Chancellor Rachel Reeves is gearing up for a critical Spending Review scheduled for Wednesday, June 11. This event will define budgets across various government departments, shaping the financial landscape for the upcoming years. In an environment strained by economic pressures, Reeves faces significant challenges as she articulates plans for government spending on crucial public services like the National Health Service (NHS) and other infrastructure projects.
The Spending Review will build on Reeves’ prior commitments made in October when she allocated department budgets for the fiscal year 2025-26. During this review, she will provide in-depth details regarding spending allocations for the subsequent three to four years. As part of this, the Chancellor has previously outlined a “spending envelope,” effectively providing a framework detailing how much total government spending is projected to rise during the review period.
This pivotal review is divided into two primary categories: day-to-day spending, which encompasses operational costs like salaries and supplies, referred to as “resource” spending, and investment spending that focuses on long-term infrastructure projects such as new schools, hospitals, and roads, termed as “capital” spending. Specifically, the Spending Review will delineate day-to-day expenditure for the next three years and the investment spending for four years.
The current state of the UK economy presents a challenging backdrop for Reeves. According to recent data, governmental borrowing reached £20.2 billion in April; a significant increase from the previous year’s figures. Despite a rise in tax revenues due to higher National Insurance Contributions (NICs) from employers, expenditure has spiked primarily due to increased pensions, benefits, and rising interest payments on national debt.
These fiscal constraints are compounded by the government’s self-imposed rules: day-to-day spending must be covered by tax revenues without additional borrowing, and debt as a percentage of national income must decrease by the end of the current parliamentary session in 2029-30. However, projections indicate that the anticipated surplus will be the third-smallest on record, allowing little overhead to cushion against potential economic shocks or unplanned expenditures.
Ahead of the Spending Review, the government has signaled a modest increase in total spending on operational and investment costs, which has raised alarms among various fiscal analysts. The Institute for Fiscal Studies (IFS) has suggested that this restrained growth necessitates harsh trade-offs. Notably, significant funding channels, such as overseas aid, face cuts to finance a notable escalation in defense spending—projected to rise from 2.3% to 2.5% of the UK’s GDP by 2027.
Reeves is expected to unveil substantial allocations, including a £15.6 billion investment package aimed at extending transport links in cities beyond London, such as Greater Manchester, the Midlands, and Tyne-and-Wear. However, crucial funding information for the Department of Health and Social Care, which comprises nearly 40% of yearly departmental expenditure, remains undetermined at this stage.
Additionally, the Chancellor has indicated modifications to the regulations regarding Winter Fuel Payments, promising revisions that will affect those who qualify for aid beyond just those on means-tested benefits. However, comprehensive details regarding these too will be postponed until the later Budget announcement this year.
In a bid to foster more public investments, Reeves has reportedly altered debt measurement methodologies to unlock more than £100 billion for infrastructure and pivotal long-term projects. Notably, a significant nuclear power project, Sizewell C, which involves collaboration with EDF (a French state-owned energy corporation), is under consideration for funding through public and private investments. Moreover, plans for establishing small modular reactors (SMRs) in England and Wales may also be disclosed.
In summary, Chancellor Rachel Reeves’ upcoming Spending Review is not just a matter of annual budget realignment; it fundamentally reflects the balancing act of pressing public demands against stringent economic realities. The choices Reeves makes will resonate widely, affecting public services, infrastructure funding, and budgetary control within the diverse scope of the UK’s financial governance over the coming years.