FTI Consulting UK Public Affairs Snapshot: Spending Review 2025: Cash, but not a lot of flash

Taking to the despatch box to deliver Labour’s first Spending Review in 15 years, the Chancellor of the Exchequer, Rachel Reeves, was acutely aware of the importance of the moment. With growth forecasts still sluggish, Reeves today set out the government’s departmental spending and capital investment plans in the knowledge that these are the settlements through which this administration’s performance will be judged at the next election.

Cabinet ministers have negotiated fiercely with the Treasury over these settlements, which ultimately establish the limits of what their departments can achieve in this Parliament. For Reeves herself, today’s review was an opportunity to reiterate the government’s commitment to renewing Britain while acknowledging that many in the country do not yet feel renewal is happening. The gamble is whether they will do so come 2029.

As anticipated, health and defence were the big winners. There will be a £29 billion real terms increase in NHS spending from 2023-24 to 2028-29, and the commitment to spend 2.6 per cent of GDP on defence by 2027 means a significant boost for the Ministry of Defence (MoD). Housebuilding, too, remains a significant priority, with the government doubling down on its 1.5 million homes target by earmarking £39 billion for a new Affordable Homes Programme (AHP) – and raising a major cheer from the backbenches. There will be more for mayoral authorities to spend on innovation and transport, and £280 million a year for the Border Security Command in a clear Reform-driven policy.

Yet the money has to come from somewhere. Unusually, this was a “zero-based” Spending Review, meaning that every single element of departmental spending had to justify itself. In practice, that means that, with Reeves determined to stick to her remaining fiscal rule to not fund day-to-day spending with borrowing, plenty of Whitehall departments have been hit with real-terms squeezes in their budgets.

That has been a bruising process. Notably, despite negotiations with the Home Secretary, Yvette Cooper, running to Monday evening, Reeves refused to budge on Home Office funding, while the Foreign Office will face the steepest budget cut of 6.9 per cent. As with all spending reviews, protecting certain budgets means proportionally bigger cuts elsewhere. And the sums involved don’t just mean efficiencies: while Labour’s “five missions” remain unchanged, there will be elements of government activity that will no longer happen because of decisions announced today.

As the details of those cuts emerge, expect fireworks. Already, the Mayor of London, Sadiq Khan, is said to be furious at the decision to eliminate the capital’s allocation from the UK Shared Prosperity Fund past 2026. That lays the groundwork for a series of political battles, some of which the government will enjoy more than others.

In the coming days and weeks, the government will focus its messaging on the headline £113 billion sum which has been reserved for capital spending across the rest of this Parliament. Importantly, changes to the “green book” spending rules, also announced today, will allow greater prioritisation of projects outside London and the South East. Arguing that the scale of this investment has been made possible only by the measures announced in last year’s Autumn Budget and Spring Statement, Reeves has pledged to ensure that the impact of this spending “is felt in people’s everyday lives”.

Indeed, the political narrative is clear: having made difficult decisions during its first year in office, Labour is pushing ahead with the work the party was elected to deliver. Yet there’s no hiding from the fact that the decisions announced today – and indeed the rowing back on the Winter Fuel Payment earlier this week – will not lighten Reeves’ load for long. The government will be hoping that the scale of the spending will neutralise the “austerity 2.0” accusations which have driven some Labour voters to Reform, and help improve challenging polling numbers. But the macroeconomic picture remains difficult.

One of the luxuries of a Spending Review is the lack of a formal role for the Office of Budget Responsibility (OBR). This means that the economic and fiscal impact of what has been announced today doesn’t have to be scrutinised formally. That luxury will not exist at the Autumn Budget.

The hope is that lots of new investment can be scored as delivering growth, creating fiscal headroom in the process. The worry, however, is that any economic deterioration (which could be as innocuous as global sentiment adding additional billions to the cost of servicing the national debt) will eliminate fiscal headroom and require a fresh round of tax rises to fund increases in spending. Already, the National Institute of Economic and Social Research has described tax rises at the Autumn Budget as “almost inevitable”.

There is a way through, just. It requires healthy domestic growth, a benign global economic backdrop and public acceptance that flashy alternatives – such as those coming from Reform UK – have little basis in reality. The problem is that a large element of this lies outside the government’s control.

Spending reviews are always painful experiences. The chief political question right now is whether there is still further pain to come.