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Hard-pressed areas of the British state including councils and the police face a further squeeze in the spending review as the government prioritises the NHS and defence at the expense of other services.
Chancellor Rachel Reeves will on Wednesday set out the government’s spending plans until the next general election, making a political bet that improving the health service is critical to Labour’s chances of re-election.
The chancellor is set to give the NHS a 2.8 per cent real-terms rise in annual day-to-day health spending over the three-year spending review period starting April next year, according to officials.
Although the rise is less than the long-term average increase since the service was founded in 1948, the £30bn-a-year rise in cash terms by 2028-29 is significantly better than some in the service had feared.
Matthew Taylor, chief executive of the NHS Confederation that represents health managers, said the service’s leaders recognised that all public services were under enormous pressure.
“The government committing to provide a greater proportion of funding to the NHS is going to be incredibly tough for services such as housing, education and welfare, particularly as they can affect people’s healthcare needs,” he added.
Defence is also expected to see an above-inflation increase, reflecting Britain’s changing priorities as the US pressures European countries to spend more on their own militaries. The government has already vowed to increase defence spending to 2.5 per cent of GDP by 2027.
In the Budget last year, Reeves set the parameters for overall day-to-day spending that envisioned overall growth of 1.2 per cent a year in real-terms between 2026-27 and 2028-29.
But Max Warner, an economist at the Institute for Fiscal Studies, said the money Reeves had devoted to the NHS and defence would mean a squeeze for other parts of the state in the order of 0.3 per cent annual real-terms reductions in day-to-day spending.
“Health is coming back to its traditional place as a spending review winner,” said Warner. Still, the 2.8 per cent settlement, first reported by The Times, was less than the historical long-term growth rate of 3.6 per cent a year in real terms, he noted.
Areas facing real-terms day-to-day spending cuts are those that have already endured salami-slicing over the past decade from the previous Conservative government, such as courts, councils and transport.
Treasury officials confirmed some departments will have real-terms cuts over the three years. But one said: “Nobody can really think that every department should have a real-terms increase.”
Security, health and the economy will be the three main themes in Reeves’ speech on Wednesday. She will also highlight £113bn of extra capital spending funded by borrowing, enabled by a tweak to the government’s fiscal rules last autumn.
The chancellor will say that new investments across the country will only be possible because of her “choices”, a mix of general fiscal discipline on day-to-day spending as well as a Labour plan to borrow for investment. “This money is only available because of her decisions,” said one aide.
Pensions minister Torsten Bell said on X on Sunday: “I’ve seen claims that we’re going back to austerity: there is one word for that — garbage.”
Among the choices Reeves will reveal on Wednesday is an extra £4.5bn a year by 2028/29 for the core schools budget, which covers pupils aged 5 to 16.
On an annual schools budget of £64bn that implies a rise of about 7 per cent over three years. One education expert said: “It’s hard to say what this means in practice until we get the full details, but these figures suggest schools will be relatively protected.”
Reeves is likely to depict allocations for some other departments as an exercise in magnanimity, even where the numbers are only treading water with inflation.
The government said on Sunday that the spending review would allocate £86bn to research and development over four years, without giving details of its distribution. The 2025-26 figure of £20.4bn would rise to £22.5bn by 2029-30.
Despite ministers calling this “transformative”, in reality R&D spending will stay broadly flat in real terms, according to the Campaign for Science and Engineering.
While most departments have settled with the Treasury ahead of Wednesday, officials admitted that the negotiations had not been plain sailing. “It’s not a pain-free moment,” said one.
Home secretary Yvette Cooper is still holding out for a more generous settlement for the police, arguing the service needs more cash to hit ambitious crime-fighting targets.
The Home Office is also struggling to cut how much foreign aid it spends on hotel bills for asylum seekers in the UK, with an estimate of just under £2.2bn for this financial year, close to the £2.3bn the previous year.
Angela Rayner, deputy prime minister with responsibility for housing and local government, has been locked in last-minute negotiations over the fine details of funding for councils, although a ballpark figure has been agreed, according to Treasury officials.
Additional reporting by Laura Hughes and Clive Cookson