Welcome to this special edition of the Public Law & Regulation team's Coalition Watch alert series.

Karl Marx, sitting in the British Library writing Das Kapital, was always ironically amused by the fact that the British government published so much of the official data and analysis that he needed to challenge the foundations of its economic system. Plus ça change. It may no longer be necessary to take a trip to St Pancras to read it, but the British government continues to publish formidable quantities of information about the UK economy.

The Spending Review 2010 published on 20 October is one such publication, complete with detailed charts and tables of data about public expenditure and an analysis of policy priorities and spending cuts.

In this edition we consider what the Review tells us about the future. After months of speculation, and the initial flurry of media comment on the day of publication, what are we to make of it? Is it tougher or less harsh than expected? What will it mean in practice?

This is our user's guide to the Spending Review: what it is, what it does, and what it is likely to mean for different parts of the public sector and the wider economy.

We look at where the burden falls as the Coalition allocates the £81 billion in cuts that it is now committed to deliver. And we focus not just on what this means in terms of the inevitable reduction in spending, but on those services for which the Coalition has found extra money. At a time when cash has to be saved, this additional spending tells us a great deal about where the Coalition's priorities lie.

If there is anything you would like us to cover in future Coalition Watch alerts or if you wish to comment on this edition, please feel free to email the team at publiclawandregulation@wragge.com - we welcome your comments.

A. What is the Spending Review and what does it do?

1. What is the Spending Review?

The Spending Review is the process of deciding how much money the Government will spend over the next few years.

The outcome of the review is set out in a document called Spending Review 2010.

This document lists the expenditure allowance for each government department for each of the next five years - starting with the current financial year (2010-11) and ending in the last year of the current parliament (2014-15).

It therefore plots a course through spending for the entire lifetime of the Coalition government.

2. Why is it so important on this occasion?

Governments always carry out regular spending reviews. But on this occasion it matters more than most, because the Spending Review has needed to address the 'structural deficit'.

The Government currently spends much more money than it receives in revenue, leading to a huge budget deficit which has to be funded by borrowing. In due course, the debt which this creates will have to be paid back, together with accumulated interest.

To give a sense of scale, in the current year the Government will receive £548 billion in revenues, but will spend £697 billion - a single year deficit of £149 billion. In the same year, interest charges on all the debt accumulated to date will be £43 billion.

What matters here is not just the fact that there is a deficit. The UK is just emerging from a period of deep recession, and governments would normally borrow to get their countries through recession - as the national economy recovers, tax revenues will increase and the situation will right itself.

What matters is that a large part of the deficit is 'structural', in other words, semi-permanent. It will not be resolved by a period of growth after recession. No projected increases in tax revenues will cover it. If nothing is done to address this 'structural' part of the deficit, it will still be there even during better economic times. No government could allow this.

3. Why is it so controversial?

No-one questions the fact that the structural deficit needs to be addressed.

The questions are whether it is being dealt with too quickly, whether the balance between raising taxes and cutting spending is the right one, and whether spending cuts are being allocated in a way that is 'fair'.

Broadly, the Opposition says that it would implement the cuts more slowly, reduce spending by a little less while raising tax by a bit more, and allocate the spending cuts in a slightly different way. But the broad picture of major spending cuts would have been the same regardless of the political complexion of the Government.

4. So what are the major headlines?

The Spending Review states that government spending will be reduced by £81 billion over a five- year period. To be clear, this does not mean that spending will decrease by this amount per annum, but that the overall saving over the entire five-year period will be £81 billion.

The saving is calculated by reference to the amount that would have been spent if there had been no Spending Review, and part of it is a notional saving since it relates to the avoidance of interest payments that would otherwise have been necessary.

Around £30 billion of these savings were announced in the June budget. The rest were announced in the Spending Review.

Two government departments are completely protected from the cuts - the Department of Health and the Department for International Development. But for all other government departments, the effect of the Spending Review is that the average departmental budget will be cut by 19% over the next four years.

Some guide to the overall impact of the Spending Review may be found in the independent Office for Budget Responsibility's estimate that it is likely to lead to a reduction in general government employment of 490,000 by 2014-15.

When taken together with proposed tax rises - for instance the increase in VAT from January 2011 - these savings should eliminate the structural deficit in the lifetime of the current parliament.

To put matters in perspective, even after all of the cuts and tax increases, the Government projects that public spending in 2014-15 will be in the same proportion to Gross Domestic Product (GDP - the basic measure of our national economic output) as it was in 2006-07, at some 41% of GDP.

5. How much detail have we been given?

The Spending Review document amounts to 106 pages of detailed statistics and policy statements, and is accompanied by other documents such as equalities impact assessments (all of which can be found online).

Clearly, this contains a great deal of detail. But in many ways it tells us little about the real world implications of the cuts.

Typically, for any given department, the Spending Review tells us:

  • its capital and resource budgets for each year of the five-year period,
  • other expenditure that comes under its aegis (known as annually managed expenditure),
  • the savings that it is expected to make in real terms (that is, allowing for likely inflation) by the end of the five-year period,
  • the major programmes, activities and arm's length bodies that are being scrapped in order to save money,
  • the major programmes and activities that it has been decided to save or to which additional funding is being given as part of the Spending Review.

So, to take just one example, we are told that the Ministry of Justice currently has an £8.3 billion annual budget which will be reduced to £7 billion by 2014-15, requiring resource savings in real terms of 23% by the end of the period. We know that in order to achieve these savings it plans to close 157 'under-utilised' courts, rationalise its London property from 18 buildings down to 4, and shave yet more money off the legal aid budget. We also know that its capital spend will be halved, so that plans for a new super-prison are being deferred. And we are told that it will need to find cost savings of around 33% in its 'back office' functions.

This is quite a lot of information. What it means on the ground, however, is hard to interpret and indeed has clearly not yet been worked out by the Ministry itself. It is one thing to say that administrative costs must be reduced by a third, but a different and much harder matter to choose the employees whose jobs will have to go and the activities that will have to be sacrificed.

In particular, while there is much talk of public sector efficiencies - and no doubt many efficiency savings that can genuinely be made - the proposed reductions in expenditure clearly go beyond a level that efficiencies alone can achieve. The full savings can only be delivered if the Government stops doing some of the things that it currently does.

By the end of the year each department will publish a business plan, incorporating its structural reform programme (versions of which for some departments have been available in draft for a few months). These business plans will specify in more detail how the Spending Review is to be implemented and what it will mean in practice.

6. So are there any winners?

There are two outright winners:

6.1 The Department of Health

The DH will see its budget rise by 0.4% in real terms over the five-year period covered by the Spending Review (on average, an increase of around £2.5 billion year-on-year during the period of the Review).

6.2 The Department for International Development

DfID will see its budget increase from £7.8 billion this year to £11.5 billion by the end of the period of the Review. This meets the UK's commitment to provide official development assistance of 0.7% of its gross national income. (Controversially, under the Strategic Defence and Security Review, part of this increase in spending will be aimed at national security - for instance by directing it to hotspots such as Afghanistan and Pakistan.)

In return for this protected funding, both departments have been required to commit to major efficiency savings over the period, so that more money can be used on front line services.

In addition, two departments have fared much better than might have been expected:

6.3 The Department for Education

The DfE has seen its schools budget protected, with real terms increases of 0.1% each year during the Review period for 5-16 year-old education, including the creation of a £2.5 billion 'pupil premium' for children from disadvantaged backgrounds.

The DfE will need to find 12% real terms saving from the non-schools budget, and its projected capital spend (mainly through the Building Schools for the Future programme) has been heavily cut back. Nonetheless, overall the DfE needs only find savings of 3% in real terms across the period. Rather late in the process, it has become something very close to a 'protected' department.

6.4 The Ministry of Defence

There was some heavy politics relating to the MoD in the run up to the announcement of the Spending Review. The overall savings it must find amount to around 8% in real terms by the end of the Review period, which is rather less than might have been expected.

This means that most frontline services can be protected, Trident renewed, and a number of procurements of new equipment progressed. Moreover, a Treasury Reserve Fund which is separate from the MoD budget will continue to fund the additional costs of the campaign in Afghanistan. The quid pro quo is that 25% spending reductions must be found in non-front line expenditure.

6.5 Devolved Administrations for Scotland, Wales and Northern Ireland

Finally, we might class the Devolved Administrations for Scotland, Wales and Northern Ireland as winners, which have avoided the worst of the cuts, collectively being subject only to a 7% real terms cut in their funding over the Review period. Their budgets have been determined by applying the Barnett Formula in the usual way (see our commentary on this in the fourth edition of Coalition Watch), so that the citizens of the three nations continue to benefit from much higher per capita spend than their English equivalents.

7. And who are the losers?

The losers are, in effect, everyone else.

The following list is intended to give some brief headlines of the impact of the Spending Review as it will be felt elsewhere. (All percentage figures are assumed to be in real terms - i.e. allowing for inflation – unless otherwise stated, although this is not always clear from the Spending Review.)

7.1 The Department for Transport

The DfT will see its resource spending cut by 21% over the Review period, and must find savings with major implications elsewhere (for instance there will be 20% cut in bus subsidy and a 28% reduction in the local government resource grants). However, its capital budget is largely protected, allowing it to continue to fund a number of major transport schemes.

7.2 The Department for Communities and Local Government

The overall resource budget of CLG will be reduced by 33% during the Review period, and its capital spend slashed from £6.8 billion this year to £2 billion by 2014-15. This makes the department perhaps the largest single loser in the Spending Review (though its Secretary of State may be politically inclined to see its willingness to embrace the cuts as a sign of success).

7.3 Local Government

(Not to be confused with CLG - this relates to the financial settlement for local authorities themselves.) Unsurprisingly, local government is given a hard time. On average, central government funding to councils will be reduced by about 26% over the Review period. The Office for Budget Responsibility estimates that part of this reduction will be offset by anticipated rises in council tax, but even so local authorities will have to deal with, on its view, a 14% reduction in budget over the next four years, at a time when the Coalition's localism policy is likely to require them to shoulder more responsibility than before.

7.4 The Department for Business, Innovation and Skills

BIS will have to find overall resource savings of 25% across the Review period. Some areas, such as scientific research funding, are largely protected. However, the higher education budget will bear a disproportionate share of the overall burden, sustaining a 40% reduction in funding, with the balance being made up by large increases in student fees.

7.5 The Home Office

The Home Office will need to make 23% savings over the Review Period. A large part of its budget relates to police funding. Central government funding of the police will be reduced by 20% over the period, though this may be slightly offset by increases in the council tax precept.

7.6 The Ministry of Justice

The MoJ, as was mentioned above, must find 23% resource savings by 2014-15.

7.7 Law Officers Departments

The large majority of the budget of these departments lies in the costs of the Crown Prosecution Service. They must find 24% savings over the course of the Review period, which will require a substantial restructuring of the CPS.

7.8 The Foreign and Commonwealth Office

The FCO will also need to make resource savings of 24% by 2014-15.

7.9 The Department of Energy and Climate Change

DECC is heavily affected in terms of its day-to-day resource spending, which must be reduced by 30% over the period to 2014-15. But its capital budget has is being significantly increased from £1.7 billion this year to £2.7 billion in the last year of the Review period, largely to support a number of major climate change initiatives.

7.10 The Department for Environment, Food and Rural Affairs

DEFRA will have to make resource savings of 29% by 2014-15.

7.11 The Department for Culture, Media and Sport

DCMS benefits from certain protected areas of funding - notably the Olympic budget is unchanged, and there will continue to be free entry to museums and galleries. But (aside from the Olympics) it will still have to find 24% savings over the Review period. In order to achieve this, it needs to make 41% savings in its administrative costs. Some of its arm's length bodies (such as Arts Council England) will suffer a substantial 50% cut in their funding.

7.12 The Department for Work and Pensions

DWP will need to reduce its core expenditure by 26% over the Review period. However, DWP's departmental spend is trivial in comparison to the national welfare budget, the bulk of which it oversees. The position in relation to welfare is much more complex. The Spending Review adds £7 billion in welfare savings to the £11 billion announced in the June budget, by means of a number of controversial measures including the much publicised reductions in child benefit and housing benefit. On the other hand, a significant part of these savings will be recycled - notably to fund the new universal credit, and to provide a 'triple guarantee' for state pensions (see below).

7.13 HM Revenue and Customs

HMRC has to find 15% resource savings by 2014-15, but its overall budget is held largely steady and it will recycle a certain amount of the money in an investment in anti-tax avoidance schemes in order to increase tax revenues.

7.14 HM Treasury

HMT could hardly avoid appearing a model of financial discipline and making savings of its own, so it proposes to save 33% by 2014-15. However, its overall budget in the context of the government accounts is negligible.

7.15 Cabinet Office

The budget for the Cabinet Office shows an increase in cash terms over the Review period, but this is largely a consequence of the transfer of functions in support of a role for the Deputy Prime Minister. The Spending Review claims that, measured on a like-for-like basis, the Cabinet Office will need to make a saving of 35% over the period.

8. What about the quangos?

Beneath all of the main government departments lies the layer of non-departmental public bodies (i.e. 'quangos') which are funded from departmental revenues.

The precise implications of the Spending Review for those bodies are mostly unclear at the present time, but it can be expected that those which have survived the Coalition's Public Bodies Review will have to find savings at least equivalent to those of their sponsoring departments.

For instance, the day after the Spending Review, Ofcom - a non-departmental public body of DCMS, which is expected to find savings of 30% - announced a consultation on 170 job losses.

This signals the beginning of a trend. Since those who work for the non-departmental public bodies are not civil servants, and therefore not affected by the Coalition's ongoing effort to put in place new civil service redundancy terms, there is no reason to delay restructuring and they are likely to be among the first to be hit by the inevitable redundancy programme.

Conversely, a number of other independent bodies which often (if incorrectly) fall under the broad title of quangos are outside the scope of the Spending Review. These include all of the economic regulators which have been set up as non-ministerial government departments:bodies such as Ofgem, Ofwat, and the Office of Rail Regulation. It is unclear from the Spending Review document if they will be subject to the same financial discipline as other public bodies.

A special mention should go to the BBC (technically a public corporation) which during the Spending Review negotiated – no doubt with a gun to its head – a major change to its financial settlement. This had two elements. The first was a freezing of the licence fee until 2016-17, which will create a substantial real terms reduction in revenue over the period. The second was an acceptance that the licence fee will now go to fund a number of different activities as well as the core BBC. These include the BBC World Service (the funding of which is to be taken over from the Foreign Office by 2013, at an annual cost of £272 million), S4C, BBC Monitoring, and a top slicing of £300 million to improve the UK's broadband network.

9. And what about tax rises?

The Spending Review is, as its name suggests, just a review of the expenditure side of government accounts. It does not directly deal with revenues in the form of taxation, which were addressed in the June budget.

Nonetheless, reading between the lines of the Spending Review document, it is possible to spot a number of measures which are effectively designed to raise revenues or replace taxpayer-funded spending with revenues from other sources. These include:

9.1 The Carbon Reduction Commitment

This is an energy efficiency scheme, designed as a measure to address climate change, under which energy users have to pay for allowances. Funds from the scheme were meant to be recycled, penalising bad performers and giving a benefit to the good. But they will now be kept by the Treasury, effectively as a new form of stealth tax.

9.2 Rail fares

To support investment in new rolling stock while permitting the DfT to meet its cost reduction targets, the cap on increases in regulated rail fares will be raised to RPI + 3%.

9.3 Council tax

Except in 2011-2012, when the government is supporting a holding steady of council taxes, the Spending Review envisages some significant increases to offset reductions in central government funding of councils and the police.

9.4 Spectrum

The government proposes to raise money by auctioning 800MHz and 2.6GHz spectrum for the next generation of mobile broadband, as well as selling 500MHz of existing public sector spectrum below 5GHz that can be released for different use.

9.5 TV licensing

As noted above, the Government plans to use the licence fee to fund certain activities which are currently financed directly by central government, including the BBC World Service.

9.6 Student fees

The Government has been considering the review on university funding by Lord Browne. While it looks likely to reject his proposal to remove the cap on student fees entirely, it will certainly raise the cap to a significant extent, using the income to replace funding from BIS.

In addition, the day after the Spending Review was published, the Government also published its draft legislation to introduce a Bank Levy. This will be added to next years Finance Bill, and is expect to raise approximately £2.5 billion per year, effectively in the form of a tax on bank balance sheets.

B. What are the main new or protected areas for government spending?

The Spending Review necessarily entails some major cuts in public spending. But in the following analysis we have chosen to concentrate on its more positive aspects - those areas of the Review in which the Treasury has found funds for new activities, or has saved existing services from the axe.

The reality, of course, is that all additional and protected spending is more than counterbalanced by cuts elsewhere. But where the Coalition has chosen to make special room for new expenditure, in spite of the pressing need to save money across the budget as a whole, that clearly says a great deal about where its priorities lie as a government. Anything that is being given additional funding in the current climate must reflect a key Coalition objective.

Among other things, as we will see, the Coalition has made room to provide for a surprising amount of spending on new infrastructure. This reflects its aim of creating a climate that will facilitate the private sector growth needed to fill the space left by a diminished public sector. Indeed 'growth' is a theme that the Coalition wasted no time in highlighting as soon as the Spending Review was published. Clearly this is the territory onto which it would now like to shift the public debate.

In addition to major new infrastructure, schools have been given a boost by the Spending Review (though in this case, largely by way of a shift from capital to resource spending). This probably has a great deal to do with the influence of the junior partner in the Coalition. There is a renewed focus on environmental investment, which is seen to fulfil both ethical and economic aims – at the same time addressing climate change and promoting the UK as a centre for green technology. And in spite of cuts elsewhere in the welfare budget, the elderly have been substantially protected, in particular by new provisions on the annual increase in state pensions.

So not everyone loses. We look below at those policy areas which the Coalition thinks so important as to be worth funding in a time of retrenchment.

1. Society

The Olympics

1.1 Olympic and Paralympic Games

The £9.3 billion public sector funding package for the London Olympic and Paralympic Games is to be maintained.

Our comment:

The last Olympics to be held in London took place in 1948 and was known as the 'Austerity Games' because it took place against the shattered backdrop of post-War Europe. It is ironic that the 2012 Olympics, so triumphantly won by London in much better economic times, should now also find itself set in the context of economic gloom: in this case the worst financial crisis since the War.

However, regardless of the state of the nation's finances, it would have been extraordinary if the Spending Review had done anything to jeopardise delivery of this high-profile international event. In the modern world, sport matters too much to a nation's prestige. Nonetheless, only after the medals have been collected and the athletes gone home will it be possible to assess whether the promised uplift and long-term benefits will represent a valid return on the investment. The maintenance of the funding package places an even greater onus on those who are responsible for delivering the 'legacy'.

Education, education, education

1.2 Adult apprenticeships

Spending on adult apprenticeships will be increased by up to £250 million a year by the end of the Spending Review period.

1.3 Adult community learning

Spending on adult community learning will be safeguarded, allowing the continued availability of basic numeracy and literacy education for adults.

1.4 Schools budget

The school budget for five to 16-year-olds will increase by 0.1% each year in real terms. Incorporated into the budget will be a £2.5 billion pupil premium to support the educational development of children from the most disadvantaged backgrounds.

1.5 Early years education and care

The universal entitlement to 15 hours per week of early years education and care for all three and four-year-olds will be maintained, and extended to disadvantaged two-year-olds from 2012-13.

1.6 Sure Start services

Sure Start services are to be maintained in cash terms, with the focus on improving the life chances of disadvantaged children.

Our comment:

'Education, education, education' was the mantra of another economic era, but the Spending Review highlights the Coalition's commitment to education as key to both social mobility and economic recovery. Commitments to early years education and Sure Start are focused on providing those from disadvantaged backgrounds with greater opportunities.

Moreover, while the proposed rise in university fees has grabbed the headlines, and certainly involves a shift of activity away from taxpayer funding of higher education, the Coalition has ring-fenced spending on compulsory education and maintained funding for adults lacking basic skills, which in many cases act as a bar to work and economic activity. If successful, the pupil premium will ensure that the next generation has fewer such problems.

The expansion of adult apprenticeships will provide opportunities for some, but is likely to be very inadequate support for the hundreds of thousands of public sector workers for whom the Spending Review means redundancy. Since many of these will be generalist civil servants, the availability of facilities for retraining are likely to be a key social need over the next few years.

Health and benefits

1.7 NHS funding

Real terms increases in overall NHS funding are promised, with total spending growing by 0.4% over the period of the Spending Review. A new cancer drugs fund of up to £200 million a year will be established, and access to psychological therapies will be expanded. The NHS will be expected to make significant efficiency savings in order to ensure that the money that has been ring-fenced for it goes further.

1.8 Social care

An extra £2 billion is promised to support social care by 2014-15, with £1 billion being made available through the NHS and another £1 billion to local authorities.

1.9 The Universal Credit

£2 billion has been reserved for replacing the current mélange of means-tested working age benefits with the Universal Credit. The Coalition promises that this reform will deliver a saving of £7 billion a year by 2014-15, and a benefits system which is fairer and also provides greater incentives to economic activity.

1.10 Uprating of the basic state pension

The real value of the basic state pension is to be preserved by a triple guarantee: it will rise each year in line with changes in average earnings, prices or 2.5%, whichever is the higher. Winter Fuel Payments and other benefits for the elderly will be preserved.

1.11 Concessionary bus travel

Concessionary bus passes are safeguarded. (However, with a significant reduction in funds for local transport there may be fewer buses on which to use them.)

Our comment:

As expected, NHS funding has been ring-fenced and the challenges posed by the aging population have been acknowledged, with an additional £2 billion to support social care. Nevertheless, the NHS has become used to significant real terms increases in funding over recent years, and they have not always been efficiently used. This settlement relies on significant efficiency savings: time will tell whether £2 billion is sufficient to meet social care needs.

The Universal Credit is a centrepiece of the Coalition's programme and is presented as an investment, with savings expected comfortably to outweigh costs during the Spending Review period. The strength of the Coalition will be tested as the attendant benefit reductions start to bite.

For the elderly there is some good news, with the uprating of the basic state pension – a long sought after change which will ensure that pensions keep pace with (or better) average earnings - the maintenance of concessionary travel passes and other benefits such as the Winter Fuel Payment. However, continued uncertainty about the costs of social care cast a shadow over this group, and those yet to join their ranks will have to wait longer to do so as the Chancellor of the Exchequer attempts to balance the books by accelerating the rise in the state pensionable age.

Local Government

1.12 Ending of ring-fencing on revenue grants

Central revenue grants to local government will be significantly cut over the period of the Spending Review. However, councils will have more choice over how they spend the money that they do receive. Ring-fencing will be removed from all revenue grants except simplified schools grants and a new public health grant.

1.13 Council tax freeze

Central government funds will be used to discourage local authorities from solving the problem of much reduced central funding by increasing council tax in 2011-12 (though not thereafter). Local authorities that freeze their council tax next year will have the resultant loss to their tax base funded at a rate of 2.5% in each year of the Spending Review period.

Our comment:

The Spending Review does not tell us where the axe will fall at a local level, but the scale of the reduction in revenue grants to local government makes it inevitable that there will be significant cuts to local services. By ending ring-fencing the Coalition gives local authorities greater choice about where they focus funds and, the inevitable corollary, where cuts are made.

This change shifts power back to the local level, and it accords with the Coalition's localist agenda which has been discussed in previous editions of Coalition Watch. But the availability of funding to permit a freeze in council tax during 2011-12 is aimed at ensuring that local electors are not faced with a significant tax rise until 2012, by which time the Coalition must be hoping that the general economic recovery will offset some of the pain.

2. Infrastructure

2.1 Flood and coastal defence

The Pitt Review, which was undertaken following the major floods of 2007, called for urgent and fundamental changes to be made to adapt to the increased risk of flooding and to improve the country's flood resilience.

Flood and coastal erosion risk management represents a significant chunk of expenditure by the Department for Environment, Food and Rural Affairs (DEFRA), largely by way of grants to the Environment Agency, Local Authorities and Internal Drainage Boards.

The Coalition has committed to continue such funding and part of DEFRA's settlement includes £2 billion to spend on flood and coastal defences over the next four years.

2.2 School buildings

Although the Government decided very early on that the Building Schools for the Future programme had no future, it remains committed to the rebuilding or refurbishing of over 600 schools.

The Department for Education is therefore allocated a capital fund of £15.8 billion over the Review period in order to meet this commitment and to maintain the schools estate.

2.3 Priority hospitals

The building of a 'super hospital' in Teeside was one of 12 capital projects cancelled in June 2010. At the time it was announced that only the highest priority hospital schemes, which were 'affordable and were genuine priorities,' would go forward.

The Spending Review has confirmed that the three hospital schemes in St Helier, Royal Oldham and West Cumberland meet these criteria and funding for these projects will continue to be made available. The total cost for these three projects is £363 million (£219 million for St Helier, £44 million for Royal Oldham and £100 million for West Cumberland).

2.4 Broadband

The UK's broadband network is to benefit from an investment of £530 million (of which £300 million will be taken from TV licence fee revenue), so that it can be rolled out to some of the most remote areas of the UK.

2.5 Transport

The transport sector appears to have fared well in terms of capital expenditure, notably benefiting from:

  • funding of over £10 billion approved for road, regional and local transport schemes, (including construction of the Mersey Gateway bridge and upgrades to two regional Metro schemes);
  • £14 billion to be given to Network Rail for maintenance and investment (including improvements to the East and West Coast Main Lines);
  • £6 billion to be provided for upgrading the London Underground network; and
  • the continuation of funding agreed for (i) Crossrail, a new rail line linking East and West London, and (ii) HS2, the high speed rail link initially from London to Birmingham and ultimately to Manchester and Leeds.

Our comment:

While the continuation of the above projects is, of course, to be welcomed, it is not entirely clear whether the level of funding approved will be enough to meet the extent of the improvements or maintenance required or indeed provide comfort to those who do not satisfy the criteria set by the Government.

For example, although more than £10 billion will be set aside for maintenance and investment in road, regional and local transport schemes, the Spending Review makes it clear that 'significant cost reductions across the programme' will be sought. The cost reductions may well be possible from efficiency measures but they are just as likely to be achieved at the expense of projects not deemed sufficiently cost-effective.

Similarly, the statement that 'ending of the BSF [Building Schools for the Future] programme will allow new capital to be focused on meeting demographic pressures and addressing maintenance needs' is likely to provide little comfort to those local authorities that have already been told that their schools will not benefit from the programme.

3. Environment

3.1 Commercial scale carbon capture and storage (CCS) demonstration plants

As part of the Coalition's commitment to achieving a low carbon economy, up to £1 billion of general public spending will be invested in creating the world's first CCS demonstration plant in the UK. It remains to be decided whether funding of future demonstration plants will be generated by a levy on electricity supplies (the powers for which exist under legislation introduced by the last administration).

3.2 Green Deal

The 'Green Deal' remains a central feature of the Coalition's green strategy. It aims to encourage households to improve the energy efficiency of their house by allowing them to pay for the cost of improvements through the savings made on their energy bill. The initiative will not, however, become available until late 2012 and will spell the end for the Warm Front scheme, fortuitously saving the government some £345 million.

3.3 Developing low carbon technologies

The Coalition has allocated £200 million to support manufacturing facilities at port sites and the development of low carbon technologies, such as offshore wind power and energy efficient buildings.

3.4 The Renewable Heat Incentive (RHI)

The RHI scheme to incentivise generation of renewable heat technologies, due to be introduced from 2011-12, will receive investment of £860 million.

3.5 Green Investment Bank

The Coalition is committing £1 billion of funding into a 'Green Investment Bank.' The initiative is intended to attract significant new private investment in green infrastructure projects such as offshore wind farms.

3.6 Electric Cars

Use of low carbon vehicles will be encouraged through an incentive scheme offering up to £5,000 towards the cost of a new ultra low emission vehicle from January 2011. The Coalition will also support a rollout of the charging infrastructure.

3.7 Scotland

The settlement for the devolved administration of Scotland includes an additional £250 million through the Green Investment Bank (see above) for investing in green infrastructure in Scotland. However, this is conditional upon the Scottish Government agreeing to the drawdown of the Fossil Fuel Levy surplus for spending on renewables.

Our comment:

The Coalition has remained committed to building a low carbon economy. Despite the cuts announced in the Spending review, investment in renewables and low carbon technology remains a priority. This is good news for the renewable and low carbon energy industries.

The confirmation that the Coalition will be investing in the Green Investment Bank is welcome news for the green industry. However, questions are likely to be raised as to whether the investment of £1 billion, together with income generated from asset sales, will be sufficient to set up the Bank as a credible financial institution. Private investors will need reassurance that the Bank can deliver its green objectives, which are yet to be defined.

It remains to be seen whether, against the background of spending cuts, redundancies and the deficit, the Coalition can successfully encourage industry and households to invest seriously in lowering their carbon footprint. It is clear, however, that the Coalition must support the cost of building a suitable infrastructure that supports renewables and low carbon technology if the UK is to attract private investors in green technology.

4. International

The Spending Review confirms three key components of the Coalition Agreement. The provision of NHS services and the State Pension are the first two examples; the third is the Coalition's objective to spend 0.7% of Gross National Income on overseas aid from 2013. This may be surprising to some, but is of a piece with the remainder of the Spending Review and its treatment of international issues. While the Coalition continues to fully support operations in Afghanistan, it has also protected or increased spending on a number of other international matters.

4.1 Official Development Assistance

The Coalition will increase in the Official Development Assistance spend, with a view to meeting its commitment to spend 0.7% of Gross National Income on overseas aid from 2013. The administrative cost of this aid will be reduced to 2% of its overall value, ensuring that more goes to the front line.

4.2 New Independent Commission on Aid Impact

There will be a new independent commission to assess the impact of Official Development Assistance spending, to help ensure effectiveness and best value for money.

4.3 The Conflict Pool

The Conflict Pool is the fund used to prevent conflict and support post-conflict stabilisation in countries around the world. It is run jointly by the Foreign and Commonwealth Office, the Department for International Development and the Ministry of Defence. The Conflict Pool will grow from £229 million in 2010-11 to £309 million in 2014-15.

4.4 Millennium Development Goals

The Coalition will continue to honour its international aid commitments to support the Millennium Development Goals. This includes spending up to £500 million per year on tackling malaria by 2014-15.

4.5 International Climate Finance

£2.9 billion will be allocated over the Spending Review period for supporting low carbon growth and adaptation in developing countries. This is to be funded jointly by the Department for International Development, the Department of Energy and Climate Change and the Department for Environment, Food and Rural Affairs.

4.6 Cyber Security

The Coalition is implementing a £650 million National Cyber Security Programme to overhaul the UK approach to tackling cyber crime, regarded as a major strategic threat following the Strategic Defence and Security Review.

4.7 Afghanistan

The Treasury remains committed to funding all the net additional costs of military operations in Afghanistan from the Special Reserve.

4.8 Trident

The Coalition will proceed with the renewal of Trident and the submarine replacement programme. However, detailed acquisition plans, design and number of submarines will not be finalised until around 2016.

Our comment:

In a Spending Review which cuts departmental budgets (other than overseas aid and health) by an average of 19% over four years, the examples above make clear that the Coalition is determined that the deficit reduction will not compromise the United Kingdom's position on the international stage.

The Coalition does intend to reform the running of international aid projects. However, this is predominantly with a view to maximising the effect of the aid, rather than because of budgetary constraints. An example of this is the closing of aid programmes in China and Russia.

Some of the ring-fencing of aid budgets may be driven by a sense of obligation; a sense that the Spending Review really should not affect our commitment to the world's poorest. And in this regard it would be a principled move which does not have the support of everyone, since there are some who think it a luxury to fund international aid at a time of domestic retrenchment. Perhaps this is an example of Robin Cook's 'ethical foreign policy' being belatedly delivered? Or perhaps the aims are more hard-nosed – the Coalition has made a clear connection between international aid spending and domestic security, and it is clear that some of the funding will go to areas that need to be stabilised for our own benefit, most notably Afghanistan and Pakistan.

In any event, this contrasts fairly directly with the even more politically controversial decision surrounding a replacement for Trident, though it should be remembered that the largest party in the Coalition laid this down as an essential commitment even before the Coalition negotiations had started. In that context, spending cuts aside, it is one of the least surprising elements of the overall package.

The international element of spending has by no means been left alone. A clear example of this is the BBC World Service and the British Council, both required to make significant savings. It follows that it will be difficult for these institutions to continue to deliver the major contribution they currently make to the UK's international presence.

5. Economy

5.1 Promoting UK exports

The Coalition pledged to focus Foreign and Commonwealth Office resources on promoting trade links and the UK export industry in a bid to attract investment and create jobs.

5.2 Science budget maintained

The annual science and research budget is to be maintained in cash terms (but not real terms) at £4.6 billion over the review period. The Spending Report identified 'high value' and 'world class' scientific research as priorities in order to preserve the UK's international reputation in the field.

5.3 Health research

Health research, like many areas of health spending has fared well in the Review. Funding for the Medical Research Council will be maintained, while expenditure on transforming theoretical research into practical applications will rise.

5.4 Manufacturing and business development

Annual expenditure of up to £200 million by 2014-15 will target the development of manufacturing and business; in particular, technology companies and companies with potential for high growth. It is proposed that this will be achieved in part by a network of Research and Development 'intensive technology and innovation centres.'

Our comment:

Prioritising funding for research supports the Coalition's professed aim to sustain economic growth over the long term – although sub-optimal, the settlement is much better than many scientists must have feared.

It is to be welcomed that the Review has one eye on future growth and the need for government support in order to achieve it. However, finding the resources to fund this research is likely to be easier for the Department of Health, whose budget will increase by an annual average of 2.0% in cash terms over the Spending Review period, than for the Department of Business, Innovation and Skills, whose budget is planned to decrease by an annual average of 4.7% in cash terms over the same period. And some of the sums in question are surely trivial by comparison with the need – an annual £200 million for the development of manufacturing will make very little impact.