economic splits of spending feed directly into economic forecast, where general government consumption and investment makes up over 20 per cent of GDP.
The economic splits of DEL spending are taken from OSCAR, which is the database used by the Treasury to collect financial data from across the public sector, including departments’ spending outturns and plans. The economic splits of DELs are only available on OSCAR for the years covered by DEL settlements, and departments need some time to finalise and reflect their final detailed spending plans on OSCAR after their DEL totals are set in a Spending Review. For years of the fiscal forecast where details of DEL spending are not available on OSCAR (2020-21 onwards), we produce our own forecast of the economic allocation of DEL spending. Growth in spending on wages and salaries is linked to the growth in related spending areas (shown in a supplementary spending table associated with the March 2017 EFO on our website), whereas the remaining economic categories are allocated as constant shares of the remaining budget, relative to the final year for which plans exist (2019-20).