Tag Archives: spending

Key Takeaways from the Spending Review: A future that is less generous than the past

GK had the pleasure of hosting former Treasury and education minister David Laws and the Financial Times’ Economics Commentator Chris Giles in our latest webinar on Thursday (12th June) to discuss the winners and losers from the government’s spending review, and what it means for business.

The spending review is a significant moment in the political calendar. The settlements it confirms set departmental day-to-day budgets for the next three years (2026-27, 2027-28 and 2028-29) and capital expenditure for the next four (until 2029-30). It is also the moment when No.10 and the Treasury must publicly commit the funds to support their political objectives – in essence, we get to see where spending is going to be prioritised and where it is not.

In the webinar, David and Chris detailed what the spending review means for overall public spending, where the government could come undone, and the possibility of future tax rises. You can read a summary of their key takeaways below:

The spending review is not about making new money available or introducing new taxes. Spending reviews are all about the allocation of a pre-determined spending envelope which, in this instance, the Chancellor set out in the October budget last year. It does not introduce any new taxes or make new money available. Instead, it confirms what areas of public spending the government wants to prioritise, and which departments will have to be squeezed.

The departmental settlements do not represent a return to the austerity years. While the overall spending envelope is tight – especially given growing pressure on public spending across health, pensions and defence – day-to-day spending is still rising by 1.2% per year in real terms (i.e. accounting for inflation) over the spending review period. This means it is broadly in line with the departmental spending settlements put forward by various governments since 2019.

A lot of the spending assumptions depend on public sector productivity improving, which is no guarantee. Public sector productivity has declined since the Covid-19 pandemic and in 2024 it fell by 0.3%. The Office for Budget Responsibility (OBR) has historically assumed quite generous improvements in public sector productivity each year which is a key component of its overall economic growth metric.

If the OBR significantly revises down its assumptions about improvements in productivity, this could seriously impact the funds it is projecting the government will have to work with over the spending review period. This increases the likelihood of the government having to do introduce large tax rises at the autumn budget.

Defence will continue to put pressure on the government’s overall spending envelope. Since the end of the Second World War, successive governments have used cuts to defence as a means of boosting other areas of public spending, most notably health. Persistent global instability and geopolitical uncertainty means that higher levels of defence spending are likely to continue for the foreseeable future. No.10 and the Treasury will have to contend with this new spending pressure as demographic challenges continue to pile up and economic growth remains sluggish.

The NHS is the big winner from the spending review, albeit with a smaller settlement than it has historically received. Health secretary Wes Streeting will undoubtedly be the happiest around the Cabinet table following the confirmation of the Department of Health and Social Care’s settlement, with spending on the NHS set to grow by 3% per year in real terms. However, this is below historic average rises of approximately 4-5%. With a growing elderly population and people living with complex conditions for longer, the funding put forward in the spending review settlement is unlikely to significantly move the dial on the performance of the NHS.

Small tax rises are likely at the autumn budget to meet the Chancellor’s fiscal rules. The government has committed to meet day-to-day expenditure through its own revenues by 2029-30. This means its current budget will have to be in balance or surplus by the end of the decade, and any money the government does borrow will be to invest. If the OBR projects that the government is not on course to meet this fiscal rule (or any of its others), then Chancellor Rachel Reeves will be forced to come back for a second round of tax rises or decide to break a fiscal rule. Either look fairly unpalatable to the government given where they currently are in the opinion polls.

A cabinet reshuffle should be expected in the second half of 2026 as the government begins to ramp up to the next general election. 2026 is projected to a big election year in the UK. Elections are due to take place for the Scottish Parliament and Welsh Assembly, along with a series of newly created unitary authorities. Should the results prove poor for Labour, as current polling indicates they will, then Prime Minister Keir Starmer is likely to reshuffle his cabinet to get his top team in place as the No.10 machine starts to think about the next general election in 2029.

Will Higher Education be left behind by Labour?

The welcoming of international students to study in the UK by Education Secretary Bridget Phillipson in her first two weeks of office was a change of tone, and one that was well received across the higher education sector. With Labour’s manifesto promising little in terms of concrete measures for the sector, and only a broad commitment  to create “a secure future for higher education”, this early emphasis gave some much needed hope that the funding pressures on UK universities would be addressed as a priority.

In further signs that higher education policy was a focus for the new administration,  Labour  announced a review of the UK’s international education strategy during its party conference in September. The strategy was last reviewed in 2019 and set a target to increase the total number of international students undertaking higher education in the UK to 600,000 each year. Subsequent political pressures on the then Conservative government over net migration numbers led to a pivot in approach that shifted from celebrating the contribution of those coming to study in the UK, to something that required political scrutiny.

The sector will be looking for this government to be more receptive than the previous administration to shoring up universities’ financial health and embracing and promoting the benefits they bring to the UK economy, however, recent net migration data could cause pause for thought. Home Office figures show that net migration fell by 20% in the year to June 2024. Stricter rules for international students bringing their families to the UK have been cited for the drop. With Reform UK on the Labour Party’s shoulders for the first time ever in the polls, it means Labour, like the Conservative government before it, will not be immune to calls for further crackdowns.

Away from international students, the government has confirmed tuition fees will rise after universities called for financial support. However, with Universities UK arguing that funding per student would need to rise to £12,500 to meet universities’ tuition costs, the medium to long term funding pressures for many remain. The increase in employer National Insurance Contributions has not helped matters. The sector will also be feeling disappointed that the spending envelope for the DfE at the budget, which will increase by £11.2 billion up until 2026, focused on funding uplifts for schools and early years provision.

Despite an uncertain first few months for the sector regarding Labour’s plans, the next few months will be critical for determining its fortunes. A Comprehensive Spending Review in June will set out departmental budgets for the rest of this Parliament. Having missed out at the budget, the sector will be determined to have its voice represented and a slice of the cake.

The window of opportunity at the start of 2025 will demonstrate whether the government is committed to bringing forward meaningful policy, regulatory and funding reform that will put the sector on a more sustainable footing. Higher education providers should be doubling down on outlining the positive case universities have on shaping young minds and creating financial benefits for UK plc.

GK Point of View – Reflections on the Autumn Statement

On Wednesday 22nd November, Jeremy Hunt MP unveiled his Autumn Statement, setting out the Government’s tax and spending commitments for the next year.  The backdrop to this year’s Autumn Statement presents a number of challenges for a government with likely less than a year until the next General Election. The UK’s inflation rate stands at 4.6%, more than double the Bank of England’s target of 2%. Growth rates have stalled, and the Bank of England is predicting that the UK will see zero growth until 2025.

To better understand the true impact of the decisions in the Autumn Statement and how they will impact both the wider economy, and specific sectors, GK Strategy have developed a briefing containing sector specific insight and analysis from our Senior and Strategic Advisers.

Find GK’s briefing here: Autumn Statement 2023