Where are spending cuts or bigger budgets likely? Clutch Fire

The U.K. Treasury is poised to set out day-to-day spending and investment plans for all government departments on Wednesday, with markets and voters watching where budget cuts could fall.

In its ‘Spending Review,’ the Labour government will set out how public money will be allocated over the next three to four years, ranging from spending on public services like schools and police to welfare budgets and investments in energy, infrastructure, science and tech projects that can drive economic growth.

The review covers resource spending — the government’s day-to-day running and administration costs — as well as capital expenditure, which goes toward improving infrastructure and public services such as new roads, hospitals and military equipment.

Now, U.K. watchers are waiting to see where the axe falls when it comes to individual government department budgets, and which ones get a windfall or are constrained. The government has already committed to higher spending on defense, transport and health, but cuts are expected elsewhere.

Departments overseeing policing, affordable housing, the environment and local government reportedly faced funding squeezes, making for awkward negotiations in recent weeks between U.K. Finance Minister Rachel Reeves and various government ministers as they looked for bigger budgets from the Treasury.

The prime minister’s official spokesperson on Monday said that negotiations over the spending review were finally over.

“The spending review is settled — we will be focused on investing in Britain’s renewal so that all working people are better off,” he said. “The first job of the government was to stabilize the British economy and the public finances, and now we move into a new chapter to deliver the promise and change.”

The spending review will reveal a lot about British Prime Minister Keir Starmer’s priorities and Reeves’ spending choices, the independent Institute for Government think tank noted ahead of the announcement, flagging that disappointment was inevitable for some government departments.

“The government will have no choice to but prioritise where the money goes at this spending review, meaning some departments will be left disappointed,” it said in analysis last week.

“Day-to-day spending is only set to increase by 1.2% per year in real terms, which implies a 1.3% cut on average for many areas after taking into account likely above-average settlements for health, childcare and defence.”

Investment spending will be much higher than in previous years but there will still not be enough public funding to meet the long list of department demands, the IfG warned, “especially as the government’s ambitions to tackle NHS waiting lists, accelerate the decarbonisation of the grid, and support growth all require sufficient well-targeted public spending.”

The 2025 spending review is billed as a huge moment for the Labour government and a fine balancing act for Reeves.

Governments often increase borrowing to fund public spending, but Reeves has vowed to get the U.K.’s public finances in order. She has committed to self-imposed “fiscal rules” that dictate that day-to-day spending must be met by tax revenues and that public debt is falling as a share of economic output by 2029-30.

As such, Chancellor Reeves has left herself little room for maneuver unless she breaks her own restrictions, hikes taxes again or cuts spending further with economists

“Everything about this [spending review] is political – does the chancellor want to lean into welfare cuts – probably not. We know that defence is being earmarked for more cash. We know that the chancellor will be sticking to her fiscal rules resolutely, although she could tweak them to accommodate more spending,” Neil Wilson, U.K. Investor Strategist at Saxo Markets, noted Tuesday.  

“The easiest way to balance the books is tax hikes – it’s no surprise that given some big spending cuts required we are also hearing concerns about potential changes to tax on investments in the autumn,” he added.

Some economists are skeptical that the government’s spending and investment plans will drive the hoped-for growth, meaning that further tax rises will be needed to boost economic activity.

“With weak business and consumer confidence compounded by global trade uncertainty, the U.K.’s economic fortunes seem unlikely to improve anytime soon,” Andrew Hunter, senior economist at Moody’s Analytics, said in a note ahead of the spending review.

“As the government inches towards breaking its fiscal rules, further tax hikes at the next budget later this year look all-but inevitable.”