What is the spending review?

A Spending Review is a crucial government process that sets departmental budgets over multiple years. Unlike the annual Budget which handles tax changes, the Spending Review determines how hundreds of billions of pounds will be allocated across public services, covering both day-to-day spending and long-term investments. The 2025 Spending Review, concluding on 11 June, will establish departmental budgets up to 2028-29 for day-to-day spending and to 2029-30 for capital projects.

The 2025 Spending Review will bring clarity on a number of key elements including departmental allocations, multi-year plans, efficiency targets, and major project announcements. For public service leaders, the Spending Review will be crucial in shaping delivery over the coming years.

What has already been announced from the 2025 Spending Review?

Several major spending commitments have already been announced ahead of the full review.

The government has unveiled a £15.6 billion local transport package for England's city regions. This investment will fund key projects including Metro extensions in the North East, tram network renewal in South Yorkshire, and mass transit development in West Yorkshire.

The government has also allocated £14.2 billion to build Sizewell C and a further £6 billion to transform the UK's submarine industrial base, supporting Strategic Defence Review objectives.

These investments have been accompanied by broader changes to Treasury spending rules. The Chancellor has reformed the Green Book to give greater weight to projects in areas with lower economic productivity, helping to ensure consideration of investments outside London and the South East.

What will we be looking for in the 2025 Spending Review?

Despite some major infrastructure investments already being announced, the government has not given more detail on day-to-day spending, other than the 1.2% real terms growth promised in the budget – a growth rate below the first two years of this Parliament. This means many departments - especially unprotected areas - will face difficult choices about their operational budgets when the full review is published.

Which Departments does the 2025 Spending Review prioritise?

Protected Departments

Of the protected departments, health and defence are expected to be prioritised in the 2025 Spending Review.

The Department of Health and Social Care's day-to-day budget is expected to grow by around 2.8% in real terms. While this would account for approximately 60% of the total increase in UK Government spending, it would still be lower than historical NHS funding growth and is below the central estimate (3.4%) of spending growth required to deliver the NHS Workforce plan. The government's decision on spending above or below this annual rate will significantly impact NHS leaders' ability to manage their budgets and deliver services effectively. Similarly, it also matters what share of any increase is allocated to social care, since local authorities funding remains almost 10% lower in real terms than 2010 levels.

The Ministry of Defence's budget will grow to meet the 2.5% GDP defence spending commitment by 2025. Recent announcements outlined a 6.8% annual real terms increase in defence capital spending, while day-to-day defence spending will rise by 1% yearly. Funding this capital spending increase, in particular, would leave other departments’ capital budgets flat or falling slightly in real terms. The government's suggestion of potentially reaching 3% of GDP on defence in the next parliament would further squeeze other departmental budgets.

The other protected area of spending is childcare and education. Here, the 2025 Spending Review is expected to commit an extra £4.5 billion for schools by 2028-29, translating to a 7% three-year increase. While teacher pay and free school meals will absorb much of this, falling pupil numbers mean per-pupil spending should still rise by 3%.

Unprotected Departments

Departments without protection face significant challenges in this Review. Current plans suggest average real terms reductions of 0.3% annually over three years – though impacts will vary widely across services.

Local councils face particularly tough choices. Despite a 4.3% real uplift next year, funding remains 10% below 2010 levels (20% lower accounting for population growth). Rising pressures in social care, special education and homelessness mean many councils will need to cut services or increase council tax.

The Ministry of Justice and Home Office face particularly challenging settlements. Without protected status, these departments - which have historically received below-average funding increases – will likely struggle to deliver basic services effectively.

Growth-focused departments may fare slightly better. While the government supports research and development in principle, experts expect R&D budgets to stay flat in real terms. Similarly, the Department for Energy Security and Net Zero will likely need more private investment to deliver on clean energy goals.

What types of cost savings will the 2025 Spending Review target?

The 2025 Spending Review is expected to pursue cost savings through two main channels: productivity improvements and direct service reductions.

Under current spending plans of 1.2% real annual growth, departments face difficult choices around employment levels and pay. Offering a real terms pay increase to public sector staff would require minimal growth in staffing levels, but this is at odds with the requirements of the NHS Workforce Plan, and existing commitments on teachers and neighbourhood policing roles. To address this, the Chancellor has already confirmed that departments face a 15% target for cutting administrative staff by 2029-30, and the creation of a new £3 billion Transformation Fund aims to drive digital reforms and efficiency improvements.

Beyond efficiency measures, some "actual" service reductions seem likely given the tight spending envelope. The government's framing of a "zero-based" review suggests willingness to stop some activities entirely. This could mean reducing the scope of some NHS services, increasing user charges, or tightening eligibility criteria for certain services. Local authorities, facing particularly acute pressures, may need to further reduce discretionary services.

These changes depend heavily on whether efficiency targets are met. Evidence from our work at The PSC shows that major efficiency improvements take time and careful planning to achieve. Leaders of public services will need robust contingency plans for service adjustments if efficiency savings prove harder to deliver than expected.

Stay Updated

The PSC will provide detailed analysis once the 2025 Spending Review is published. To be notified when this is published, follow us on LinkedIn. If you have any questions in the meantime or want to discuss how we can support your organisation, contact us at hello@thepsc.co.uk