UK Treasury Announces Spending Review, 1.3% Cuts Expected for Many Departments

The UK Treasury is set to release a comprehensive spending review on Wednesday, outlining the daily expenditures and investment plans for various government departments. This review will cover a wide range of areas, including public services such as schools and police, welfare budgets, and investments in energy, infrastructure, science, and technology projects aimed at driving economic growth.

The review will encompass both resource expenditures, which include the daily operational and administrative costs of the government, and capital expenditures, which are used to improve infrastructure and public services such as new roads, hospitals, and military equipment. Observers are closely watching to see which departments will face budget cuts and which may receive unexpected funding or have their budgets constrained.

Government departments responsible for policing, affordable housing, the environment, and local government are reportedly facing financial constraints. This has led to challenging negotiations between the Chancellor of the Exchequer, Rachel Reeves, and various department heads, who are seeking additional budgets from the Treasury. The government has already committed to increasing spending in defense, transportation, and healthcare, but other areas are expected to face cuts.

The Prime Minister's official spokesperson announced on Monday that the negotiations regarding the spending review have concluded. "The spending review is finalized — we will focus on investing in the UK's revival, making life more prosperous for all working people," the spokesperson said. "The government's top priority is to stabilize the UK economy and public finances. We are now entering a new chapter to fulfill our promises and bring about change."

However, disappointment is inevitable for some departments. The independent think tank, the Institute for Government, noted before the announcement that the spending review will reveal the priorities of Prime Minister Keir Starmer and the spending choices of Rachel Reeves. The think tank emphasized that some departments will inevitably feel disappointed, as the government has no choice but to prioritize funding allocations, leading to cuts in certain areas.

The actual daily expenditure is expected to grow by only 1.2% per year. Considering that healthcare, childcare, and defense may receive above-average budget allocations, many other areas will face an average cut of 1.3%. The Institute for Government warned that while investment spending will be higher than in previous years, it will still not be sufficient to meet the long-term needs of various departments, especially in areas such as reducing the waiting list for the National Health Service, accelerating the decarbonization of the power grid, and supporting economic growth, which require adequate and targeted public spending.

The 2025 spending review is seen as a crucial moment for the Labour government and a delicate balancing act for Rachel Reeves. The government typically increases borrowing to fund public spending, but Reeves has pledged to reform the UK's public finances. She has committed to adhering to her self-imposed "fiscal rules," which stipulate that daily expenditures must be covered by tax revenues and that the ratio of public debt to economic output must decrease by 2029-30.

Therefore, unless Reeves breaks her own rules, raises taxes again, or makes further spending cuts, she has little room to maneuver. Economists have noted that the entire spending review is politically motivated. It is unlikely that the Chancellor will favor cutting welfare benefits. It is known that defense has been designated to receive more funding. It is also known that the Chancellor will strictly adhere to her fiscal rules, although she may adjust the rules to accommodate more spending.

The simplest way to balance the budget is to increase taxes. Given the need for significant spending cuts, concerns about potential adjustments to investment taxes in the autumn are not surprising. Some economists are skeptical about whether the government's spending and investment plans will drive the expected economic growth, suggesting that further tax increases may be needed to stimulate economic activity.

Andrew Hunt, a senior economist at Moody's Analytics, stated in a report before the spending review that due to weak business and consumer confidence, as well as uncertainty in global trade, the UK's economic outlook is unlikely to improve in the short term. "As the government approaches breaking its fiscal rules, further tax increases in the next budget later this year are almost inevitable," he added.