Dearbail Jordan
Business reporter, BBC News
Reuters
Chancellor Rachel Reeves is facing some difficult choices in the upcoming Spending Review, which sets the budgets for all government departments over the next few years.
The review will confirm how much taxpayers’ money will be spent on the NHS and other public services used by millions, as well as how much money the government plans to invest in projects like new public transport schemes.
What is the Spending Review and when is it?
The Spending Review will be delivered by Reeves on Wednesday, 11 June.
In October she set department budgets for 2025-26, and will now confirm spending allocations for the following three to four years.
Reeves has already set out what is known as the “spending envelope” – how much total government spending will rise by over the period.
On Wednesday this will be broken down by department.
The review covers two categories of spending:
- day-to-day spending which includes things like salaries, supplies and other administration costs. This is known as “resource” spending
- investment which includes funding for infrastructure as well as building things like new schools, hospitals and roads. This called “capital” spending
Wednesday’s Spending Review will set out day-to-day expenditure for three years and investment spending for four years.
How is the UK economy doing and how much room for manoeuvre does Reeves have?
Government borrowing – which is the difference between how much it spends and how much it raises from taxes – grew to £20.2bn in April.
That was £1bn higher than the same month in 2024, and more than some economists expected.
Although tax revenue increased in April, notably as a result of the increase in the amount of National Insurance Contributions (NICs) paid by employers, so did spending.
This was largely because of increases in pensions and other benefits and other pay rises as well as higher borrowing costs.
Meanwhile, the financial buffer that allows Reeves to meet the government’s two self-imposed fiscal rules is very slim.
The rules are that:
- day-to-day government spending should be paid for with tax revenue, not borrowing, and
- the amount of government debt should fall as a share of national income by the end of the current parliament in 2029-30
The government is currently forecast to have a budget surplus of £9.9bn at that point – which is the third-smallest on record.
This surplus is often referred to as “headroom” and theoretically acts as buffer against an economic shock or an increase in spending.
But because the projected surplus is so small, it is very vulnerable, Between the Autumn Budget and Spring Statement in March, some of it was wiped out by higher debt interest payments and sluggish economic growth.
As a result, Reeves announced a £14bn package of savings in March, including £4.8bn of welfare cuts.
The latest official data suggests that the UK economy could be strengthening. It grew by 0.7% between January and March, which was better than expected.
However, it is not clear whether that growth will continue, especially as US President Donald Trump’s US tariffs hit the UK and wider global economy.
What has already been announced ahead of the Spending Review?
The government has already said that the increase in the total spending on day-to-day running costs and on investment is going to be relatively modest for the years covered by the Spending Review.
That could mean that “sharp trade-offs are unavoidable”, according to the Institute for Fiscal Studies (IFS) think tank.
For example, the government has said that the overseas aid budget will be cut to fund a sharp increase in defence spending.
Spending on defence will rise from 2.3% of gross domestic product (GDP) to 2.5% by 2027. That’s around an extra £5bn a year. Ministers want to increase defence spending further to 3% by 2034.
Reeves is set to unveil a £15.6bn package to fund extensions to trams, trains and buses in Greater Manchester, the Midland as well as Tyne-and-Wear, after criticism that too much infrastructure spending targeted London and the south-east.
As yet, there are no details about how much money will be allocated to the Department of Health and Social Care (DHSC), which oversees the NHS.
But due to its size – nearly 40% of total departmental expenditure this year will go to DHSC – its budget can have a considerable impact on those of other departments.
Reeves has confirmed that the government will revise its controversial decision to limit Winter Fuel Payments to those in receipt of means-tested benefits.
But while the government will share some information about who will receive the payment as part of the Spending Review, full details will not be released until the Budget later in the year.
The government also wants to increase investment.
Reeves has tinkered with the way that debt is measured to free up more than £100bn to fund building, research and development as well as other major projects.
There have been reports that she could announce a new nuclear power station in Suffolk.
Sizewell C, a project that is jointly owned by the UK government and the French state-owned energy giant EDF, wants to begin construction of a power station that will be funded by taxpayers and private investors.
The government may also set out detailed plans to build small modular reactors (SMRs) – mini nuclear power stations – in England and Wales.
