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On 11th June 2025, Chancellor Rachel Reeves unveiled the UK's first multi-year Spending Review since 2021, setting out government spending plans for the next three to four years. The review, a pivotal moment for the Labour government, prioritizes health, defence, and economic growth but has sparked debate due to its implications for businesses and the broader economy, especially following the announcement on June 12th that the UK economy shrank by 0.3% in April. This article examines the review’s key points, focusing on its impact on businesses while also addressing broader sectoral implications and the economic contraction.
The Spending Review includes measures aimed at fostering economic growth, but businesses face challenges from prior fiscal policies and the recent economic downturn. Reeves announced £2 billion for an AI action plan to drive job creation and investment, alongside increased funding for the British Business Bank, boosting its financial capacity to £25.6 billion to support small businesses seeking finance. These initiatives align with Labour’s goal of leveraging technology and innovation to stimulate economic activity.
However, businesses are grappling with the fallout from the Autumn Budget’s £40 billion tax hikes, particularly the rise in employers’ National Insurance Contributions (NICs) that took effect in April 2025. Critics, including Conservative leader Kemi Badenoch, argue that this increase has strained businesses, contributing to job losses and closures, with unemployment rising since Labour took office. Badenoch described the government’s approach as a “war on the private sector,” claiming it stifles growth by burdening businesses with higher costs. The 0.3% GDP contraction in April, attributed partly to uncertainty over Donald Trump’s tariffs and weak manufacturing output, amplifies these concerns. Businesses, particularly those reliant on exports, faced a “challenging month,” with Reeves acknowledging that global trade uncertainties exacerbated the economic slowdown.
Despite these challenges, Reeves emphasized that her spending plans are “fully funded” through prior tax rises and fiscal rule adjustments, avoiding immediate new tax hikes. However, analysts warn that the tight fiscal headroom—estimated at £9.9 billion—may necessitate further tax increases in the Autumn Budget, potentially targeting savings, pensions, or fuel duty. Laith Khalaf from AJ Bell noted that while improved economic growth could alleviate fiscal pressures, a deteriorating economy might force deeper cuts or tax rises, further impacting businesses. The Institute for Fiscal Studies (IFS) criticized the review for lacking clarity, with director Paul Johnson calling it “full of numbers, few of them useful,” highlighting uncertainty for businesses planning long-term investments.
The NHS emerged as a primary beneficiary, receiving a £29 billion annual increase in day-to-day spending, a 3% real-terms rise over three years, reaching £226 billion by 2029. An additional £10 billion is allocated for technology, including enhancements to the NHS App and single patient records, aiming to reduce waiting times and fulfil Labour’s manifesto promises. However, the IFS and Nuffield Trust warned that planned pay rises could erode this settlement, potentially limiting its effectiveness. Reeves defended the allocation, citing positive feedback from NHS workers during her hospital visits, but the Resolution Foundation noted that health and social care will consume half of public-service spending by decade’s end, squeezing other sectors.
Defence received a significant boost, with an £11 billion increase in capital spending and a 0.7% real-terms rise in day-to-day budgets, targeting 2.6% of GDP by April 2027. This aligns with Labour’s commitment to strengthen national security amid global threats, such as Russia’s actions. Additionally, £280 million annually will fund a new Border Security Command, and a plan to end asylum hotel use by 2029 is projected to save £1 billion yearly. Police spending power will rise by 2.3% annually, supporting 13,000 additional neighbourhood policing roles. These measures reflect Labour’s focus on security but may strain other departments’ budgets.
Reeves announced a £39 billion package over the next decade to address the housing crisis, including social housing initiatives. Transport infrastructure also saw significant investment, with £15.6 billion allocated for projects in English city regions outside London and £3.5 billion for the TransPennine Route Upgrade. The £16.7 billion commitment to nuclear power, including £14.2 billion for Sizewell C, aims to enhance energy security and create jobs. These capital investments, enabled by Reeves’ fiscal rule changes allowing more borrowing for investment, are central to her growth strategy. However, the Resolution Foundation highlighted that capital spending for public services like health and education remains less generous, potentially limiting their long-term benefits.
The core schools budget will increase by 0.4% in real terms, reaching £69.5 billion by 2029, but this modest rise has raised concerns about meeting rising demands. Other departments, such as the Ministry of Housing, Communities, and Local Government, face a 1.4% real-terms cut in day-to-day budgets, with councils expected to offset this through maximum council tax increases. The transport department’s day-to-day budget will be cut by 5%, with savings anticipated from nationalizing private train companies. These cuts reflect the “tight fiscal situation” described by Bank of America analysts, raising fears of “austerity 2.0” despite Reeves’ insistence on delivering “national renewal.”
The announcement on June 12th that the UK economy shrank by 0.3% in April, worse than the predicted 0.1% decline, casts a shadow over Reeves’ plans. The Office for National Statistics attributed the contraction to a 1.1% drop in manufacturing and a 0.2% fall in construction, compounded by global trade uncertainties from Trump’s tariffs. Reeves called the figures “disappointing” but noted that monthly GDP data is “notoriously volatile,” suggesting that April’s challenges, including export weaknesses, were not entirely unexpected. Shadow Chancellor Mel Stride labelled the contraction a result of “economic vandalism,” arguing that Reeves’ policies, particularly the NIC hike, have undermined growth. The Guardian reported that weak economic performance could erode Reeves’ fiscal headroom and potentially force tax rises or spending cuts in the Autumn Budget.
Reeves’ review aims to shift Labour’s narrative from fiscal repair to renewal, emphasizing health, security, and growth. However, the IFS and other analysts warn that tight settlements and economic stagnation could necessitate further fiscal adjustments. The partial U-turn on winter fuel payments, costing £1.25 billion, and pressure to lift the two-child benefit cap add to fiscal strains. Reeves’ refusal to rule out future tax rises, despite her pledge not to increase taxes on working people, has fuelled speculation about the Autumn Budget measures. The IMF’s recent suggestion to refine fiscal rules to avoid emergency cuts highlights the delicate balance Reeves must maintain to sustain market confidence while delivering on Labour’s promises.
Rachel Reeves’ 2025 Spending Review is a bold attempt to prioritize long-term investment in health, defence, and infrastructure while navigating a shrinking economy and tight fiscal constraints. For businesses, the review offers support through AI and financing initiatives but is overshadowed by tax burdens and economic uncertainty. The 0.3% GDP contraction in April underscores the challenges ahead, with global trade tensions and domestic fiscal pressures threatening Labour’s growth agenda. As Reeves prepares for the Autumn Budget, her ability to deliver sustainable growth while maintaining fiscal discipline will be critical to Labour’s vision of national renewal.
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