The contours of the government’s spending plans for the remainder of this parliament are now becoming clearer. Following the substantial tax increases in the autumn and a loosening of the fiscal rules, the government had more room to play with than their predecessors – particularly on investment. The Spending Review published this week is the first full account of how that space will be used.
As expected, the big winners are the NHS and defence. More than 90 per cent of the increase in day-to-day resource spending will go to the NHS, where budgets will rise by 3 per cent a year in real terms to support the workforce plan and reduce waiting times. Defence spending is set to rise to 2.5 per cent of GDP by 2027–28 (or 2.6 per cent including spending on the security services), with a large share directed towards nuclear-deterrent upgrades, munitions and next-generation technologies such as swarm drones and directed-energy weapons. These decisions were largely priced in – but the much tighter settlements for other departments illustrate just how little fiscal room there really is.
One of the defining themes of this government is the scale of capital investment. The government is leaning heavily on it to drive growth and resilience – and rightly so. In addition to defence, new capital is being channelled into social housing, regional transport, clean energy, and science and technology – all areas that matter for long-term growth.
Many of these choices feel directionally right – and align with TBI’s own recommendations. For example, on nuclear the government is wisely supporting the full innovation pipeline: £14 billion for existing large-scale reactors (Sizewell C), £2.5 billion for promising emerging technologies (nuclear small modular reactors) and another £2.5 billion for long-term bets on nuclear fusion. Carbon capture, too, receives additional support, cementing its role in the government’s net-zero strategy.
On technology, the government has committed £2 billion to implement the AI Opportunities Action Plan, including £0.5 billion for sovereign AI capabilities. Other investments include: £750 million for a new supercomputer in Edinburgh – a vital investment in the UK’s compute infrastructure; £520 million funding for life sciences manufacturing – to build resilience to future health emergencies; and £600 million to launch the Health Data Research Service in Cambridge – to accelerate the discovery of life-saving drugs. These are smart tilts, and all areas TBI has championed in recent months.
The Spending Review also puts public-sector efficiency and modernisation high on the government’s agenda. It was framed as a “zero-based review”, with all departments required to justify budgets from scratch and deliver at least 5 per cent in day-to-day efficiency savings. Administrative budgets face even deeper cuts of at least 10 per cent, to be delivered through a mix of conventional levers – early civil-service exit schemes, travel cuts, reduced consultancy spend, London office closures – and broader tech-enabled reforms.
To support that, the government has committed £3.25 billion through a public-sector transformation fund, alongside £1.2 billion for cross-government digital priorities (a downpayment on digital-ID infrastructure), and additional departmental funding, most notably £10 billion to digitalise the NHS. These are welcome steps with real potential to improve services, staff productivity and system performance. But they are also politically essential. With tax levels at post-war highs and public satisfaction with services falling, value for money is now a test not just of fiscal management, but of political legitimacy.
Still, there are caveats. While the government’s instincts on modernisation and digitalisation are sound, it remains unclear whether the funding is sufficient to deliver a transformation that voters can feel. The Health Foundation, for instance, estimates that digitalising the NHS and adult social care will require £21 billion over five years – significantly more than the £10 billion currently allocated.
Likewise, the £3.25 billion transformation fund, while helpful, is modest – amounting to less than 0.2 per cent of total departmental spending over its three years. And it is spread across at least a dozen priorities, from special-educational needs and preventative social care to early exit schemes for civil servants and digital upgrades. All worthwhile in isolation – but collectively at risk of being too diffuse to deliver meaningful change.
While the Spending Review has set departmental funding envelopes, much of the detail on how this money will be used – and what trade-offs have been made – is still to come. Several major strategies are due in the coming weeks, including: the Modern Industrial Strategy (where trade-offs between emerging sectors and traditional ones like steel will be key); the 10-Year Infrastructure Plan (which will shed light on the government’s priorities for energy, housing, utilities and transport); the NHS 10-Year Health Plan (where the promised shift from treatment to prevention will need to be substantiated); and in the autumn a new Government Digital & AI Roadmap, an acid test of whether the government’s digital-transformation agenda has the substance and ambition to succeed.
And of course, funding doesn’t equal delivery. The Spending Review is an input, not an outcome. Without strong implementation, even well-judged spending risks falling short. The fact the review was done, and done comprehensively, is welcome. It reflects well on the chief secretary to the Treasury, who led it. But departments must now move with pace. Delivery – visible voter-facing delivery – is what counts.
Finally, fiscal pressure is far from over. The £1.25 billion U-turn on winter-fuel payments, possible reversals of the spring welfare cuts, rumoured easing of the two-child benefit cap and a worsening global outlook – including the impact of US tariffs – may mean that the modest fiscal headroom the chancellor left herself has already disappeared. With departmental budgets now locked in, further welfare cuts looking politically difficult and an apparent cast-iron commitment to the fiscal rules, the chancellor may face little choice but to reach again for tax rises in the autumn.