Spending Review 2025 – an initial response

Responding to today’s Spending Review, Paul Johnson, Director of the IFS, said:

“To make sense of today’s Spending Review, you need to understand what the government is calling Phase One and Phase Two. Phase One is last year and this year, 2024–25 and 2025–26. Phase Two starts next year, 2026–27, covers the rest of the parliament, and is the focus of today’s announcements. Take Phase One and Phase Two together, as the government does, and growth in government spending looks rather strong. Take Phase Two only and things look tighter.  

The crux is that most departments will have larger real-terms budgets at the end of the parliament than the beginning, but in many cases much of that extra cash will have arrived by April. Eight departments will actually see cuts to their budget between this year and the end of the parliament. This is not an austerity Spending Review, though much of the government’s largesse, such as it is, was focused on the first two years of the parliament.         

The Chancellor’s speech was full of numbers, few of them useful. To understand the government’s priorities, you have to go to the underlying documents and appendices and – to coin a phrase – follow the money. Here, there weren’t too many surprises: the money largely followed Chancellor Rachel Reeves’ long-stated priorities and the Government’s missions. There was more cash for the English NHS, which as usual was the biggest winner from the Spending Review process. Defence spending is planned to hit 2.5% of national income (2.6% if you include the security services) and stay there, with its budget bolstered by a sharp increase in capital funding, treated kindly by the Chancellor’s fiscal rules. 

In pounds and pence, these two departmental behemoths – health and defence – were the big winners. But even here, one has to wonder whether this will be enough. Aiming to get back to meeting the NHS 18 week target for hospital waiting times within this parliament is enormously ambitious – an NHS funding settlement below the long-run average might not measure up. And on defence, it’s entirely possible that an increase in the NATO spending target will mean that maintaining defence spending at 2.6% of GDP no longer cuts the mustard. 

Still, the funding increases for health and defence are substantial. The corollary, of course, is a less generous settlement elsewhere. The schools settlement in England is tight. Strip out the cost of expanding free school meals, and you get a real-terms freeze in the budget. With falling pupil numbers, this would in principle allow a rise in spending per pupil. Instead, the government may have to freeze spending per pupil in order to meet rising demand for special educational needs provision.

Some departments – like Environment, Food & Rural Affairs and Culture, Media & Sport – are facing outright budget cuts, whichever of the government’s “Phases” one examines. Funding for the Home Office is being squeezed, but largely because of planned cuts to asylum support. Spending on overseas aid will, as announced earlier in the year, be cut by some 40% – a clear loser.

Much of the Chancellor’s speech focused on capital spending, where she trumpeted her plans to spend £113 billion more on capital investment over this parliament than planned by her predecessor. Here genuinely big sums are to be spent, allowing for increases in priority areas like green energy projects, transport infrastructure outside of London and the South East, new prisons, and housing. But if the government insists on accumulating the extra spending it’s planning over the full parliament, it seems only fair to also draw attention to the £140 billion of extra borrowing we’re forecast to do over the same period. That borrowing incurs a cost in the form of additional debt interest – and one that’s bigger than it was a year ago. The question was always whether the extra investment would bring sufficient benefits to make that worthwhile. We now know more about what sorts of projects the government plans to invest in. The focus must now shift to delivery and avoiding the all-too-common project over-runs.”