Spending review 2025: Six key things we learned from Rachel Reeves' announcement

What has the government chosen to prioritise?

The many competing demands on the chancellor combined with tight overall spending plans, especially for day-to-day spending, meant the chancellor had to prioritise at this spending review.

At the autumn budget, Rachel Reeves announced sizable increases in capital spending, enabled by her new fiscal rules, which meant investment budgets were relatively generous. And today she was able to announce big increases in investment spending for energy and net zero, transport, and business – in support of her missions to grow the economy and decarbonise the energy system – as well as defence. However, public service departments (especially education and health) received smaller uplifts.

In contrast, on day-to-day spending the government protected core public service departments from cuts. Health (2.8% per year), education (0.7% per year), justice (1.8% per year) and local government (2.6% per year) all received real-terms increases, though smaller than those awarded at the one-year ‘spending round’ last year. This meant large cuts in other day-to-day spending – including on transport, agriculture, asylum spending, aid and Whitehall administrative budgets.

Even defence, which received a big settlement overall, received only a small increase in day-to-day spending. This will leave many departments with lower budgets in real terms in 2028/29 than in 2010/11.

Looking at overall departmental settlements, the government prioritised in a similar way to the one-year spending review in 2024. Health did particularly well – as has been the case at almost every spending review since 1998. But in a break from the reviews of the 2000s and 2010s, local government and justice were also protected and received above-average settlements. Meanwhile, the Home Office and (especially) overseas aid have been tasked with finding some of the biggest cuts.  
The big change in approach since the autumn is on defence, where an evolving international environment has forced the government to accelerate its plans to reach 2.5% of GDP.

Public services still face a considerable challenge to improve performance

Going into the spending review, the outlook was grim for unprotected services such as local government, police, prisons and criminal courts. Commitments on areas like health and defence meant that those other services looked set to receive cuts to their budgets. 

Compared to that bleak picture, the announcements today were relatively benign. Spending on all of the NHS, local government, schools, and the criminal justice system is set to rise between 2025/26 and 2028/29.

The government managed that in part by increasing NHS funding by less than many expected; 3.0% per year in real terms, compared to the anticipated 3.6%. That sounds like a small difference, but such is the scale of the NHS’s budget that even a slightly smaller increase frees up a relatively large amount of money. Cuts to other departments like transport as described above also helped these public services.

The question then is if these settlements will be sufficient to improve performance by the end of this parliament. That is far less certain.

When considering expected growth in demand for services between 2025/26 and 2028/29, only three areas – local government, courts, and general practice – have funding that exceeds expected demand growth by more than 1%. All other services with the exception of prisons are within -1% or +1% of expected demand growth.

That will still mean it is difficult for services to improve performance substantially before the next election, particularly given higher than budgeted for pay rises for key staff groups and the prospect of further industrial action.

One unknown is the extent to which services will become more productive before 2028/29. Many services (particularly hospitals, courts, and prisons) are less productive now than in 2019, meaning that the government receives less for the money it spends. So the government will be hoping to recoup some of that loss.

There are some positive signs on that account. Hospital productivity has increased over the last year or so, albeit from a low base. Industrial action has abated (for now) and staff are becoming more experienced. Increased capital spending compared to the 2010s will also allow for more investment in diagnostic equipment, improved maintenance, and new computers. These are all positive tailwinds for improved productivity.

The new public service reform principles are sensible but more detail is required

The government has argued that improvements in public services would also come from reform, not just more spending. If there was ever a moment to explain what that reform programme would entail, it was today.

The government laid out three principles for reforming services: 

1. Better integration of services to match people’s needs
2. A focus on prevention
3. Devolving power to local areas 

These are spot on and align with recommendations that we have previously made for how to improve performance. But there was little detail about what this would mean in practice for services or how departments should integrate these principles into ongoing reforms, for example the NHS’s upcoming 10-year plan. We hope further detail will be forthcoming.

In the meantime, the announcement of community help partnerships (CHPs) is welcome. The government has allocated £100m to these with the aim to more effectively support adults with complex needs – some of the most intensive users of public services. Though small, it has the potential to be scaled up and could become the start of a wider programme to more effectively integrate public services’ budgets at a local level.

The Office for Value for Money (OVfM) also published departmental efficiency plans for the first time. These provided information about how departments planned to achieve 1% efficiency savings a year over coming years. This is a meaningful break with the past, where governments tended to set vague efficiency targets, with little idea for how to achieve them. The only concern is that many of the drivers of improved efficiencies are pre-existing programmes of work. For example, the NHS hopes that increased use of surgical hubs will drive improvement, but that programme has been in train for years. It is unclear, therefore, how much of these efficiency savings are genuinely new, or just recorded publicly for the first time. 

How did Rachel Reeves allocate higher capital spending?

The chancellor used the autumn budget to commit to higher capital spending than the previous government had planned. Capital spending is now set to grow much faster over the next few years than day-to-day spending, while overall annual departmental capital spending between 2026/27 and 2029/30 will be around 20% higher in real terms than in 2024/25. As a result, Reeves’s speech today was dominated by announcements of new public investment.

As expected, defence was the big winner. The government has also focused capital spending on transport, energy, and business, in line with the government’s growth and decarbonisation missions. But key public services (like the NHS, education and justice) received less generous increases in their capital settlements, even if the level remains much higher than during the 2010s. 

The spending review does not set out exactly how these budgets will be spent. But it is welcome that the accompanying documents set out an ambition to focus on the maintenance of buildings in the NHS and schools and not just on new building, as has often been the case in the past.

It is also welcome that – as the Institute has previously called for – two major projects (HS2 and Sizewell C) have been reported on separate budget lines. This should support better scrutiny of these major projects over the next few years.

The government has also made use of the shift in its fiscal rules to a balance sheet measure – ‘public sector net financial liabilities’ – that nets off the public sector’s financial assets to increase support through financial transactions such as loans. The government plans to rapidly increase spending on these kinds of financial transactions from £0.6bn in 2023/24 to £8.8bn in 2029/30 in cash terms, with the energy and housing departments the main beneficiaries.

The government should ensure that its choice about when to use financial instruments (loans and equity stakes for example) and when to use direct grants or other government spending is driven by what is most appropriate in policy terms, rather than the one that flatters the public finances the most.

Is this a mission-driven spending review?

The headline framing of the government’s priorities has shifted from five missions to three priorities: security, health and the economy. Within these three, the growth and NHS missions remain front and centre with the clean energy mission grouped with defence under security. The opportunity and safer streets missions, however, now appear far less prominent.

While on the surface this does not look like a ‘mission-driven’ spending review, it is clear the milestones in Plan for Change have guided prioritisation when it comes to budget allocations. Mission-lead departments DHSC and DESNZ get some of the most generous settlements, economic infrastructure and housing are prioritised and while the Home Office is cut the police budget is relatively protected. The missions agenda is still alive.

The spending review documents show little evidence of cross-departmental working around the missions. Whatever role the ‘mission groups’ have played in the spending review, it has not resulted in joint budgets with shared outcomes. This is a missed opportunity to incentivise the kind of collaboration that has limited the effectiveness of previous spending reviews. 

The absence of a planning and performance framework is also disappointing. While this is promised before the next budget, well-defined outcomes should have been driving decisions and shaping the settlements in this spending review rather than coming as an afterthought.

Local authorities’  funding will rise, but funding reform will have to wait 

As already discussed, local government ended up with a higher-than-expected settlement. Local authorities’ core spending power (the amount of money available to spend on local services) will rise by an average of 3.0% per year in real terms between 2024/25 and 2028/29.

But even still, local authorities’ spending power will be 2.7% lower in real terms in 2028/29 than in 2010/11 – and 15.9% lower when accounting for population growth.

That higher-than-expected settlement will help the government deliver some of its key public services priorities, including early years and youth services, and increasing access to adult social care.

As has been the case for years, much of the growth in spending power will come through further rises in council tax. The government announced that it will keep the council tax referendum principle and social care precept set at 3% and 2% respectively, meaning that councils that provide social care will continue to be able to increase council tax by 5% per year between 2025/26 and 2028/29.

While the chancellor made no announcement on the level of funding for the four strategic authorities due to receive integrated settlements from 2026/27 there was confirmation that London will now join them in this next phase – excluding transport funding. Alongside this the government published a policy document setting out how these integrated settlements will be designed and delivered, including the addition of two new pillars focused on environment and climate change and health, wellbeing and public service reform.

There was also the announcement of several new funds: a £240m growth mission fund, a local growth fund and funding for 350 communities across the UK, including 25 ‘trailblazer neighbourhoods’ – some of the areas highlighted earlier this year as ‘mission critical’ by the Independent Commission on Neighbourhoods. Detail on how the funding will be allocated and administered is thin. While the government has committed to further streamline local government funding, the announcements today don’t set out a clear pathway for how this will be done in practice.

Finally, the government announced that it would update the process it uses to assess local authorities’ funding needs. That is welcome, though successive governments have made that commitment since 2016.

Overall this appears to be a reasonable spending review for local government, and better than many will have been fearing, but it was not the strategic shift that local leaders might have been hoping for.