The UK’s Chancellor of the Exchequer, Rachel Reeves, has just delivered the three-year Spending Review (SR), the first multi-year settlement since 2021.   

Let’s be clear what the SR is… and isn’t.  It's not a budget, so no tax changes or annual spending plans – both will need to wait for this autumn’s annual budget.  It’s not a legislative or legal document, but it is a hugely important policy statement, setting the spending envelope for the next three years, and the political envelope of what the Government wants to achieve before the next election too. 

Time for some acronyms, particularly two Treasury-imagined characters, DEL and AME. The money the UK Government spends is known as Total Managed Expenditure (TME), made up of Departmental Expenditure Limits (DEL) – the amount that each department is allocated by the Treasury to spend each year – and Annually Managed Expenditure (AME), which is the demand-led, less predictable spending on welfare, pensions and debt interest payments and so on. AME is forecast by the independent Office for Budget Responsibility (OBR), hence all the talk about the Chancellor’s ‘fiscal headroom’ of just £9.9 billion by 2029/30, and whether or not the Chancellor will need to raise taxes this autumn to stay on track with the OBR’s forecast.

Today, though, was all about the overall DEL spending envelope for the next three years, from 2026-27 to spring 2029 (just before the likely date of the next election) and which is itself split into two: current spending, the Government’s spend on its day-to-day running costs, everything from pay and pensions, to bullets and bus subsidies; and capital spending, investment designed to improve the UK’s infrastructure and public services – new roads, railways, prisons and power stations. These two have very different self-imposed fiscal rules, and which were repeated today. The ‘stability rule’ means that the current spending budget should be on course to be in balance or surplus by 2029/30 and the ‘investment rule’ which allows the Chancellor to borrow for investment as long as overall public debt is falling by 2029-30. With the UK paying more to service its debt than almost any of its competitors, the case for maintaining these rules to help reassure the financial markets is compelling – even if it annoys Labour backbenchers.

These different rules explain why the Chancellor appeared to splurge money on capital projects across the country today, while the last few weeks have been dominated by talk of furious rows with Cabinet Ministers about current spending. Understandably, the Government will want to talk about the former rather than the latter in the next few days. The Chancellor announced that DEL spending will increase by 2.3% over the SR period in real terms. But with extra on the Government’s priorities of the NHS and defence, many departments will have to survive on real current spending increases close to, or even below, zero – relieved by big capital spending increases on social housing, energy security and infrastructure.

The politics, as ever, was the most interesting. The Labour Government has been in power for just 10 months and has a working majority of over 160 seats, yet Reeves gave a speech that could have been delivered during an election campaign.  Multiple mention of Labour seats and MPs in provincial Britain: Blackpool, Bassetlaw, Birmingham, Lincoln, Lichfield, Sheffield, Southport plus of course the steel towns of Scunthorpe and Port Talbot – and just one mention of London. Even more striking was that the leader of the Opposition Conservatives was only mentioned once, the Liberal Democrats not at all, while Nigel Farage’s Reform UK (a party with just five MPs) was attacked on multiple occasions. Let there be no doubt who Labour see as their main opponent in the 2029 election, with a surprise announcement that the use of hotels to house asylum seekers will be ended by then, thrown in for good measure. 

Labour began its time in power talking up the pessimism of the economic gloom it said it had inherited from the Conservatives but, spooked by the popularity of Reform, the Chancellor today pivoted to optimism: ‘the ‘renewal of Britain’, ‘the choices of the British people’, and being ’on the side’ of working people.

It’s going to be a tough challenge, of course, to pull off; seeking to persuade the voters, particularly the Reform-curious, that she’s on their side, while managing eye-watering debt levels and sceptical money markets. As she summarised it herself, “In place of chaos, I choose stability. In place of decline, I choose investment”.

Spending Review key points

• NHS current spending up 3%

• Defence spending will rise to 2.5% of GDP by 2027 (2.6% including intelligence services) from the current 2.33%

• £39 billion for affordable and social housing and £10 billion for Homes England to help with private investment in housebuilding

• £15 billion for local transport infrastructure, predominantly in the north of England and the Midlands, including £3.5 billion to upgrade TransPennine rail between York, Leeds and Manchester, £2.5 billion for East West Rail between Oxford and Cambridge

• £280 million for the Border Security Command and end use of asylum hotels by 2029

• Core funding for the police would rise by 2.3% a year in real terms to meet the government’s pledge to recruit 13,000 neighbourhood officers by 2029

• Schools to receive an extra £4.5 billion a year in core funding by 2029 and £2.4 billion capital spending to rebuild 500 schools

• £14 billion for the Sizewell C reactor, and £2.5 billion small modular nuclear reactors, and for research into nuclear fusion, plus a carbon capture project in Aberdeenshire.

• £2 billion for the AI Action Plan

• The Industrial Strategy will follow in the ‘coming weeks’

Key announcements

Current DEL Spending (real terms) over three years, up 1.2%. Details as follows:

• Health up by 2.8% (of which NHS England is up by 3%)

• Local Government up by 1.1%

• Housing & Communities down 1.4%

• Education up 0.7% (of which schools up by 0.4%)

• Home Office down 1.7%

• Justice up 1.7%

• Foreign Commonwealth and Development down 6.9%

• Culture, Media & Sport down 1.2%

• Science, Innovation and Technology up 7.4%

• Transport down 5%

• Energy, Security & Net Zero up 0.5%

• Environment and Rural Affairs down 2.7%

• Business and Trade down 1.8%

• Work & Pensions up 0.4%

If you want to discuss what all this means for your organisation, do get in touch with publicaffairs@cardewgroup.com