Reeves has placed big bets – if they don’t pay off, she’ll need to reduce ambitions or make hard choices
Rachel Reeves delivers her spending review, 11 June 2025 (Credit: PA Images / Alamy Stock Photo)
4 min read
The spending review was a defining moment for this government, setting out how it would allocate around £600bn a year for the rest of this Parliament.
Rachel Reeves’ speech was dominated by announcements of new investment projects – unsurprising as the government had a lot more money to play with for capital than day-to-day spending, following changes to the fiscal rules last autumn. On the latter, much of the spending growth has been front-loaded – last year and this year (in what the Treasury describes as phase one of the spending review) – with some departments facing real-terms budget cuts over the rest of this Parliament.
Defence and health were the big relative winners from this spending review. Spending on defence will grow quickly to meet the government’s target of spending 2.6 per cent of national income on defence and the security services, with most of the growth coming in defence capital spending, which will grow by seven per cent a year in real terms. Day-to-day spending on the NHS will rise by three per cent a year.
The more generous settlements for defence and health had been well-trailed in advance. The question before Wednesday had been how Reeves would square the circle between these increases and the planned slow pace of growth in total day-to-day spending (of just 1.2 per cent a year). We and others had expected that some other key public services would face cuts. In the end, Reeves set out plans for spending to grow in real terms on all major areas of public services – police (1.7 per cent), justice (1.8 per cent), education (0.7 per cent) and local government (2.6 per cent).
These increases were enabled by plans for sharp cuts elsewhere – including the Department for Transport, where the government plans to end rail fare subsidies introduced during the pandemic; the Home Office, where the government intends to sharply reduce spending on asylum; and substantial cuts to administrative budgets, including £14bn of planned efficiency savings. There were also the pre-announced large cuts to overseas aid. The relatively generous settlements for local government and justice mark a break from the 2000s and 2010s, when these areas were consistently relative losers from spending reviews.
#Despite these better-than-expected settlements for key public services, it may still be difficult to tackle problems that Institute for Government analysis suggests already exist in many services, or to meet the government’s future ambitions. Only local government, courts and general practice seem to have received settlements that will be enough to significantly outpace expected growth in demand over the next few years.
While the NHS settlement is more generous than for other services, it is below what the NHS has historically received on average and is less than what was thought to be needed to meet the last government’s workforce plan. The likely need for further above-inflation pay rises will also put pressure across the board. A lot is riding on the ability of services to do things more productively.
The big winners from Reeves’ capital spending decisions – in addition to defence – were net-zero, transport and the Department for Business and Trade. This suggests that the Chancellor has prioritised the government’s growth and clean energy missions in how she has allocated investment. She also used some of the flexibility created by her new debt target to expand the use of government financial transactions – providing more loans to small businesses and housebuilders, and incentives to homeowners to upgrade the energy efficiency of their homes.
Ensuring that these spending settlements deliver on the government’s ambitions will require some big bets paying off, such as managing to slash asylum and administrative spending, and improve the productivity of services. If that is not possible, the government will either have to reduce its ambition – or compromise on other aspects of its fiscal plans.
But with the economic outlook having worsened since the spring and debt interest costs having risen, even if Reeves can deliver on her spending review plans, she may still be left facing difficult choices between more borrowing, higher taxes or new spending cuts.
Gemma Tetlow is chief economist at the Institute for Government
