Tomorrow’s spending review will set out government spending plans for the NHS, housing, national defence, the police, and other public services. What should we expect?
Billions of pounds will be allocated this week, as the government sets out how public services will be funded in the years ahead. From the NHS to national defence, these choices will shape the UK’s economic and social priorities into the next parliament. To understand what’s at stake - and what the government can and can’t afford - we need to start with the big picture.
In the financial year ending March 2025, the UK government is estimated to have spent nearly £1.3 trillion. That’s around £45,000 per household, or 44% of the country’s national income (GDP). This is known as total managed expenditure – the full amount of public money spent across everything from hospitals to pensions to interest on the national debt. But not all spending is decided tomorrow.
What spending does the review cover?
Government spending is split into two big categories: departmental expenditure limits (around £597 billion last year) and annually managed expenditure (around £680 billion last year). The former of these, departmental budgets, are the focus of the spending review with over £600 billion to be allocated each year – around a fifth of UK GDP. Departmental budgets are further divided into:
- ‘Resource departmental expenditure limits’ (RDEL) place multi-year limits on the day-to-day running costs of public services, accounting for 35% of total public spending. In 2024/25, the biggest items were health (£193 billion), education (£90 billion) and defence (£38 billion) (OBR).
- ‘Capital departmental expenditure limits’ (CDEL) account for 11% of public sector spending and include capital investment such as infrastructure projects and loans to households and businesses. The majority of CDEL is spent by government departments.
All spending outside these limits falls under ‘Annually Managed Expenditure’ (AME). This spending is not set in the review. Instead, it includes costs that are difficult to predict and manage year-to-year. The largest components of AME are welfare transfers (around £310 billion last year) and net interest payments on national debt (around £105 billion). These costs are not subject to firm multi-year limits and are forecast by the OBR, after accounting for the government Spending Review and wider economic conditions.
Why does this review matter now?
The 2025 Spending Review will set out the government’s spending plans for the next three to five years (Chart 1). Specifically, it will:
- Set day-to-day spending totals for 2026/27 to 2028/29 for each department.
- Set capital investment spending plans for a longer period, through to 2029/30.
This review follows a two-phase process:
- Phase 1, published alongside the Autumn Budget 2024, confirmed budgets inherited from the previous government for 2024/25 and set initial totals for 2025/26.
- Phase 2, which concludes tomorrow, follows six months of negotiations between government departments and the Treasury, and will finalise multi-year settlements.
For the first time in decades, the review is being conducted on a “zero-based” footing. Instead of starting from existing departmental budgets and applying incremental adjustments, departments have been asked to justify all spending from scratch. The aim, ministers have said, is to “prioritise value for money” and ensure spending aligns with the government’s evolving industrial and infrastructure strategies (both due later this month).
Chart 1. Timeline of Spending Reviews
Source: Authors’ analysis of HM Treasury spending review archives.
The stakes are high. The UK enters this review with limited fiscal headroom – even after re-writing the rules last October. Spending vastly exceeds revenues. In the financial year to March 2025, the government is estimated to have borrowed £148.3 billion, roughly 4.4% of GDP. Public sector net debt stands at 95.5% of GDP – a level not seen since the 1960s (see Chart 2). While the government’s preferred fiscal anchor, public sector net financial liabilities (PSNFL), stood at £2.47 trillion (83.5% of GDP) at the end of April 2025. According to the IMF, the UK is expected to run the third-highest deficit among G7 countries in 2025, behind France and the USA (see Chart 3).
Chart 2. Historical public finances, since 1900
Source: ONS and Office for Bugdet Responsbility
Chart 3. Fiscal deficits - G7 comparison
Source: IMF Fiscal Monitor, 2025 estimates.
This means there is very limited scope to raise spending without increasing borrowing, taxes, or debt. The Autumn 2024 Budget introduced new fiscal rules that define sustainability in terms of the PSNFL measure - and require debt to fall as a share of GDP over the medium term. These rules are now binding constraints on this review. However, the new rules signal increased flexibility for capital investment. That could mean more room for infrastructure spending within the review’s ‘CDEL’ envelope.
Chart 4. Debt in large countries
Source: IMF Fiscal Monitor, gross debt position. UK net debt is around 95% of GDP.
Note: Largest 21 countries by population.
Like the UK, many countries are struggling to reconcile strategic ambitions with the constraints of a tight fiscal environment. France, which ranks 23rd globally by population, falls just outside the top 21 economies we usually focus on (see Chart 4). But its case is highly instructive (see French Exchange). With a deficit of 5.5% of GDP and gross debt of 119%, France has one of the most strained fiscal positions in Europe - behind only Greece and Italy. President Macron has called for a near-doubling of military spending by 2030, aiming to meet NATO’s rising expectations. But high debt, surging interest payments, and a strict no-tax-rise stance have left his government in a bind. Recent efforts to fund this expansion through budgetary reforms and EU-level borrowing have yet to resolve deep internal tensions.
Expected winners and losers
Several big spending announcements have already been trailed by the government. These include:
- Defence. The Strategic Defence Review confirmed defence spending would rise from 2.3% to 2.5% of GDP by 2027, with an ambition to reach 3% in the next parliament.
- Transport. Last week the Chancellor announced £15.6 billion for city region transport investments.
- NHS. The NHS and science and technology have also been mooted as likely areas of investment.
All of which leaves little room for manoeuvre as the Chancellor seeks to keep to her fiscal rules.
The two departments expected to be the biggest ‘winners’ of the Review are health and defence (Chart 5). Spending on healthcare has been consistently growing since the 1960s, spiking as a result of the Covid-19 pandemic. This Review is expected to continue the trend of expanding health spending.
Chart 5. UK health and defence spending as a share of GDP
Source: ONS
The UK is not unique in healthcare becoming a growing drain on public money. A rising trend is apparent among most advanced economies, although the United States spends far more than its peers (Chart 6). The US government spends twice as much per person on health due to the high costs of insurance, prescription drugs, and medical workers.
Chart 6. Heath expenditure in UK and comparator countries
Source: OECD
Defence spending in the UK tells a different story to health. Declining since the end of World War II, defence expenditure has been less than 3% of GDP for almost 30 years. This ‘peace dividend’ allowed government spending in other areas, such as health, to increase. But more recently, the speed with which defence spending has fallen has slowed.
As a member of NATO, the UK is required to spend at least 2% of GDP on defence (a target formally committed to in 2014). Currently, the UK sits just above the middle of the NATO pack on defence spending (Chart 7). With ongoing support for Ukraine and pressure from American allies, expect UK defence commitments to continue to rise.
Chart 7. Defence expenditure of NATO members, 2024
Source: NATO
The government has set itself strict fiscal rules on spending. While health and defence are expected to receive a healthy pay packet, who is losing out? The PM has said that increased defence investment will be fully funded by reducing aid spending from 0.5% of gross national income (GNI) to 0.3%. On British shores, police funding might be one to watch. Home secretary, Yvette Cooper, was the last minister to reach a deal with the Treasury, reportedly police numbers and pay are a concern.
Tomorrow, we will know more about the government’s plan for how public services will be funded in the coming years. Keep an eye out for more news from the Economics Observatory.
