The Spending Review is a Labour innovation designed to set out clearly the government's public spending priorities over the next three years.

It announces how the �400bn worth of government funds are to be divided up.

It replaced the Autumn statement, the annual struggle by spending departments for more government funds.

The spending review holds huge importance, not just in terms of what government departments are able to spend but also for the direction of the government's political strategy.

What is the spending review?

It fixes spending plans for three years It takes place every two years This review will lay out spending plans from 2003 to 2006 The first spending review took place in 1998

During its first period in office, Labour made big changes in spending priorities.

Debt interest was reduced, and social security spending (the largest spending item) held constant, while the Chancellor clearly put health and education at the top of his agenda.

This year they are likely to be winners again - but transport and crime prevention are also fighting for priority and defence, too, will get more attention.

The statement itself is made by Chancellor Gordon Brown to Parliament.

In the days following his statement individual government departments will give details of how they intend to spend the money.

But the chancellor's annual Budget statements can either update or pre-empt the spending review.

Take, for example, the last Budget which announced a huge increase in health spending to be funded by increases in National Insurance payments.

Why change the system?

In 1998 Mr Brown said the point of the new system was "to move from the short-termism of the annual cycle and to draw up public expenditure plans not on a one-year basis but on a three-year basis".

Critics of the old, one-year strategy had argued that it contributed to a damaging 'boom and bust' cycle of spending.

For example, health spending would tend to soar whenever there was a beds crisis, only to be slashed again when government debt grew.

The spending review sought to break this circle by setting out long-term aims and objectives.

The long-term approach was also expected to help concentrate on public investment in transport infrastructure and buildings, which has suffered most in earlier years.

Mr Brown is still hoping for a big boost in public investment, although so far underspending has proved a serious problem.

But it is important to bear in mind that only half of all government spending will be covered by the three-year spending targets.

The remainder is still being planned on an annual basis because the cost of such areas as social security and debt interest cannot be predicted, and vary, based on the current state of the economy.

Too much central control?

The Treasury believes its approach has led to a smoother path for public spending, and better allocation of resources.

It wants to put more emphasis on whether spending departments can improve their productivity and actually deliver better services in return for more money.

So it has insisted on performance agreements with other government departments, setting out targets which they are expected to meet - and which will be used to determine whether they receive extra funds in the future.

But critics say that the new procedures - especially the agreements that departments now have to sign with the Treasury outlining their performance targets - give too much power to the Treasury, and the chancellor, to centralise power.