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Whilst Labour struggles with its poor poll ratings and the media speculate endlessly over the departure of the prime minister, senior civil servants and their ministers are quietly gearing up for a major showdown over the forthcoming comprehensive spending review (CSR 2007). Already delayed and cloaked in secrecy, the three-year CSR, due to be announced next summer, will allocate resources and targets across Whitehall. Who gets what can make or break political careers, and the CSR settlement overall may well determine Labour鈥檚 fate at the next general election.

The first CSR in 1997 marked the beginning of the Blair-Brown consensus, and set the tone for public spending over the next decade. This time round it will be different. CSR 2007 (covering government expenditure from 2008-11) is about Blair鈥檚 legacy and Gordon Brown鈥檚 aspirations. Rather than appeasing No.10, the chancellor (and his CSR team under Stephen Timms, the chief secretary to the Treasury) will want to set his own agenda and use the CSR as a platform for his premiership.

Last year the prime minister promised to publish a fundamental savings review (FSR) of all departmental spending, which he claimed would set out the key CSR investment priorities for a fourth-term Labour government. However, the FSR seems to have been downgraded as the Treasury awaits feedback from the CSR cross-departmental ministerial group and takes stock of its own reviews, such as the Eddington transport study, the Leitch review of skills, Barker鈥檚 review on planning, Stern鈥檚 review of climate change, and the Lyons review of local government. The chancellor may well keep No.10 guessing until the handover date becomes clear.

The big political decisions that are taken over future spending priorities and efficiency savings will also shape the policies of the opposition and will no doubt feature in next May鈥檚 local elections. The devolved administrations are not directly involved in the CSR, but talk of reviewing the Barnett formula (the formula used to calculate budgets for the Scottish Parliament and Welsh Assembly) and general all-round belt-tightening will inevitably impact on the 2007 elections in Scotland and Wales. There is a lot to play for, and MPs will be looking for clues as to where the CSR is heading when the interim spending review is published this month.

The 2006 Budget set the tone for the CSR, announcing zero-based reviews of departments鈥� baseline expenditure, major asset sales (of up to 拢30bn a year by 2010) and a further round of Gershon efficiency savings, including more cuts in civil service and local government jobs and a renewed emphasis on electronic service delivery. Brown also spoke about the need for the CSR to reduce the burden of inspection and regulation and rationalisation of targets and public service agreements.

No one in Whitehall expects the next CSR to be as generous as the last, and many anticipate significant reductions in real terms growth. The Treasury and Department for Works and Pensions have already set the pace, offering 5% reductions in expenditure planning. A lot will hinge on the scale of the cuts among the big spenders, like health and education, but prospects for the new DCLG do not look good. Head of the DCLG, Ruth Kelly, will have to work hard to keep the department鈥檚 spending flat, and may face intense pressure to axe some of the one-off programmes, such as the 拢480m planning delivery grant and funding for arm鈥檚-length bodies such as urban regeneration companies. Cross-cutting programmes where budgets are shared with other departments, like the 拢1.8bn a year housing-related Supporting People scheme, neighbourhood renewal schemes, funding for the government regional offices and the regional development agencies, may also face cut backs. At the same time the DCLG is likely to face a rising bill for its contribution to the 2012 Olympics and demand for more gap funding investment in the Thames Gateway.

The Treasury appears sympathetic to the DCLG鈥檚 need for continued funding to help it increase the provision of affordable homes, but the focus will be more on maximising the use of private finance for more intermediate housing and major savings from the Housing Corporation (in part as a result of any merger with English Partnerships). While the costs of new build continue to rise, Kelly will look more and more to using public land and assets and seeking bigger efficiency savings within the registered social landlord sector itself.

Meeting the government鈥檚 target of helping 100,000 households into home ownership by 2010 doesn鈥檛 come cheap, and some fear that scarce resources may be diverted away from tackling homelessness and the low demand pathfinders in the North and Midlands. However, the key to extra housing growth in the South will be more funding for infrastructure. Given the financial black hole at the Department for Transport, Kelly is likely to look increasingly towards more innovative funding approaches, such as the Milton Keynes 鈥渞oof tariff鈥� and possibly a new planning gain supplement.

Although the housing budget overall may be safe from major reductions, Kelly has already hinted that the focus for the CSR will be more on transforming neighbourhoods by combining funding streams and working with the private sector rather than directing extra resources towards stock transfer and meeting the 2010 decent homes target. As she said in June: 鈥淲e cannot fund the fourth option... and in the future, decisions on investment for improving social housing should be considered alongside other investment necessary to deliver sustainable, mixed communities, and not as a separate programme.鈥�

The next CSR will also have a major bearing on the future of local government. The chancellor has announced that he wants local area agreements (LAAs) extended and more area-based funding streams pooled together under the tutelage of the local strategic partnership. Phil Woolas, the local government minister, has meanwhile promised to improve LAA funding stability and provide greater local flexibility. This will help the development of LAAs, although councils will be reading between the lines of the CSR to deduce how it will determine future local government settlements.

The long-awaited local government white paper is expected to set out future reform proposals, including possibly major governance reforms and new local or city-based delivery vehicles. However, any new measures will have to be funded under the next CSR and the Treasury will be careful to avoid embarking on any major restructuring of local government which has heavy upfront costs.

Over the coming months Whitehall departments will be busy crunching the numbers and pondering over the scope of their efficiency savings and public service agreements. 鈥淢ore from less鈥� will be the mantra, and ministers (mindful of the prime minister鈥檚 vulnerability) will be under more pressure than ever to please the Treasury. However, the end game for the CSR will be less about the machinery of government and more about the inner politics of the Cabinet, and who has the clout and negotiation skills to fight their corner. The ODPM鈥檚 former boss, John Prescott, was, for all his faults, a master political strategist and knew how to secure a good deal. Civil servants at the DCLG are hoping Ruth Kelly will follow in his footsteps.