National renewal over defeatism – that’s how Chancellor of the Exchequer Rachel Reeves described the announcements set out in the Spending Review.

With increased investments for defence, NHS funding, transport and schools, the Spending Review was not without its positives. The Review in itself, by setting three-year operating and four-year capital budgets, allows departments to plan ahead more effectively than they were previously able, which should increase efficiency in investment.

There was also money set aside for transformation projects, such as investment in HMRC systems, though the amount – £3bn over three years – is relatively small.

This is an indication of the reality in which the Chancellor finds herself in, operating within fiscal constraints that give her limited capacity for budget increases.

Alison Ring, ICAEW’s Director, Public Sector & Taxation, says: “The perilous state of the country’s public finances has left Rachel Reeves with little room for manoeuvre, with a lethal cocktail of high debt, low investment and poor growth ultimately landing the government in a ‘catch-22’ situation: without the money to pay for the investment it so desperately needs to grow the economy, that would in turn generate the tax receipts to pay for that investment.

The Chancellor chose to focus on upfront investment in the hope that it will provide the economic growth and stability in public services that the government has been pushing for, but that does leave room for issues down the road.

“Tax rises are now all but inevitable following the Chancellor’s decision to significantly bolster defence and health spending, no matter what measures are taken between now and the Autumn Budget,” says Ring. “The government’s sticking plaster strategy remains an obstacle to addressing the deep-set challenges facing the country. 

“Instead, we need a clear, long-term plan to fix and futureproof the UK’s balance sheet, and without this there is little hope of achieving the transformative change needed to propel the country forward.”

Public sector funding

Defence spending will increase to 2.6% of GDP from 2027, with an aim to increase it to 3% in the next parliament. Budget for the UK’s intelligence agencies will rise by £600m in real terms over the Spending Review period.

The NHS will have a £29bn real terms increase in its annual day-to-day spending from 2023-24 to 2028-29. This is, according to the government, equivalent to a 3% average annual real terms growth rate over the Spending Review period.

The Department of Health and Social Care’s annual capital budgets will increase by £2.3bn in real terms from 2023-24 to 2029-30 for NHS investment in areas such as technology, hospitals and primary care.

Additional £3.4bn of grant funding will be available for local government in 2028‑29 compared to 2024‑25. The Schools budget will increase by £2bn in real terms over the course of the Spending Review period.

The devolved governments will receive an additional £4.8bn per year on average between 2026-27 and 2029-30. Specifically, the Scottish government will get £2.4bn resource and £510m capital on average per year, with the Welsh getting £1.4bn resource and £200m capital and the Northern Ireland Executive receiving £1bn resource and £220m capital.

These spending increases were paired with plans for state reform, with the Chancellor announcing plans to embrace digital and AI to reduce the administrative burden and increase efficiency across all public services.

Growth, investment and the economy:

The government is investing: 

• £15.6bn in total by 2031‑32 through the new Transport for City Regions (TCR);
• £39bn for a new 10‑year Affordable Homes Programme;
• £14.2bn for Sizewell C over the SR period, the first state‑backed nuclear power station since 1988; and
• £22.6bn per year for research and development by 2029‑30, in support of the government’s forthcoming modern Industrial Strategy.

The Spending Review brings forward £3.3bn capital spending into 2026‑27 from later years; total capital spending over the period remains at the level set out at Spring Statement 2025.

A further £9.6bn will be made available for financial transactions such as loans and equity to support growth through entities such as the British Business Bank.

David Petrie, ICAEW’s Head of Corporate Finance, welcomed the British Business Bank announcement, but noted that there will be challenges in ensuring the additional funding is genuinely incremental and reaches businesses that have previously struggled to find finance.

“If the bank’s partners stick to tried and tested approaches, then competition to fund businesses which meet the standard parameters for debt or equity investment will increase and returns will fall. Those companies that need higher capital investment in the early stages, such as in life sciences or quantum technology really need fund structures and managers that fully understand the technology and its global capabilities: the bank’s challenge is going to be finding those funds and the people that can really do this.”

The government has allocated £4.8bn from 2026‑27 to 2029‑30 to catalyse private investment in house building.

“While investment in infrastructure projects is a positive move, overall transformative investment is relatively small which reflects the Chancellor’s lack of wriggle room,” says Ring. “We are still relatively early in this parliament, and now is the time to take the steps necessary to put the public finances on a more sustainable path to deliver certainty and stability, and get the economy growing.”

It is also devolving power and decision making for local investment by implementing five new integrated settlements, and providing funding for new mayoral strategic authorities.

A new local growth fund for mayoral city regions in the north and midlands will be introduced alongside investment in up to 350 deprived communities across the UK.

While there is a boost to capital investment in the first year of the spending review period (following a significant boost to capital budgets this year), investment spending is then expected to decline in real terms in the subsequent three years. “It is likely that the government will want to top up capital budgets in two years’ time when the spending review is updated,” says Martin Wheatcroft, ICAEW adviser and author on public finances.

Budget cuts

The government plans to reduce administration budgets across the board by 11% as part of its drive for state reform and digitally enhanced efficiency. It is not a big saving in financial terms – it equates to about £1.6bn a year – but the impact on the consideration will be significant. “It is an important signal about the government’s intention to improve efficiency and there does at least seem to be a plan, so there is more hope that it will actually happen this time around,” says Wheatcroft.

Home Office spending was cut by 1.7% a year, while the Foreign Office budget was reduced by 6.9% a year. Transport loses 5% a year for three years. The Department for Business and Trade is having its budget cut by 1.8% a year.

“The Chancellor did not touch on the cuts that she is making to non-protected budgets and what that will mean for the public services affected,” says Wheatcroft. “The speech focused much more on short-term ‘big ticket’ items such as transport projects (most of which are welcome) but there was much less about the strategic narrative of public service reform and long-term investment. Hopefully, we will get more of a vision when the 10-year infrastructure strategy is published next week.”

Boosts to HMRC

HMRC has been allocated money to hire nearly 8,000 more staff, an increase of a further 600 people since the Spring Statement. These will focus on compliance and debt management rather than front-line services, however; a missed opportunity to improve services.

“We need to understand exactly how HMRC will reach its target that a minimum of 90% of taxpayer interactions by 2029-2030 will be by way of digital self-service,” says Frank Haskew, ICAEW’s Head of Taxation Strategy. “It remains unclear what further measures will be introduced to achieve this target, other than the proposed use of AI to help taxpayers with their enquiries and raise productivity, and allowing taxpayers to easily get the information they need without having to call or write to HMRC.”

HMRC says it will eliminate most outbound post, with limited exceptions such as letters that generate revenue for the Exchequer. This would reduce the number of letters HMRC sends out by 75%, with savings of £50m a year by 2028-29. Haskew highlights the need to create a robust and user-friendly alternative system that caters for agents, costs will reduce at the expense of the service to taxpayers. As yet, the details of how this will be achieved remains to be seen.

“The question of what will happen to inbound post remains, and the need to provide taxpayers and agents with the confidence that their information has been received and logged promptly by HMRC and that it is being acted upon,” says Haskew. “We should have a better idea of the proposed developments when HMRC publishes its digital transformation roadmap.”

Not moving the dial

While the Spending Review featured many positive measures and has been relatively warmly received by its beneficiaries, the underlying issues in the UK’s public finances – and its economy – remain. The Chancellor needs to do more to address these issues.

"The Chancellor has a once-in-a-generation opportunity to reboot the system and turn the public finances around,” says Ring. “She must not pass it up.”