Re:Act: Spending Review 2025
Chief Executive
Today’s long-awaited Spending Review includes a lot of very big numbers and raises more than a few questions – the obvious of which is, without OBR scoring the numbers, what does this mean for the Chancellor's fiscal rules?
“My fiscal rules are non-negotiable”, she reminded us within the first few minutes of her speech. Which implies that taxes will have to rise come Autumn. Just in case that’s not self-explanatory, while we may indeed be the fastest growing economy in the G7, that’s really not saying a lot. At the Spring Statement just a couple of months ago, the OBR halved its growth forecast for 2025, and that was before Trump introduced his tariffs. Add to that rising unemployment and falling payroll employees, plus high borrowing costs (meaning sky-high debt servicing costs), and it’s very likely Reeve’s fiscal headroom has been wiped out. One economic think tank suggested last month she would need to find more than £60 billion.
Of course if Labour nails it’s growth mission then all could be fine, but that would mean reaping the benefits of investment in very short order, and the State isn’t known for the speed of its major projects delivery. In addition, while we’re pleased to see more detail on infrastructure investment, and we do need to address the woeful transport links outside of London, there is a risk in deprioritising the current growth – and tax generating – machine that is the Capital. More on the changes to the Green Book below.
So what are the very big numbers? The Chancellor reminded us that she was spending an additional £190 billion on the “day to day running of our public services”, and is allocating an additional £120 billion in capital spending.
Let’s take the latter, Britain is in desperate need of investment – see all the growth-depressing crumbling/unmodernised/completely inadequate core infrastructure. See also our internationally high – also growth killing, as well as cost of living crisis inducing – energy costs. Our thoughts on the committed projects below.
And the day-to-day spending… It’s really all about the NHS – twas ever thus. NHS England gets a 3% average annual real growth in resource DEL between 2025-26 to 2028-29 (which in cash terms is massive). Education gets 0.7%, Home Office -1.7%, Ministry of Defence 0.7%, Work and Pensions 0.4%. As we discuss below, most of the Defence uplift is from capital. For policing and local gov, council-levied taxes (pretty sure a lot of ‘working people’ pay these) are doing the heavy lifting. As you would imagine, we have strong views on this, so do read on.
There are some ambitious plans for departmental efficiency savings, but despite the need to address our unsustainable debt levels, these are about a “rebalancing of spending” towards the frontline. We give our verdict below on how “credible” the delivery plans actually are.
We’re also awaiting, “in due course”, the findings from a review into arms-length bodies, and we’re promised “the first ever civil service strategic workforce plan” later this year. And at the Autumn Budget there will be “a new planning and performance framework”, which, “together with transformed finance systems, this will ensure better tracking of government spending, with assessment of performance against both outcomes and value for money.” Very good. We’ll assess them when they arrive.
As ever, the team has poured over the detail to lay out the good, the bad and the ugly below.
👍 GOOD FOR
Children’s social care
Children’s social care services have received two welcome funding increases. First, £555 million has been allocated through the Government’s ‘Transformation Fund’ to support earlier interventions for families with vulnerable children at risk of entering care. Given the dire life outcomes experienced by ‘looked after children’, this funding, if used effectively, represents a positive step towards preventing children being taken into state care.
Alongside this, an additional £560 million has been earmarked between 2026-27 and 2029-30 to refurbish and expand children’s homes and foster care placements, where the impact will depend on effective deployment. Any move to reduce the involvement of profiteering private equity funded homes is very welcome.
Renewing devolution in London
For much of the past decade, London has felt like the forgotten sibling. That changes today with the surprise announcement that London is set to receive a Manchester/Birmingham-style single, multi-year “integrated funding settlement” from 2026-27, alongside Liverpool and other places. In principle, this change could give London stronger tools to face its complex opportunities and challenges – and has been welcomed by the Mayor (in a statement which also expresses concern about the investment pivot away from the capital – see Jury’s Out, below). But London’s size and institutional complexity mean the settlement model can’t simply be copied from elsewhere. Making it work will require a different kind of accountability framework, one that reflects the distinct roles of the Mayor, the Assembly and the boroughs. If Government and City Hall can get that right, this could mark London’s re-entry into the mainstream of English devolution.
Infrastructure projects
It is no surprise that this SR includes a variety of significant capital investment commitments in what the Chancellor dubs “growth-driving sectors”. Transport — both the Whitehall department and regional funds — is a major winner. Rail projects, metro-extensions and bus route upgrades across the country are set for funds that follow through on the promised injection following the cancellation of one of the legs of HS2. This is encouraging; inadequate transport links inhibit growth and development and are estimated to contribute to a £16 billion productivity gap between regions.
Investment in energy security also runs through the heart of the SR: the Department of Energy Security and Net Zero has secured 2.6% average annual real growth from 2025-26, with a new generation of nuclear power on the way. Already-announced changes to the planning system, including a huge revision to the NPPF (which we praised in our Spring Statement Re:Act ), should enhance the efficiency of infrastructure projects. More will be revealed about the specific spending plans in the full industrial strategy, expected later this month, but we can be confident they will include £2.5 billion of investment in Small Modular Reactors through Great British Energy.
However, while the Government are making a virtue of their significant investment in Sizewell C, the reality is anything but. Britain is already home to the most expensive nuclear reactor in the world, Hinkley Point C, and Sizewell is likely to become the second-most expensive based on these increases. Key to getting value for money from energy investment is cutting the red tape that inflates these costs.
Social housing and affordable homes
The Chancellor announced a £39 billion investment in the Affordable Housing Programme over the next ten years. Whilst difficult to make direct comparison to the previous decade due to overlapping programmes, it is certainly a significant increase on the 2021 Affordable Housing Programme which promised £11.8 billion over the five years from 2021 to 2026.
The announcement is welcome news for housing associations and the 1.3 million households sitting on waiting lists for social housing. It will also boost the Government’s core mission to build 1.5 million new homes over this Parliament, a target that has appeared increasingly out of reach as housebuilding figures have moved in the wrong direction, and significant labour shortages persist.
The social housing sector will be buoyed further by the 10-year rent settlement that allows landlords to raise rents by 1% above inflation, giving social housing providers confidence to build and long-term clarity over revenues.
And the good news kept coming for the housing industry, as the Chancellor announced an additional £4.8 billion of housing investment through Homes England.
Technology and digital transformation in public services
As with similar set-piece funding announcements, the transformative power of technology features heavily throughout. While this allocation doesn’t amount to a genuine ‘rewiring of the state’, as claimed, there is clear evidence that digital innovation and technological adoption is a priority across much of the public sector.
Of the £864 million directed to digital initiatives via the £3.5 billion Transformation Fund, £621 million have been absorbed by just two recipients (the first, HMRC, to improve their customer services and the second, for the Digital Centre of Government, to support cross-cutting digital priorities).
Most departments’ existing transformation budgets are already under significant pressure, and the Transformation Fund won’t be able to fund all digital priorities. So while we can expect to see a step-change in some areas, other areas will likely remain outdated.
The £2 billion allocated to support the UK’s AI action plan signals strong intent. The precise allocation of funds between investments in private sector infrastructure like datacentres, or in digital budgets for frontline public services, is not set out. But it could provide much-needed transformation funding for AI adoption in government.
👎 BAD FOR
Health
All eyes were on the NHS funding settlement today, given that the financial fate of the NHS effectively determines that of almost every other department. As usual, the funding settlement for the Department of Health and Social Care is far more generous than it is for other public services. Today Rachel Reeves announced an average annual 3% real-terms increase in revenue funding for the NHS, while few departments are receiving even half this increase.
And puzzlingly, in a Spending Review defined by capital investment, the NHS remains they exception. After significant increases in the last two years, CDEL budgets are set to remain flat in real terms between now and 2028-29.
This combination is the worst of both: a revenue settlement considered insufficient to meet the elective backlog target by the end of this Parliament, but at the expense of several other departments, while tightening the capital funding that could actually generate meaningful progress.
Although a commitment to increase technology and digital transformation spending by up to £10 billion, primarily from revenue spending, is very welcome, it is a drop in the ocean. This will not incentivise fundamental reform, but instead only serve to reinforce the same old model we know doesn’t work — all at the expense of other cost-effective services that can relieve pressure off the NHS.
The Home Office and police
Over the next three years, the Home Office budget will be cut by an average of 1.4% in real terms. A hefty cut for a frontline delivery department. Yet police forces, who receive the largest share of the Home Office budget, are seeing their funding grow — by an average real-terms increase of 1.7% over the same period. What gives?
These plans need you to take two hefty pinches of salt. The first: that the other big budget line in the Home Office can actually be cut, to free up money for the police. The Chancellor said asylum spending would be cut by £1 billion a year by the end of the Spending Review period compared to now, by ending the use of hotel accommodation for asylum seekers. It’s hard to see how that will be possible by speeding up case working and increasing returns. In practice, that means more temporary dispersal into social housing and the private rented sector — both areas where the Government admits critical shortages in this same publication.
The second: the Home Office won’t foot the whole bill for higher police spending. Lots of the cost will have to be raised by further council tax increases above the police’s referendum limit. Given last year’s £14 limit was expected to raise £320 million, it looks likely there will be similar rises for taxpayers every year until 2028-29 to prop up police total spending power.
And, a 1.7% increase per year, based on shaky foundations, is not much money to meet the manifesto commitment of 13,000 more officers on the frontline.
Efficiency
The Chancellor was clear that her spending plans are an end to austerity, but the Government still has big ambitions for efficiency in public services. The trouble is, there wasn’t much evidence of that in the Spending Review.
In her speech, Rachel Reeves majored on selling off government properties, moving the civil service workforce outside of London, cutting consultancy spend, and top down efficiency targets of 5% for every department. Many of the same approaches that previous governments have tried, with mixed results.
Cuts to departmental admin budgets are good evidence of radical focus, but will money be recycled into pay for exceptional talent and high skills? Or will it mean needing to hire more contingent labour in from the private sector, going against the efficiency plan to save on consultancy money. Presumably the civil service “strategic workforce plan”, to be published later this year, will hold the answers.
Rather than selling our assets and salami-slicing budgets, the Government needs to work out ways to transform public services to get better value, with actual efficiency-boosting measures.
The Departmental Efficiency Plans published alongside the SR merit a read. Not least because they show that most departments only have a plan to deliver 3% savings, not the full 5% savings costed into plans.
Defence
The Chancellor was sparing with new defence announcements today, probably as the Strategic Defence Review (SDR) was only published last week. A real-terms increase of £600 million to the UK intelligence agencies’ budget over the period of the Spending Review was the only new pledge. The SDR commitment to upgrade the nuclear deterrent was re-upped, with a figure of over £6 billion attached to the plans. And further details were given on the SDR’s £6 billion of investments in munitions – Reeves outlined that £4.5 billion would be invested in munitions made in British factories.
But disappointingly, the rest was left to the imagination. No details were provided on how we might reach the ambition of defence spending increasing to 3% of GDP in the next Parliament. The specific spending allocations for new munitions and submarines appear to account for the vast majority of the Ministry of Defence settlement until 2029-30. Given the geopolitical context, the SDR was very clear that we need to move to a state of warfighting readiness. Munitions and submarines alone do not deliver this. The gaps in plans here feel pretty worrying.
⚖️ JURY'S OUT
Reforms to the Treasury’s Green Book might be the most consequential decision of this SR. This is a quiet revolution: a shift from a narrow, centralised focus on direct returns to an explicitly “place-based” logic that attaches more weight to the harder-to-measure and longer-term value of investing across the whole country. This, if it really shifts the behaviours of those making decisions, will be a more structural way of pursuing some of the aims of the old ‘Levelling Up’ agenda, enabling projects in the North, Midlands and rural areas to make a case on their own terms rather than always being outgunned by the economic gravity of London.
The language here about integrated working across government tiers to properly assess “place-based business cases” is welcome. Yet the wider implications remain uncertain. There are, after all, some pretty clear reasons why London and the South East have historically attracted more investment. A system that shifts capital elsewhere will bring important benefits, but may also make it harder to generate the kind of growth on which Treasury revenues ultimately depend — and which fund public services.
🧐 MISSING IN ACTION
Mission-led government
This Spending Review could have been the moment when Government showed it was serious about a “mission-led approach”. But while the impact on their missions can be felt throughout – from investment in R&D, to promises over health reforms and net zero – deeper structural change to make the missions real does not seem to be on the agenda. The new Growth Mission Fund to target additional funds toward regional ambitions, is going to be managed by the Treasury. Almost all spending is still routed through traditional departmental silos. Funding for cross-cutting challenges like child poverty or promoting productivity remains, for the most part, fragmented, and mediated by institutional boundaries. The missions may be shifting the intent and the framing of what Government is doing – but it is important to note they have not yet reshaped the machinery of spending.