Chancellor Rachel Reeves’ Spending Review 2025 contains strong commitments to core spending areas such as health and defence but leaves several other parts of government facing real-terms cuts over the next three years.
Civil service unions applauded capital spending increases significantly above the last government’s planned trajectory, but cautioned that sub-inflationary allocations for some departments would hit service delivery and leave staff fearing for their jobs.
An Institute for Fiscal Studies analysis of the SR25 figures shows total departmental spending is set to grow at 2.3% a year above inflation over the course of the parliament. However, the think tank said that front-loading of funding for the current financial year meant real-terms growth in the remaining years to 2028-29 would be 1.5%.
The Department for Science, Innovation and Technology is looking at the biggest increase in resource spending – 7.4%. Yesterday’s Spending Review announcement saw Reeves allocate £1.2bn to the department to drive forward “cross-cutting digital priorities”.
However, the Department of Health and Social Care is SR25’s big winner according to the IFS. It is looking at annual real-terms increases in resource spending (RDEL) of 2.8% between 2025-26 and 2028-29. That means health gets around 90% of the total uplift in day-to-day spending for departments over the period, when funding for devolved administrations is stripped out.
The IFS noted that growth of 3% a year is below the historic average for the NHS, and that health funding agreed at spending reviews nearly always gets topped up.
At the other end of the scale, the IFS crunch of settlements shows the Foreign, Commonwealth and Development Office is facing an average real-terms reduction of RDEL growth of 6.9% a year over the years to 2028-29.
The Department for Transport is looking at annual real-terms reductions in RDEL growth of 5%. At the Department for Environment, Food and Rural Affairs, the expected annual real-terms cut in RDEL growth is 2.7%.
The IFS said the Department for Business and Trade, the Home Office, HM Treasury, and the Department for Culture, Media and Sport were also looking at annual real-terms growth reductions in the region of 1.5%-2%. The projection for the Department for Work and Pensions, meanwhile, is for a real-terms growth cut of around 1% a year over the remainder of the spending review period.
Graphic: IFS
Overall departmental allocations in SR25 include capital spending growth of 3.6% a year between 2023-24 and 2028-29. The IFS described defence and intelligence as the biggest winner in the area, with a £14.2bn uplift between 2023-24 and 2029-30, followed by capital spending on energy and net-zero initiatives, which is up by £9bn over the same period.
IFS director Paul Johnson said it was clear that SR25 did not represent a return to coalition government-era spending restraint.
“This is not a period of austerity," he said. “This is a long period during which spending will be growing faster than the economy which, given current OBR estimates – which are more optimistic than most – is set to grow by 1.5% a year.”
‘Not much room for pay rises’
Johnson said the generally slow growth in departments’ budgets for day-to-day spending should be a warning on the likelihood of generous pay settlements for officials over the coming years.
“There is not going to be much room for further significant increases in public sector pay," he said.
“Perhaps last year’s increases followed by a period of rises broadly in line with inflation will be enough to keep peace with the unions, and to recruit and retain as necessary. If not there could be trouble ahead.”
Johnson also noted that the growth in spending in SR25 is “focused” on capital projects and that it was a “real achievement” on the part of the government to maintain investment spending at the high level the Sunak administration reached – but planned to slow down.
The IFS said that the published plans of the last government would have seen annual growth in capital spending cut to around 0.6%.
Think tank the Institute for Government said Rachel Reeves’ plans had turned out to be “relatively benign” compared to the “bleak picture” anticipated when the spending-review process began last year.
It suggested that increasing health service funding by less than the 3.6% annual growth that some were expecting had helped to ease the pain of other departments.
Missed opportunity on cross-cutting ‘missions’ funding
The IfG noted there was “little evidence” of cross-departmental working around the government’s five “missions”. It said the framing of the government’s priorities appeared to have shifted 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," it said. “The opportunity and safer streets missions, however, now appear far less prominent.”
The IfG added: “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.”
Unions voice fears for jobs
Civil service unions reacted positively to the Spending Review’s increases in capital spending, but noted that staff at departments in line for real-terms cuts would fear for their jobs.
Fran Heathcote – general secretary of PCS, the civil service’s biggest union – said increased spending on housing, transport and energy infrastructre was “welcome”. However, she said departments facing “worrying real-terms cuts” would be a source of insecurity for officials.
“Cuts have consequences," she said. “They will hamper our members’ ability to keep the country running, deliver vital services and meet the policy objectives the government has set for itself.
“We will be fighting hard to ensure that we defend our members from any threats that may arise to their job security and to persuade the government to deliver properly funded, good quality public services.”
Mike Clancy, general secretary of the Prospect union, agreed that increased capital investment – including in defence – is an “important” step change, but echoed concerns about the impact of reduced revenue spending in some areas.
“The government will need to articulate much better what it wants the civil service to stop doing, given many essential government agencies are already facing recruitment and retention crises, particularly for specialist digital, scientific and technical staff,” Clancy said. “Only by investing in the skills it needs will it be able to achieve its objectives and undo the damage of the last 15 years.”
Dave Penman, general secretary of civil service leaders’ union the FDA, said ministers could not expect to see business-as-usual results from areas of government work saddled with real-terms funding reductions.
“Elected governments are free to make decisions around funding for departments – but cuts of this size and speed will have a significant impact on what the civil service is able to deliver for ministers and the country," he said. “The chancellor needs to ensure that the commitments that she has today made to the country will match the resources available within public services.”
Penman added that it was “disappointing” that ministers had decided to delay the publication of the civil service strategic workforce plan, which had been due to appear alongside the Spending Review.