The Comprehensive Spending Review has been dialled back in ambition but will still set the future direction of departmental spending and will impact on policy development, writes Rt Hon David Laws, former Cabinet Minister

It is commonplace these days for large parts of Budgets and Spending Reviews to be leaked in advance, so it is no surprise that we have already learned that in next week’s Spending Review the Defence budget will get a boost, while Overseas Aid faces cuts – as yet, of an uncertain size.

This Spending Review is arguably less important than when it was first announced, many months ago, because at that stage it was designed to be a long term review, setting out spending plans for the next three years. The Treasury has now understandably got cold feet about long term spending plans, when there is so much uncertainty about the size of our economy next month, let alone in three years’ time. So, because of COVID, most budgets will only be set for the financial year ahead (incidentally one-year settlements are the norm across many western nations).

But to conclude that the Review no longer matters would be a big mistake, for three reasons. Firstly, it will allocate hundreds of billions of pounds over the next year, and it could involve some big changes in priorities. Budgets such as health, business support and welfare could be increased dramatically due to COVID related pressures. Other budgets could also face a big squeeze, as the Treasury fights to prevent a further upward spiral in public borrowing.

Secondly, while budgets for day-to-day spending may only be set for a year, the allocations for “capital spending” could be set for much longer periods – perhaps even up to a decade. These days the Treasury accepts the case for longer term capital budgets for infrastructure spending, in areas such as transport, housing, defence equipment, and school building. And with interest rates at historic lows, money for such projects can be accessed incredibly cheaply – meaning that productive investments can be made for a zero or even negative real cost. In some policy areas departments have been pressing for longer term capital budgets than have been usual in the past (for example school buildings), and it will be interesting to see if the Treasury is willing to allocate more capital spending for 5-10 years, rather than the usual three.

Finally, this is our first real opportunity to see the spending priorities of what is, after all, essentially a new government. While much will be distorted by the near term imperatives of responding to the COVID crisis, it should also be possible to discern new areas of priority, and to distinguish these from areas the government does not seem to want to give top billing to.

It is important to understand the Spending Review process, and what the final published “numbers” actually mean. In essence, the Treasury starts by deciding privately how much in total it wants to spend and save, and it then sends out a proposed “settlement” to departments. Departments then supply detailed papers, usually explaining why they want more money, and make the Treasury a counter-proposal about how much money should be allocated. The Treasury knows departments will never settle at the first number it proposes, so it always builds some “fat” into the negotiation, which it can generously concede. But it will have a “bottom line” with each department that it cannot go beyond, if the Spending Review as a whole is to add up.

During these negotiations, departments will look at their spending programmes in huge detail – and will have assumptions for every programme about how its budget should grow or shrink. This means that when the Review is concluded and announced, there is a departmental assumption somewhere about how each budget line will be affected. But this detailed information is usually not publicly released on the day of the Spending Review – leaving more time for departments to decide how to “share out the cake” So it’s crucial to understand that not all decisions on individual budgets will be baked in after the Spending Review is announced, and within departments there is huge scope to debate and discuss what the spending priorities should be.

That’s why for all those interested in helping shape the detail of government spending, next week’s announcement should not be seen as the end of a process, but as an opportunity to start more detailed and serious engagement with Ministers, advisers and civil servants.

By Ioan Phillips, Senior Political Analyst

Joe Biden has finally been confirmed as US President, following several fraught days of ballot-counting. But what does his victory mean for Private Equity?

Many in the industry will be glad to see the back of the volatility that characterised policy-making in the Trump administration.

While the platform Biden ran on suggests higher taxation and tighter regulation overall (trends that are typically negative for deal activity), the priority afforded to tackling COVID-19 and climate change could open up opportunities for assets in the healthcare and built environment sectors. We outline these themes in more depth below.

Tax rises: Low-hanging fruit?

Biden talked a lot about raising corporation tax during the campaign. If the Democrats control both houses of Congress come January, expect to see an increase prioritised as part of the new administration’s legislative agenda. This move would reduce the profitability of larger assets and Private Equity firms trading as corporations – but it is smart politics for a President who crafted his personal brand around standing up for “ordinary folk”.

The incoming President also sees an easy political win from raising Capital Gains Tax (CGT) on all income above $1 million, as well as a timely revenue raiser that helps offset losses from COVID-19.

Tighter regulation and scrutiny of M&As

Biden is no firebrand, but he and his party have stressed the need to better regulate M&As – especially those in sectors, such as technology, where issues of national security arise. The Democrats already proposed legislation during Trump’s presidency that sought to increase the oversight powers of the Federal Trade Commission (FTC) and broaden its regulatory remit.

In addition, it is likely that the Biden administration will use the appointment of progressive figures to drive tighter enforcement of antitrust regulations.

Fighting COVID-19

Biden’s acknowledgement that social distancing measures will have to continue into next year will likely sustain demand heightened for companies that can provider remote medical assistance and advice – or adapt their offering accordingly.

Against this, it is worth considering how any tightening of regulation around M&As may affect demand for healthcare assets. With Democrat proposals aimed at encouraging greater pluralism within markets, this could create favourable procurement environment for smaller healthcare firms seeking entry into state- or federal-level supply chains.

Green opportunities

Biden promised to increase taxes on carbon emissions and increase subsidies for clean energy sources. This is likely to augment demand for assets active in the sustainable energy sphere.

How GK can help investors and businesses

Biden’s agenda is arguably the most radical of any incoming president since Franklin Delano Roosevelt.

GK Strategy has helped many international firms operating similarly fluid fiscal, political, and regulatory frameworks. Whether advising investors and management teams on the sell-side and buy-side in a transaction process, working with investor-backed businesses and Private Equity firms on engagement with policy-makers, or providing ongoing support and advice on the political and regulatory environment, GK’s political, policy and regulatory DD offering leads the field in mitigating risk and value creation.

For more information, please contact our Head of Investor Services, Martin Summers, via Martin@gkstrategy.com.

By Ioan Phillips, Analyst at GK

If Boris Johnson’s name is linked to any political idea, then it is ‘cakeism’ – the belief that it is possible to govern without making trade-offs. On devolution, the PM’s cake is in danger of toppling over.

Coronavirus has stalled government plans to devolve more powers to English regions while highlighting the limitations of centralisation – especially in healthcare delivery. Health devolution is already under way in places such as Greater Manchester, London, and West Yorkshire. However, the Government is yet to develop a coherent vision as to how this should be applied across England. Expect then to see pressure from local government for greater decentralisation in this area – both in terms of policy-setting and procurement powers.

The pandemic also threw into sharp relief the impact of a decade of austerity on England’s councils. Funding cuts made by central governments meant many struggled to provide vital services, or deal with increased demand for them arising from coronavirus. Although the Government told councils to do “whatever it takes” to protect communities, whether this rhetoric is backed up with a substantial long-term funding uplift remains to be seen. Uncertainty over future funding (particularly regarding the form the UK Shared Prosperity Fund takes), coupled with reductions to income streams as a result of coronavirus, suggests councils will seek to consolidate or enhance existing revenue sources amidst the deepest recession in 300 years.

Over Hadrian’s Wall, the perceived missteps of the UK Government in dealing with the pandemic has brought Scottish independence back to the fore. Polls regularly put public support for it at 50% and above – a recent survey found 53% of Scots in favour. The governing SNP is also polling at record levels. The psephology points to a majority for pro-independence MSPs at next year’s Holyrood elections. This shift in constitutional sentiment has stirred the UK Government into action. A ‘Union Unit’ has been established in Downing Street; the PM frequently challenges the SNP on devolved matters, while Whitehall is said to be planning a spending programme intended to show Scots the advantages of staying in the union.

At the same time, the Government’s framing of post-pandemic economic recovery in strongly unionist terms in its new white paper on the UK internal market is fermenting new tensions with the devolved administrations. Although the UK’s four governments all accept the development of a series of ‘common frameworks’ to harmonise standards and regulation, the UK Government believes it should have sole responsibility for the terms of future trade deals. But the devolved administrations have responsibility for many of the areas – including controversial aspects, such as food standards – that will be covered by future deals. Once the deals are concluded, there is a risk that the devolved administrations could simply refuse to implement parts of them.

The internal market is just the latest example of how the Government is setting itself on a collision course with the devolved administrations. This trend is here to stay – and with it, greater political contestation of policy-making and regulatory powers. The Government’s reluctance to devolve further powers to national legislatures is in sharp contrast to its regionalist ‘levelling up’ mantra. The long-term sustainability of this devolution dualism is questionable, though.

GK Strategy works with many firms operating within what look set to be fluid fiscal, political and regulatory frameworks in the years ahead. Using our extensive knowledge of policy, political, and regulatory trends, we can help investors and businesses to address risks and identify business opportunities at a local, regional or national level.

For more information, please contact Martin Summers, Head of Investor Services, on Martin@gkstrategy.com.

By GK Account Manager and social care policy expert, Jack Sansum

For successive leaders and political parties social care has been politically toxic. From Labour’s 2010 “death tax” to the Tories 2017 “dementia tax”, during the past 22 years, the question of how to improve social care has been explored in 12 “white” or “green” papers or major government consultations, four independent reviews or commissions and numerous parliamentary inquiries.

Indeed, it is now over a year since Boris Johnson stood outside Downing Street promising to “fix the crisis in social care once and for all”. While Johnson previously planned talks within the first 100 days of his administration, aimed at finding a cross-part solution to the issue, the COVID-19 pandemic has turned a medium-term policy goal into an urgent priority.

COVID-19 and the need for a “clear plan”

The COVID-19 crisis has laid out in stark terms the need for social care reform. There have been more than 25,000 excess deaths among care home residents, with care workers having the highest death rate of any occupational group.

A recent report by the Parliamentary Accounts Committee, highlighted that the crisis has revealed the “tragic impact” of delays by successive governments to reform the social care sector. The Committee found that problems in the sector have been compounded by a lack of leadership, accountability, and centralised control for social care. They have called on the Government to publish a “3-point plan” by September, ahead of a potential second wave of COVID-19 infections.

A “Big Bang” blueprint for reform

Reports from Whitehall indicate that Johnson is determined to deliver on his commitment to “tackle the injustice of social care” and to put in place a new funding system to “give every older person the dignity and security they deserve”.

Johnson has drafted in David Cameron’s former policy chief Camilla Cavendish to help finalise these plans, while Rachel Wolf, the policy adviser who co-wrote last year’s Conservative manifesto, has been brought into the Department for Health and Social Care (DHSC) to oversee a “Big Bang” blueprint for reform.

Once such reform could see social care being brough under the control of NHS England, taking responsibility away from councils in England – together with £22.5bn in annual funding. The move, which would swell the health service’s budget to £150bn, would see services commissioned and budgets controlled by embryonic regional integrated care systems (ICSs). However, legislation would be required to implement such a change, with ICSs still to obtain legal standing.

Funding for a reformed system could see those over-40 in the UK pay an increased level of tax to cover the cost of care in later life. Health Secretary Matt Hancock is an advocate of such a plan, however, in order to succeed with plans for reform, Johnson will need to build cross-party consensus with Labour and the Liberal Democrats who are currently seeking assurances from the Government on significant funding increases, changes to immigration rules and the workforce crisis.

A 73^rd year birthday present?

With plans for reform of the sector appearing to finally be back on the agenda in Whitehall, policy proposals are likely to be examined by a new health and social care taskforce and DHSC, providing significant scope for social care providers to shape the structure and mechanisms of the plans.

To engage with the Government’s plans for reform effectively, organisations will need to understand the wider direction of health and social care policy. Health and social care is GK Strategy’s largest policy area and we are expert at supporting organisations who are operating in highly regulated sectors and helping them to navigate complex markets and build relationships with key decision makers.

With the Government signalling its intention to deliver on its commitment to shake up the social care system, there are plenty of opportunities for social care providers to benefit.

For more information or if you would like to speak to the GK team, please contact: Jack Sansum on jack@gkstartegy.com

With the UK and world economy facing unprecedented economic disruption, there has been little peace at Her Majesty’s Treasury for many months now, and the Autumn looks to be just as busy – the Chancellor has promised to deliver a Budget and a multi-year Spending Review, and both (as well as Brexit!) are going to take a great deal of preparation.

The focus of the Budget is likely to be on sustaining and restoring economic growth, in order to prevent a surge in unemployment as the Furlough Scheme ends.  If the economy is sagging again, the Chancellor could consider a reduction in VAT, though the impacts of this might be modest if growth is being suppressed not by consumer incomes but by a second virus surge. Other options include reducing employers national insurance contributions or even (whisper it!) extending the Furlough Scheme for any sectors still “shut down” by COVID-fighting regulations. Extending the Furlough Scheme or “picking sectors” to stay in the scheme are certainly not options the Chancellor wants to adopt, but all bets are off if there is a significant second wave of the virus.

But what about the Spending Review? Given the government is projecting a fiscal deficit this year of mind-boggling size (twice the level of 2009/10, after the financial crisis), you might have thought that the Spending Review would be all about cuts and dividing up the pain. But the Chancellor and Prime Minister don’t want to see a return to austerity – or certainly not yet. They would be worried that spending cuts would drive economic growth back down, and they also appreciate that there is limited appetite for more austerity after ten years of squeezing the public sector. Somewhat surprisingly, therefore, the Chancellor is still planning to set future spending plans (three years worth for current spending, and four for capital spending) in which spending will be rising modestly in real terms – this combination of a massive deficit and higher real spending has only really been experienced previously in war years.

Other than modestly rising real spending, what should we expect from the Review? Well, continued largesse for the NHS and social care, as the government has to write a spending “blank cheque” for COVID related costs and for helping the NHS catch up eventually with the growing backlog of non COVID work. And no doubt there will be significant other public spending pressures from dealing with the pandemic.

But the government can also be expected to use the multi-year settlement to “look beyond” COVID and seek to deliver some of the pledges in its election manifesto. This could include more spending in targeted areas of the education system, perhaps to improve post-16 technical and vocational education and to “level up” opportunity in areas of the country with poor education outcomes. It will also include more infrastructure spending – perhaps targeted towards areas such as the North and Midlands, where the government has both economic and political aspirations. It will be fascinating to see if the Prime Minister’s adviser, Dom Cummings, manages to secure real money and policy substance to back his ambition to spread new science and innovation industries across the country, and out of London and the South-East. How will the government choose to back the “winning sectors” of the future, and can these businesses really be nurtured in the parts of the country that arguably most need the extra investment? And what of the pledge to back the zero carbon businesses of the future? How will that be realised?

The Spending Review also pledges to look at the way in which central government delivers public services and infrastructure. Whitehall civil servants will be looking nervously at what this might mean. Will the civil service be dramatically “re-purposed”? Will more powers be devolved from Whitehall and Westminster?

As well as announcing all the “positives” about extra spending on health, education, science and infrastructure, we need to look at what the government does about some of the more challenging items in the Chancellor’s inbox. Will there be a serious attempt to properly fund social care and to re-consider the split of social care costs between the private and public purse? Will the Chancellor signal a move away from the state pension “triple lock”, which could be very expensive over the next few decades? How can a government so dependent on pensioner votes cut back on future pension related costs?

We also know that in spite of the current growth in public sector wages, the Treasury will want to reduce public sector settlements in 2021 and beyond, to help control public spending and avoid public sector wages moving above those in the private sector. With inflation likely to be very low, private sector wage growth could collapse, requiring some much tougher public sector settlements.

In this year’s Spending Review there will be relatively little of the pain and anguish that have characterised other such reviews since 2010. But with the public sector deficit surging to 15-20% of GDP, the pain cannot be delayed indefinitely. There is a reckoning to come on taxes and spending. But not for now.

Parliamentary Select Committees have never been more important in shaping policy, nor as accessible to organisations who have the expertise and insights most needed by Government.

Social distancing has presented a perfect storm of challenges in Westminster. The traditional emphasis on face-to-face engagement in the chamber and tea rooms combined with a long-held resistance to incorporating new technology into proceedings has meant that the institutions of Government have had to evolve quickly or cease to function.

Credit then to the Speaker, Lindsay Hoyle, and his office who by in large were able to ensure the technological capabilities were in place for remote voting and digital debate during a time of national need. Controversially though, Leader of the House, Jacob Rees-Mogg, mandated MPs to return in person to Parliament from June – putting to an end the hybrid virtual working model. Some MPs are now put in the invidious position of having to choose between representing their constituents and putting their health – and indirectly that of their families and local communities – at risk by continuous visits to the Capital City.

There is some relief then that Parliamentary Select Committees, the bodies that scrutinise each Government department’s work have been granted permission by the Speaker to continue to work and hold sessions remotely – at least until September. There is agreement that this will assist Committees to operate in the most effective way possible. Bernard Jenkin MP, chairman of the influential Liaison Committee, has said that it would ensure all MPs could participate “on a fair and equal basis during the current pandemic.”

Importance of Select Committees & how they have adapted during COVID-19

It is important that these Committees are supported to operate as effectively as possible within the circumstances because, as GK has outlined previously, the profile and independence of Select Committees is increasing, as is the volume of inquiries they undertake. The pandemic appears to be accelerating not reversing these trends. GK has seen first-hand how effective Committees have been in scrutinising the Government’s response and even influencing its policy agenda.

Virtual Inquiries are the most obvious change to the work of Select Committees, and this has influenced the behaviour of MPs and their interactions with those giving evidence. Circumstances dictate that MPs need to be focused and economical with their questions. Furthermore, there seems to be less time and opportunity for political grandstanding and point-scoring. However, this is also no doubt influenced by the sense of unity that comes from a national crisis – perhaps a manifestation of the more constructive tone being championed by the new leader of the opposition, Keir Starmer.

However, it is clear that not having to appear in person has lessened the fear factor for Ministers being questioned by Committee members. The ability to claim a Ministerial scalp or get the headline-grabbing ‘gotcha’ moment has been diluted.

For instance, the Prime Minister’s first appearance in front of the Liaison Committee last month exposed a lack of detailed knowledge, and his inability to take some subjects seriously, e.g. female representation on senior decision making bodies. He used a mixture of charm, diversion and bluster to get through some of the trickier moments.

Overall, he came through it relatively unscathed. However, the session would have been significantly more awkward with a higher likelihood of negative press had the Prime Minister been physically in front of the Committee, where they could see the whites of his eyes and be less constrained by time and internet connectivity.

How external organisations should engage

COVID-19 has demonstrated that the Government does not always have the in-house expertise to devise a strategy and ensure practical delivery of the solutions that will manage the virus and lessen the disruption. This has been demonstrated by the uneven success of antigen testing roll-out, coordinating test, track and trace and the availability of PPE.

The Government has consulted and asked for help because they have not had all the answers to this new and unfamiliar adversary. No.10 and Cabinet Office have worked overtime to understand how non-government bodies can support with solutions and triage their submissions. This refreshing openness from Government is now extending to medium and longer-term plans and solutions. Direct award of contracts also means that public-private collaboration can be agreed faster.

The proactive listening mode has also extended to Select Committees who have a duty to focus on the impact of COVID-19 within their remit. To do this effectively, they need to be briefed on the latest issues and challenges within sectors and to consult for potential solutions. As an example, The Education Select Committee has just finished collating responses on their mammoth inquiry into how “COVID-19 is affecting all aspects of the education sector and children’s social care system.”

The Committee is seeking views on short and long term disruption and the range of stakeholders who impacted and feeding in submissions is enormous – from nurseries to apprentice schemes and local authorities to care providers.

This pressing need presents golden opportunities for trade associations, the third sector and commercial organisations with the appetite to engage. Never has Parliament been so keen to learn and be advised by such a diverse range of stakeholders.

Organisations should be ambitious about making representations to Select Committees. GK recommends monitoring the most relevant Committees to your sector, taking advice at the earliest indication of a relevant inquiry or call for submission being announced. This allows time to liaise with committee clerks about the scope of an inquiry and provides sufficient time to agree on key messages, draft a written response and – if called to give evidence – begin developing Q&As and taking an assessment of the characteristics of the Committee.

GK are specialists in preparing organisations for the unique and challenging experience of providing evidence to a Parliamentary Select Committee. Our training package is tailored for each client depending on their needs, objectives, and the scope of the inquiry. You can find out more about our offer here.