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 under or over-spend 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. From our November 2023 forecast, we no longer assume that the Treasury will underspend against this policy assumption, which is consistent with recent historical evidence. The appropriate point to judge whether departments will underspend or overspend, and if so by how much, is when departmental allocations are set in Spending Reviews.
The forecast process involves the Treasury attending challenge meetings and providing evidence on: departments’ spending and budget allocations; pressures on the central RDEL and CDEL reserves; and the Treasury’s own in-year forecasts, to allow the Budget Responsibility Committee to reach a judgement about spending in years covered by a Spending Review. We have expanded the range of information we scrutinise following our review of the March 2024 forecast for departmental expenditure limits.
Forecast approach
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 2024-25 to 2025-26 were initially set at the 2024 Autumn Budget. For the years that have not yet been covered by the latest Spending Review (2026-27 to 2029-30 in our latest forecast), the Government sets the overall resource and capital DEL spending totals in each Budget or Spring Statement.
Our DEL spending forecasts are produced top-down, rather than bottom-up – for example, we do not forecast education spending by forecasting how many school pupils there will be and the average cost of teaching them. We start with the totals for RDEL and CDEL plans, provided to us by the Treasury, and make an assumption about the aggregate degree of underspending or overspending we expect against these budgets in years covered by a Spending Review. The in-year judgement is based on the latest in-year data as well as historical trends and reserve pressures. The judgement on future years is based on historical trends, the level of reserves and pressures against them, the level and path of DEL spending, and macroeconomic factors such as private sector wage growth and construction supply indicators.
In autumn forecasts, our in-year underspend 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 set out the level of 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 departments are surrendering for the current year, and any allocations to departments from the Treasury’s central reserves. At that closing stage of the year, we will also know departments’ forecasts of spending against their final plans, which they submit to the Treasury in February. We still express underspends or overspends against the initial PESA plans, but our forecasts are now informed by the final plans and the latest news on likely underspending or overspending against those plans.
When explaining changes to our DEL forecasts, we separate them into three categories 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 or overspending 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.
Policy decisions: any changes to DELs that the Government chooses to make that are not covered by either of the two categories listed above. 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 our economy forecast, where departmental consumption and investment make up around [15] 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 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 (currently 2025-26 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 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 (currently 2025-26).
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