As the first female Chancellor of the Exchequer, Rachel Reeves has made history not just in terms of representation but also through a pivotal Spending Review aimed at reshaping the United Kingdom’s economic future.
Unveiled against the backdrop of sluggish productivity, high inflation, and mounting public service pressures, Reeves’ fiscal strategy seeks to balance growth, efficiency, and social investment.
This Spending Review, which outlines departmental spending allocations up to 2029, marks the Labour government’s formal economic blueprint.
It prioritises digital innovation, public sector reform, and targeted investment in key areas such as healthcare, defence, science, and infrastructure, while signalling tighter scrutiny and accountability for departmental budgets.
What Are the Key Economic Themes in Rachel Reeves’ Spending Review?
The 2025 Spending Review, led by Chancellor Rachel Reeves, sets a new fiscal direction for the United Kingdom under a Labour government.
It balances growth ambitions with fiscal discipline and presents a medium-term vision for rebuilding public services, restoring economic stability, and positioning the UK for long-term competitiveness.
Several prominent themes define the economic outlook presented in the review:
1. Fiscal Responsibility Without Austerity
One of the central pillars of Reeves’ approach is a commitment to fiscal discipline, but without repeating the austerity measures of the past.
The Chancellor has made clear that the government will work within existing fiscal rules, avoiding major increases in borrowing or unfunded spending pledges.
At the same time, she has resisted calls for immediate, large-scale tax increases, opting instead for a steady, targeted deployment of public funds.
- The Labour government aims to reassure financial markets by maintaining a credible debt trajectory.
- There is a strong emphasis on sustainable public finances, with a clear intention to maintain economic confidence while investing in productivity.
2. Targeted Investment in Growth-Enhancing Sectors
Rather than applying uniform increases or reductions across departments, the review selectively prioritises areas that are likely to boost economic productivity.
Sectors like healthcare, science, technology, and defence receive above-average real-terms increases, reflecting the government’s ambition to stimulate long-term growth and resilience.
- Healthcare sees both operational and digital investments to improve delivery and efficiency.
- Science and technology budgets are enhanced to support artificial intelligence, research, and high-performance computing.
- Capital investment is directed toward infrastructure that will enable faster and more inclusive economic growth.
This thematic focus demonstrates a shift from reactive budget planning to strategic resource allocation, supporting areas that are critical for modernising the UK economy.
3. Efficiency as a Core Principle
A notable feature of the review is the introduction of a £13.8 billion government-wide efficiency target to be met by 2029.
This reflects Reeves’ commitment to delivering better outcomes with existing resources rather than expanding public spending unnecessarily.
- Every department is expected to identify cost-saving measures through reform, digital transformation, and procurement improvements.
- The Department of Health alone is tasked with finding £9 billion in savings, largely through digital innovation and service redesign.
- These efficiency measures aim to free up funding for frontline services without compromising service delivery quality.
The message is clear: improving performance does not always require higher spending. Instead, the government is looking to achieve “more for less” through innovation and smarter administration.
4. Long-Term Economic Stability
By maintaining tight control over public finances while investing in productivity-enhancing areas, Reeves aims to create a stable macroeconomic environment.
The Spending Review avoids short-term populist decisions and instead lays the groundwork for a more balanced and resilient economy.
- Stability is prioritised over rapid expansion, especially in the face of inflation and interest rate concerns.
- The review suggests that a return to growth must be structurally sound, underpinned by better services, improved workforce participation, and a focus on green and digital technologies.
This approach contrasts with previous spending reviews that either favoured immediate stimulus or deep cost-cutting. Reeves’ model seeks a middle path, blending prudence with progress.
5. Modernising Government and Public Services
Reeves also signals a wider reform of how government operates. The Spending Review lays the foundation for digitalisation, modern workforce practices, and data-led decision-making across departments.
- The NHS digital overhaul is a headline example, but similar reforms are expected in areas like justice, education, and transport.
- Departments are encouraged to adopt digital systems, streamline reporting, and use performance metrics to drive efficiency and accountability.
This not only supports cost-saving but is designed to make the state more responsive and transparent in delivering services.
6. Reducing Regional Inequalities
While not branded as “levelling up”, the review continues efforts to address regional disparities.
Investment in transport and housing outside London, especially through regional infrastructure funds, reflects a recognition that balanced geographic growth is essential for national economic performance.
- £15.6 billion has been allocated for transport projects in English city regions excluding London.
- Local authorities are also being empowered, albeit within tight budget constraints, to tailor services to regional needs through flexible funding mechanisms.
These policies support the idea of a more decentralised and locally accountable public sector, especially in areas suffering from historic underinvestment.
Summary of Economic Themes
| Theme | Description |
| Fiscal Responsibility | Adherence to borrowing limits and debt rules without austerity |
| Strategic Investment | Focus on health, tech, defence, and infrastructure |
| Efficiency and Reform | £13.8bn in savings through smarter government operations |
| Stability over Stimulus | Long-term growth, low inflation, and macroeconomic consistency |
| Modernisation and Innovation | Technology-driven transformation across public services |
| Regional Rebalancing | Funding aimed at reducing geographic inequalities |
These economic themes show a shift in the UK government’s fiscal planning from reactive crisis management toward a measured, future-focused strategy.
The Spending Review, therefore, is more than an allocation of funds; it represents a recalibration of how the state interacts with the economy and its citizens.
How Will the Spending Review Impact the NHS and Healthcare Sector?
Healthcare spending receives substantial attention. The NHS in England is set to receive a 3% average annual increase in its day-to-day operational budget, reaching £226 billion by 2029.
However, capital investment will remain flat in real terms, indicating a shift toward consolidating recent gains rather than expanding further.
A portion of the budget, up to £10 billion by 2029, is dedicated to upgrading digital infrastructure.
Projects include improvements to the NHS App, real-time data sharing, and creating a unified electronic patient record system across trusts and care providers.
The Department of Health will be required to deliver £9 billion in efficiency savings by 2029, a significant portion of the overall government target.
This means internal reforms will be crucial in meeting patient demand without inflating costs.
What Changes Are Coming to Education Funding and Schools?
The education sector experiences a more modest change. The core schools budget in England will rise by an average of 0.4% in real terms per year, reaching £69.5 billion by 2029.
While this does not represent a transformative increase, it helps maintain service levels amid inflationary pressures.
One of the more socially impactful policies is the extension of free school meals to approximately 500,000 more pupils.
This is intended to support families affected by the cost of living crisis and enhance student outcomes.
How Will Crime, Justice and Border Spending Be Affected?
The Home Office will see its operational budget fall by 1.7% in real terms over the next three years.
Much of this is driven by plans to end the use of hotels for asylum seekers, which the government believes can be phased out by the next general election.
Despite the budget reduction, police “spending power” is expected to rise by 1.7% due to an assumption that local councils will increase council tax to support law enforcement.
The Ministry of Justice, in contrast, receives a 1.8% real-terms annual rise in day-to-day spending.
This will help support prison reform and reduce backlogs in the court system. However, capital investment in justice infrastructure is set to decline by 2.1%.
What Do the Defence Budget Changes Mean for National Security?
Defence is one of the major beneficiaries in this review. The Ministry of Defence will see a 0.7% real-terms increase in its operational budget and a significant 7.3% annual average rise in investment spending.
The UK is also committing to raise defence spending from 2.3% to 2.5% of GDP by 2027. This change is partly influenced by pressure from NATO allies and international partners to meet security obligations.
The extra investment will go towards modernising armed forces, enhancing cyber defence capabilities, and strengthening NATO interoperability.
How Is the Government Addressing Housing and Local Authority Funding?
The Ministry of Housing, Communities and Local Government (MHCLG) will undergo a 1.4% real-terms cut in its day-to-day budget.
Nonetheless, councils’ “core spending power” is expected to rise if they fully utilise permitted council tax increases.
In a notable shift, £39 billion is allocated for social housing over a ten-year period from 2026 to 2036.
This represents an average annual allocation of £3.9 billion, compared to the current annual figure of £2.3 billion.
Social Housing Allocation Comparison
| Period | Annual Allocation | Total Allocation |
| 2023–2026 (Current) | £2.3 billion | £6.9 billion |
| 2026–2036 (Planned) | £3.9 billion | £39 billion |
This increased investment aims to ease housing shortages, reduce homelessness, and support urban regeneration.
What Will Change in Transport and Environmental Investment?
The Department for Transport faces a 5% real-terms reduction in its operational budget. This is primarily due to expectations that nationalising private rail franchises will lead to administrative cost savings.
Despite the operational cuts, the government plans to invest £15.6 billion in transport infrastructure across English city regions outside London between 2027 and 2031. This funding targets long-term improvements in regional connectivity.
Meanwhile, the popular £3 cap on single bus fares in England is extended until March 2027, a policy aimed at keeping transport affordable.
The Department for Environment, Food and Rural Affairs (DEFRA) will see a 2.7% real-terms fall in its budget.
This could impact conservation programmes and efforts to meet sustainability targets, despite environmental concerns remaining high on the political agenda.
How Will Energy and Nuclear Projects Be Supported?
The Department for Energy Security and Net Zero receives a real-terms operational budget increase of 0.5% and a 2.6% rise in investment funding. These funds are intended to support the UK’s energy transition and ensure national resilience.
One of the largest projects announced is a public investment of £11.5 billion towards the construction of the Sizewell C nuclear power plant in Suffolk. This project is expected to be completed with substantial private sector co-investment.
Energy Department Allocations
| Category | Real-Terms Increase | Notable Investment |
| Operational Budget | +0.5% | Grid resilience, energy audits |
| Capital Investment | +2.6% | Sizewell C nuclear project |
This approach aims to diversify energy supply, reduce dependence on fossil fuels, and contribute to net-zero targets.
What Does the Spending Review Say About Foreign Policy and International Aid?
The Foreign, Commonwealth and Development Office (FCDO) faces the most significant reduction among departments, with a 6.8% real-terms cut in day-to-day spending.
This is largely due to lower overseas aid commitments, which remain fixed at 0.3% of gross national income.
The reduction aligns with a long-standing government target but may limit the UK’s global development role.
Diplomatic operations and embassy networks may also be affected, though the department is expected to prioritise strategic international partnerships and crisis response capabilities.
How Will Science and Technology Innovation Be Funded?
The Spending Review places strong emphasis on science, research, and digital advancement.
The Department for Science, Innovation and Technology will receive a 7.4% real-terms rise in its operational budget.
Key components of this funding include:
- £2 billion to implement the “AI Opportunities Action Plan”
- £750 million to build a next-generation supercomputer at the University of Edinburgh
These investments are intended to elevate the UK’s global standing in research and technology, especially in artificial intelligence, data science, and high-performance computing.
Government stakeholders view this as a long-term growth engine that can generate high-value jobs and global competitiveness.
What Are the Overall Winners and Losers in the Spending Review?
The Spending Review creates a distinct set of departmental winners and losers based on allocation changes, growth priorities, and expected efficiencies.
Departmental Outcomes Overview
| Sector | Change (Real Terms) | Outcome |
| NHS | +3% annually | Major investment, digital focus |
| Defence | +0.7% (ops), +7.3% (capex) | Strategic expansion, NATO-ready |
| Science & Tech | +7.4% | AI, research, supercomputing |
| Education | +0.4% | Steady growth, meal expansion |
| Home Office | -1.7% | Hotel costs cut, local funding up |
| Foreign Office | -6.8% | Aid scaled back, global presence |
| Environment | -2.7% | Risk to sustainability programmes |
| Transport | -5% operational | Savings from rail nationalisation |
This breakdown illustrates how the Spending Review attempts to modernise public services while controlling expenditure growth.
Conclusion
Rachel Reeves’ Spending Review reflects a cautious but targeted shift in the UK’s fiscal direction.
With a focus on long-term growth, technological innovation, and efficient public service delivery, the review attempts to strike a difficult balance between investment and fiscal discipline.
While questions remain about the scale and speed of reform, especially in areas facing cuts, this budget blueprint lays the groundwork for the Labour government’s broader economic ambitions.
Frequently Asked Questions
How does the Spending Review affect inflation control?
The review aims to avoid inflationary pressures by limiting large-scale borrowing and keeping spending focused on long-term productivity gains.
What is the timeline for the proposed social housing investment?
The £39 billion investment in social housing is planned for 2026 to 2036, with an annual average of £3.9 billion.
Will the NHS benefit from digital upgrades?
Yes, up to £10 billion will be invested in health technology, including app upgrades and unified patient records.
Is defence spending increasing in real terms?
Yes, especially in capital investment, with a projected annual increase of 7.3% and a target of 2.5% of GDP by 2027.
How does this review differ from previous Conservative budgets?
This review places more emphasis on efficiency, long-term investment, and targeted social support, avoiding widespread cuts or borrowing.
What sectors are seeing the largest funding reductions?
Foreign aid, transport, and environmental departments are among those facing real-terms budget cuts.
How does the Spending Review support science and AI?
A 7.4% increase in DSIT funding will support AI research, a supercomputing project, and digital innovation in public services.
