Tomorrow's Spending Review: higher health and defence spending, fiscal squeeze everywhere else
The Spending Review (SR25), to be published tomorrow, sets day-to-day spending to 2029 and investment priorities to 2030. It is best understood as a political triage — allocating limited resources under the fiscal rules set in the 2024 Autumn Budget. Most major decisions were finalised in late 2024, while remaining disputes, such as winter fuel allowance payments for pensioners, have been briefed to the media as ministers push last-minute asks. On the day, the Chancellor’s announcements will focus on targeted projects in Reform-leaning constituencies to generate favourable headlines and distract from real-terms cuts and upcoming tax rises. Our view is below.
Snapshot:
Capital spending is front-loaded, with most funding already committed to defence, healthcare, transport, and energy.
Real-terms cuts to day-to-day spending are coming for non-protected departments like education, culture, and local government
Spending will be overtly political, with targeted investments in Reform-leaning areas to manage electoral risk.
SR25 will strain Cabinet unity, as ministers defend unpopular trade-offs ahead of Labour Conference, where they will come face to face with unions and party members
Our view:
The government has managed expectations and is unlikely to announce surprise spending uplifts. Bound by self-imposed fiscal rules, the Chancellor will focus media attention on capital-intensive sectors with broader reach, like energy and healthcare. Ministers at labour-intensive departments, such as policing and culture, will focus mainly on damage control efforts ahead of Labour Party Conference. Stagnant pay and union pressure could become politically disruptive as the party votes on contentious motions to inform next year’s policy platform.
Health and defence spending’s dominance will distort the rest of the settlement. Around 60% of the entire real-terms day-to-day spending uplift is going to health. This, along with a increase to defence spending, will effectively crowd out meaningful increases elsewhere not already protected, locking in flat or negative growth for most departments and increasing political dependence on health outcomes and defence investments to justify fiscal policy.
Labour’s capital-intensive spending strategy implicitly relies on the continued fragmentation of the right-wing vote between the Conservatives and Reform. Most infrastructure projects take between three and five years to complete, meaning tangible local benefits are unlikely to materialise until just before — or shortly after — the next general election. If well timed, this could work to Labour’s political advantage, particularly if it can showcase high-visibility, near-complete projects that deliver photo-ready moments in key battleground constituencies.
The government will use large capital spending figures to justify tax rises in the Autumn Budget. While borrowing is permitted for infrastructure, the visibility of multi-million-pound projects helps normalise higher taxes to fund tighter day-to-day budgets. As Labour Party Conference approaches, the debate will shift from spending promises to revenue-raising — laying the groundwork for a narrative of tax increases framed as national renewal, reinforced by union pressure within Labour’s policymaking structures.
The SR25 is a clear case for early, strategic engagement. It reflects a year of consultation and political consolidation, locking in financial priorities for the next five years. Outside exceptional cases like the recent SDR, new spending bids will face tighter constraints and fierce competition. Firms must go beyond technical merit — successful propositions will combine commercial logic with credible political alignment, offering clear value for money, domestic industrial impact (especially in Reform-sensitive regions), and support for the government’s core goals: growth, productivity, and public service renewal and resilience.