In advance of the review

There continues to be considerable publicity surrounding the Government's spending plans.  The Conservative party conference heralded changes to the child benefit and we now await further details which we expect will be included in the 20 October announcements.

As with the Budget and Pre Budget reports, our site will be updated with news and analysis after the announcements have been made and press releases issued.

Why the 2010 Spending Review is important

Spending reviews have been part of the governmental landscape since the late 1990s, but none have garnered quite the anticipation of the one which the Coalition government is to deliver on 20 October.

The reason?

A declared ambition to eliminate the bulk of the country's structural budget deficit - that part of government borrowing that does not decline as the tax take climbs - by the end of the current Parliament and to set a fixed target for public debt as a percentage share of GDP, lowering it from its present 10.1 per cent this year to 1.1 per cent by 2015/16.

Under the plans, most Whitehall departments will be facing reductions in expenditure upwards of 25 per cent.

Spending reviews

The purpose of the spending review is to set the budgets for individual departments - defence, education, business etc - as determined by the government's spending priorities. Each department must then make a decision on how to best to manage the resources available to it.

As well as Whitehall budgets, the review looks at spending levels that cannot be fixed over a period of years. This includes welfare benefits, tax credits and local government expenditure.

Until the introduction of spending reviews, most planning was based on a year-on-year footing which made longer-term strategies more difficult to follow through.

The 2010 spending review will set government investment for the years from 2011/12 to 2014/15.

The Budget

It may seem the case that the government has already set out its spending plans in the June Budget.

The Budget, however, only provided an overall spending parameter (known as the spending envelope).

Exactly how those funds will pay for public services will be detailed in the forthcoming spending review.

The Chancellor, George Osborne announced in the June Budget that overall spending will increase from £640 billion in 2011/12 to £659 billion in 2014/15.

Despite the increase, in effect government spending will actually be £83 billion lower in four to five years' time as a result of the planned cuts.

Some, but not by any means all, of those cost cuts were included in the June Budget. These amounted to £11 billion of welfare reform savings and a two-year freeze in public sector pay, except for those earning less than £21,000 a year.

Importance of the 2010 spending review

Usually spending reviews are a matter of the Treasury tidying up the broad sweep of the Budget in terms of specific departmental allocations.

In one respect, the 2010 review is no different. In another, it is hugely significant.

In order to achieve the savings which the current government has set itself, public expenditure is to undergo an adjustment not seen in two generations.

The cuts will affect individuals, households, public institutions (the health service, schools, universities, the armed forces) and businesses.

The government has promised a "radical" appraisal of the delivery of public services.

Central to the government's strategy is the hope that the private sector, boosted by tax cuts, will be able to take up the slack left in the economy by a much diminished state presence.

Supporters of the government position have praised it for its role in preserving the UK's international credit rating; opponents have expressed worries that such a stringent reduction in public expenditure could force the economy back into recession.

Growth plans needed as well as cuts

Business groups have emphasised that cuts in government spending are not enough by themselves to encourage economic recovery.

A strategy for growth is just as important, they have argued.

While supporting measures to reduce the budget deficit, business leaders have also argued the case for plans to promote private sector expansion.

Commenting on the Chancellor's speech at the Conservative Party Conference, David Frost, director general of the British Chambers of Commerce, said: "George Osborne not only set out a clear explanation of why immediate steps have to be taken to reduce public expenditure, but importantly outlined the central role of business in driving economic growth, and the need to maintain investment in crucial infrastructure projects.

"However, it is vital that we shift the focus of the national debate from the necessary spending cuts to one of growing the UK economy. We need to regain our self-confidence, and it will be business that is at the heart of this - but only if it is given the freedom to create jobs and wealth.

"This is why it is critical that the burden of red tape is reduced, and sufficient help is given to exporting companies. 2011 has to be the 'Year of Growth', and the only way to achieve this is by ensuring that we create the right environment for a strong and flourishing business community."

Steve Radley, director of policy at EEF, the manufacturers' organisation, added: "Over the coming month, the major announcements in the pipeline must show more detail of the government's overarching economic strategy.

"Manufacturers will be looking for government to demonstrate that it is targeting resources at growing the productive potential of our economy and creating the conditions for businesses to invest and grow."

It was a sentiment echoed by Richard Lambert, the director general of the CBI.

Mr Lambert said: "The UK can't just cut its way back to economic health. That will have to be built on private sector growth, business investment and trade."

Tax and regulation reform must be central to spending review

Streamlining the business tax system and simplifying the regulatory regime must form the core of the government's comprehensive spending review, a business group has argued.

The Forum of Private Business (FPB) said that reforming business tax and cutting red tape would help smaller firms grow and rebalance the economy.

Such moves would mean savings of £12 billion a year for small businesses, the FPB argued.

Phil Orford, the FPB's chief executive, said: "Put simply, the UK's economy should be run more like a small business, making the most out of the country's valuable resources and ensuring that all departments work together to create and promote a real culture of enterprise.

"Historically, the public sector has accounted for just under 40 per cent of economic activity in the UK. Reducing it back to that level will inevitably mean significant cuts and there will no doubt be some pain to come.

"However, there are also opportunities that could bring significant benefits for small firms. Our members frequently complain of duplication, confusion caused by different public bodies and excessive bureaucracy. We have a rare chance to remove these barriers to business growth in this comprehensive spending review."

The FPB's submission to the government in advance of the spending review covered a number of areas.

On the question of taxation, the FPB urged a simplification across the board. The government, it said, should consider a national insurance holiday for all non-employers and not just, as is currently the case, for the first ten people employed by new businesses.

Overall, the burden of tax on smaller employers needs to be reduced so that they can develop their businesses.

Regulation is another key area that needs to be addressed in the FPB's view. More must be done to limit EU social regulation, particularly legislation which has an impact on small firms' abilities to trade profitably.

The mediation body, Acas, should be given powers to throw out unreasonable claims by employees against employers before they reach the tribunal stage, and there needs to be a rebalancing of the rights of employers and individual employees.

When it comes to the procurement process for public sector contracts, projects should be awarded on the basis of the quality of the tender, the ability to undertake the work and proof of the quality of previous work.

Given that rebalancing the economy is a priority, the FPB argued that spending on UK Trade and Industry (UKTI) should be ring-fenced and that the Exports Credits Guarantee Department (ECGD) should offer businesses extra financial protection.

More support needs to be offered to the construction industry and low carbon economy in the form of a VAT cut for businesses that opt to install energy efficient or energy creation systems.

As well as reducing the number of business support quangoes on green issues, the government should look at scrapping the Carbon Reduction Commitment (CRC) and other overly complex schemes, the FPB added.

And more effort should be made to open up universities to commerce and the commercialisation of research.

To boost employment prospects, the cost of administering employment law must be cut significantly, the FPB said, and the redundancy process streamlined so that businesses in distress can act quickly and minimise job losses.

On skills and training, the FPB wants to limit state subsidised training for businesses with over 250 people.

Funding should be allocated to smaller employers for training they feel that their staff need, and internal training should be encouraged.

The role of the new Local Enterprise Partnerships (LEPs) must be clarified and they should be allowed to borrow against council rates rather than business rates since the former are less volatile.

With so many smaller firms struggling to access finance, the FPB put the case for a more flexible Enterprise Finance Guarantee scheme which should be used for growth finance.

Banks ought to be given formal targets to respond to lending requests, and part-funded public sector equity funds should be more flexible in their targeted sectors.

To help boost business investment, foreign direct investment should be co-ordinated at a national rather than local level in order to prevent a 'Dutch auction' between potential locations.

And research and development tax credits should be replaced with better annual investment allowances, the FPB argued.

Austerity cuts will dampen growth

Planned cuts in public spending, intended to tackle the UK's largest peacetime budget deficit, will slow the economic recovery next year, the CBI has predicted in its latest forecasts.

The employers' organisation said it expects the UK economy to continue to grow, and at a slightly faster pace in 2010 than had been expected. But the pace of recovery looks to be more sluggish in 2011 than previously forecast, following measures announced in the emergency Budget to deal with the deficit.

According to the CBI's predictions, growth in 2010 will be 1.6 per cent, up from the 1.3 per cent forecast in June, the improvement the result of stock rebuilding among companies.

However, the CBI revised down its GDP forecast for 2011, from a previous 2.5 per cent to 2 per cent. This is because earlier predictions did not take into account the additional fiscal consolidation measures announced in the June emergency Budget.

The report was not, though, unduly pessimistic. The CBI believes that, although the level of uncertainty around the forecast remains high, a double dip back into recession is unlikely.

This is despite the fact that the outlook for consumer spending next year is now weaker since households will have less disposable income as a consequence of ongoing high inflation on the back of January's upcoming VAT rise.

Consumer spending growth of 0.9 per cent in 2010 is likely to be followed by an equally anaemic 1 per cent in 2011, the CBI said.

Business investment will also be subdued, showing just moderate growth next year after having stabilised this year following record falls in 2009.

In the CBI's estimate, UK exports are expected to grow by 3.5 per cent in 2010 and 6.4 per cent in 2011, while unemployment will rise at a more gradual rate, moving from an expected 2.49 million at the end of this year to 2.62 million at the end of 2011.

The forecasts predict that the Bank of England will adopt a slightly more dovish approach to interest rates, raising them only from next spring, perhaps to reach 1.25 per cent by the end of 2011.

Richard Lambert, the CBI's director-general, said: "Our view is that the UK's tentative recovery will be sustained, albeit with weaker levels of growth.

"The fragile nature of the recovery is why, in the forthcoming spending review, the government must focus its scarce resources on those areas which most galvanise growth, namely infrastructure and capital investment."

Ian McCafferty, the CBI's chief economic adviser, added: "While the outlook for growth in 2010 has been lifted slightly, due to slightly faster economic activity in the second quarter of the year, the outlook for next year will be more restrained.

"The action to get the public finances back onto a sustainable footing will no doubt temper the recovery going into 2011.

"Consumer spending will be more constrained than previously thought, due to higher inflation resulting from next January's VAT rise, and wage increases continuing to be modest. We do expect exports to grow at a faster rate than imports however, with net trade making a positive contribution to GDP growth during the coming 15 months."

UK debt needs long-term fiscal reform

The UK's debt compared with gross domestic product could almost double from its 2007 levels by 2015, the International Monetary Fund (IMF) has said.

Although the IMF acknowledged that the UK had started to tackle the issue of its debt to GDP ratio, longer term reforms would be necessary.

In its latest report on the global economy, the IMF forecast that the UK's debt to GDP ration could more than double from the 44.1 per cent recorded in 2007 over the next five years.

The IMF projected the debt ratio at 83.9 per cent by 2015.

The report said: "Fiscal policy will need to react more strongly to debt than past behaviour would suggest, and governments will need to engage in reforms that place debt on a sustainable footing.

"In the last three and a half decades, public debt has been the shock absorber in advanced economies - going up in bad times and not coming down in good times."

The government's decision to set up the Office for Budget Responsibility (OBR) won applause from the IMF, but the organisation went on to say that the UK was still "constrained in its degree of fiscal manoeuvre".

The IMF's is a more pessimistic projection than that of the OBR itself, which expects debt to to 69.4 per cent by 2014/15, up from 53.5 per in 2009.