Few winners and many losers in the UK’s 2025 Spending Review

Unlike the annual Budget or the recent Spring Statement, the Spending Review does not outline plans to change taxes or other revenue-generating measures. Instead, these reviews explain how resources will be allocated between sectors and government departments. 

They give a clear political signal of where the government’s priorities are and how the “spending envelope” will be distributed. This includes day-to-day (resource) spending and investment (capital) spending, see Chart 1.

In her speech, the Chancellor explained that the fiscal rules set at the 2024 Autumn Budget are “non-negotiable” and highlighted her intention that day-to-day government spending be financed by receipts. The plans to increase capital spending by GBP 113 billion over this parliament will be financed by using part of the fiscal headroom available and additional government borrowing.

Reeves outlined that total departmental spending will grow by 2.3% in real terms per year over the next three years. This figure includes spending in the 2025-26 period, which saw a significant frontloading of government spending, and was not part of the changes announced this week.
 

Chart 1. Government spending and future plans
(% Year-on-Year real growth)

Source: HM Treasury Spending Review 2025, JPMorgan and EFGAM. Data as of 11 June 2025.

Regarding day-to-day spending, the government has set a clear priority to boost the National Health System (NHS) and defence. 

• NHS England will see an increase of +3% per year in real terms for the next three years. Efforts to reduce waiting times and improve productivity of the sector will require significant investment. The Department of Health and Social Care, which includes the NHS, will see an increase of GBP 29 billion in real terms in annual NHS resource spending from 2023-24 to 2028-29. Currently, day-to-day costs including salaries, medicines and running costs, represent almost 40% of the total healthcare spending, highlighting the scope for efficiency gains.
• Defence spending will increase from 2.3% to 2.6% of GDP by 2027-28. The Spending Review also referenced the government’s commitment to increase this to 3% of GDP in the next parliament, if economic and fiscal conditions allow. This would still be below the NATO target of 5% of GDP. Funding is expected to come from a reduction in the budget for the Foreign Office and overseas aid.

These increases in spending imply that other departments will see strong spending cuts. In addition to cuts in foreign aid, departments such as Transport, Environment, Food and Rural Affairs and Business and Trade are facing significant budget cuts, see Chart 2.
 

Chart 2. Day-to-day departmental expenditure limits
(Average annual growth 2025-26 to 2028-29)

Source: HM Treasury, Spending Review 2025 and EFGAM. Data as of 11 June 2025.

Capital spending is expected to increase by GBP 113 billion, representing an average annual growth rate of 1.8% between 2025-26 and 2029-30. Here, the government has set clear priorities on boosting defence, infrastructure, transport, green energy project and improving education. Capital spending in healthcare is expected to remain flat during the period, see Chart 3.

Chart 3. Capital departmental expenditure limits
(Average annual growth 2025-26 to 2029-30)

Source: HM Treasury, Spending Review 2025 and EFGAM. Data as of 11 June 2025.

Two of the departments that have come out of the Spending Review in a worse position are the Home Office and Foreign Office. Resource spending for the former is expected to fall by an average of 1.7% per year until 2028-29, with large part of these cuts attributed to a reduction in asylum system costs. Capital spending for this department will grow marginally during the same period. Resource spending at the Foreign Office is expected to decline by almost 7% per year, with an additional 6.8% per year cut in capital spending. 

Environment, Transport and Culture, Media and Sport are among the other departments which will see their budgets cut over the coming years. These are part of a strong drive to improve efficiency, cut costs and boost productivity.

Markets were somewhat unmoved by these announcements. The pound sterling was up by 0.37% against the US dollar while UK gilt bonds were unaffected by spending changes.

Conclusion
The changes to government spending outlined by the Chancellor offered few surprises, highlighting the clear priority to boost healthcare and defence spending. These announcements also reinforced the Labour government’s commitment to the UK fiscal rules and its intention to work alongside the private sector to drive investment and boost GDP growth.

Following a decline in UK GDP of 0.3% month-on-month in April, the ambitious target set by the Chancellor to achieve annual GDP growth of 2.5% by the end of this parliament looks ambitious.

These spending plans are the government’s latest effort to generate a boost in GDP growth and rebuild public support. However, voters’ patience will be tested at the next Autumn Statement, when tax increases or further austerity measures could be needed.