By Johannes Read, Senior Policy and Data Analyst
City-REDI, University of Birmingham
One year on from winning the General Election, the Labour Government have outlined their 2025 Spending Review. Throughout the Government’s first year, headlines have focused on tightening public finances. This Spending Review follows in a similar vein. But there are also relatively significant increases in capital spending too, which reflect the Labour Government’s priorities.
A Spending Review of two halves
The Labour Government have been consistent in sticking to their two fiscal rules for:
- Debt to fall as a share of the economy
- Day-to-day spending to be met by revenues
These two rules set the tone for the Spending Review as a whole.
On the one hand, there is an increase in funding for large infrastructure projects to support long-run economic growth. Examples include £39bn allocated for social housing in England, £22.5bn per year for research and innovation, £15.6bn for transport projects in English city regions, £11.5bn investment in nuclear energy at Sizewell C, and £7bn to build new prison spaces. A change in the definition of public sector net financial debt gives more leeway for the Chancellor to make these larger capital investments. Added together, these large-scale, long-term investments should support an improvement in the long-term economic growth rate.
On the other hand, the fiscal rules commit to reduce borrowing. And, in order to keep a manifesto pledge of not increasing taxes on “working people”, the Government has chosen to reduce some departmental budgets. There are planned yearly decreases in budgets of the Foreign Office (down 6.9% year-on-year), Transport (down 5%), Environment and Rural Affairs (down 2.7%), Business and Trade (down 1.8%) and Home Office (down 1.7%).
Even amongst departments with budget increases, such as a 3% yearly real increase in NHS funding, this is still less than the 40-year long-term average of 3.7% growth per year. The 1.1% uplift for Local Government barely covers the 26% real-terms, per-person cuts faced since 2010. A relative winner is the Department for Science, Innovation and Technology with a budget increase of 7.4%, however one of the factors in this decision is likely to do with the potential to boost long-term economic growth. Similarly, defence spending is set to increase from 2.3% of national income in 2024 to 2.5% by 2027, although this is likely influenced by global factors rather than Labour’s fiscal rules.
In short, the motivations behind which departments are set to receive an increase in funding are influenced by those best placed to help meet the Government’s five missions.
Bringing a place-based perspective to the Spending Review
The Spending Review predominantly looks at funding through a national lens, rather than at the local or regional scale. Although every pound spent and policy decision outlined in the Review will have a geographical impact, there has been little analysis of what this means for addressing inequalities within the UK. For example, in the Chancellor’s fiscal rules, there is no consideration of the geographical impact. By ignoring the place-based impacts, there is a risk that the Spending Review fails to address existing inequalities and potentially increases them further.
Still, there is one announcement that brings analysis of UK economic geography into sharper focus. The Treasury Green Book, as guidance to help appraise spending public money, is being updated to include more focus on the place-based impacts of public spending.
The updated place element of the Green Book, and associated guidance on conducting value for money assessments, will help local and regional policy makers more robustly appraise their projects. Particularly with regards to the measurement of more social benefits, which are often difficult to measure.
The choices in the 2025 Spending Review show:
- Labour is committed to sticking to its fiscal rules of falling debt share and balancing day-to-day spending.
- There is a clear focus on investing for the long term through large infrastructure investments.
- Whilst the foundations for long-term economic growth are being put in place, in the short term, budget constraints are very real.
- When faced with budget cuts to reduce day-to-day spending, the departments that are protected are the ones most closely aligned with the Government’s 5 missions and changing global factors.
- The risk of not conducting place-based analysis of policy decisions could lead to exacerbating existing inequalities.
- There is a commitment to improve understanding of place-based impacts through the updated place guidance in the Treasury Green Book.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the University of Birmingham.