The spending review settlement

1.4 The emergency budget was followed by a spending review completed in October 2010 to set the Department's budgets from 2011-12 to 2014-15 (Figure 2). In cash terms the overall reduction between the 2010-11 baseline and 2014-15 is 7 per cent. However, inflation, which official forecasts at the time of the spending review showed as averaging 2.4 per cent, meant that the reduction in real terms was 15 per cent. Inflation is currently running higher than forecast and the Department's modelling suggested the additional pressure would be between 1 and 4 per cent of the 2014-15 budget (discussed further in Part Three), which, in the absence of any other changes, could imply an overall real-terms reduction of between 16 and 19 per cent.

1.5 The Treasury set out the process for allocating budgets through the spending review:

• To agree capital budgets, the Treasury took a zero-based approach, asking all departments to submit evidence on the net present value per pound of future spending. This was a calculation showing the relative economic benefits and costs for all new spending. This was used to help prioritise capital budgets across Government.

• For resource spending, the Department was asked to provide savings options corresponding to two budget reduction scenarios.

The Department complied with the Treasury's process giving them a range of spending options and met its timetable. In preparing its proposals, it asked all its directorates to identify options for reducing spending, building on work that the Department started in early 2010. Directorate level bids were combined by a central team, and scrutinised by the Department's leadership. The Department's preparations for the spending review are covered in Part Two.

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Figure 2 The Department's budgets 2010-11 to 2014-15 (cash terms)

NOTE

1 Numbers may not sum due to rounding. The Department's total budget in 2014-15 is £11,951 million.

Source: National Audit Office analysis of the Department's
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1.6 Under the settlement, the Department's 15 per cent budget reduction is composed of real-terms reductions of:

• eleven per cent to capital budgets, which includes spending on the Network Rail grant, Crossrail construction, road building and maintenance, and local major transport projects; and

• twenty-one per cent to the Department's resource budgets, which includes the Transport for London grant (accounting for over half of the resource budget), PFI contracts, some national road maintenance and preparatory costs for High Speed 2.