Chancellor Rachel Reeves has unveiled a spending review she said would put Britain on a path to “national renewal”, with the NHS receiving a £29bn annual boost while other areas of day-to-day spending face cuts.
Reeves outlined what she said were “Labour choices” for public spending for the next three or four years, with a focus on the NHS and schools and a £113bn borrowing-fuelled spree on capital projects.
However, Whitehall departments facing real terms cuts in their day-to-day budgets include the Home Office, Foreign Office and the Department for Culture, Media and Sport.
Reeves’ statement to the House of Commons included a long list of investments on projects from railways and nuclear power stations to housing and prisons.
The chancellor, cheered on by Labour MPs, said the statement was a repudiation of Conservative “austerity”. “In place of decline, I choose investment. In place of retreat, I choose national renewal,” she said.
But the Institute for Fiscal Studies, a think-tank, cautioned that the growth in government spending was focused on the first two years of the parliament. From mid-2026 on, it added, “things look tighter”.
For the opposition Conservatives, shadow chancellor Sir Mel Stride said Reeves had “lost control” of the public finances and that she would be forced to come back with more tax rises in her autumn Budget.
“After a summer of spending, the Budget this autumn will be far more challenging,” said Ruth Curtice, chief executive of the Resolution Foundation think-tank.
She warned that a weaker economic outlook meant “more tax rises or welfare cuts for the chancellor to meet her fiscal rules”.
Asked about the prospect of tax rises in a GB News interview, Reeves did not rule them out, saying only that “taxes won’t need to go up to pay for what is in this spending review”.
The small print in Reeves’ spending review revealed some of the winners and losers, after what has been a fierce haggle over money between the Treasury and individual cabinet ministers.
Day-to-day spending by Whitehall departments will rise by an average 1.2 per cent in real terms over the next three years, but the NHS England budget will increase by 3 per cent — a boost of £29bn a year by the end of the parliament.
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Reeves also increased the schools budget by £2bn in real terms by the end of the parliament.
Defence, which has seen its budget topped up by cuts to overseas aid, was another big winner, while local councils, some of which are facing bankruptcy, will receive an extra £3.4bn of grant funding by 2028-29.
After bitter negotiations between Reeves and home secretary Yvette Cooper, the Home Office budget will be squeezed by 1.7 per cent in real terms.
However, Reeves said “police spending power” would rise by an average 2.3 per cent a year in real terms. Police forces receive funding from local council tax bills as well as from central government.
Council tax bills might need to rise by the maximum of 5 per cent a year to enable the increase in “police spending power”, Paul Johnson, director of the IFS, said, although this will be down to decisions by individual local authorities.
Reeves’ spending review sets the political battleground for the rest of the parliament, with the goal of shoring up Labour support in parts of northern England and the Midlands where Nigel Farage’s Reform UK is advancing.
The Treasury “green book”, which assesses value for money for public schemes, has been rewritten to put more weight on projects in less productive areas of the UK.
She said the revised rules would mean that “no region has Treasury guidance wielded against them”, with more investment permitted in poorer parts of the country.
Reeves focused heavily in her Commons statement on the “good news”, in which she started to allocate £113bn of extra infrastructure spending over the rest of the parliament, much of it outside London and the south-east.
She promised to give more details soon of Labour’s plan to build faster rail connections linking the main cities of the north, while confirming an extra £39bn for affordable and social housing.
Reeves vowed that investments in nuclear power, artificial intelligence, skills and developing the so-called Oxford-Cambridge Arc would all be part of a plan to “fix the foundations” of Britain.
Defence is set to receive a big uplift in its capital expenditure of more than 7 per cent a year, but the investment budget for health is far less generous, remaining flat in real terms from 2025-26 to 2029-30.
The spending review is a big moment in Reeves’ chancellorship. Her poll ratings have dived since last year’s election, to levels last seen during the brief time at the Treasury of Kwasi Kwarteng, who delivered the disastrous Tory “mini” Budget of 2022.
Reeves has argued she was able to dispense £113bn in extra investment because of “choices” she made to loosen her fiscal rules for capital expenditure while keeping a tight grip on day-to-day spending.
But in March she left herself just £9.9bn of headroom against her fiscal rule on day-to-day spending, which economists believe has since narrowed sharply.
Stride said: “Now the chancellor parades her largesse, but we all know what is coming in the autumn. She is constantly teetering on the edge of breaking her own fiscal rule.”
Investors shrugged off the statement, which did not include any fresh numbers on borrowing, with the 10-year gilt yield hovering below 4.6 per cent. The blue-chip FTSE 100 closed 0.1 per cent higher.
“Another fiscal event goes by with little resolved in terms of allaying investor fears that fiscal policy is on a sustainable footing,” Neil Mehta, portfolio manager at RBC BlueBay Asset Management, said.
Additional reporting by Emily Herbert
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