Faced with a cliff-edge of uncertainty over departmental spending – with plans set out by the previous government ending in six months – and the desire to put in place a multi-year settlement to allow for better long-term planning, Rachel Reeves has chosen a phased approach to Labour’s first spending review in 14 years.
Using the October Budget to set out settlements for 2025-26, as well as extra funding for some departments in the current financial year, the chancellor branded this as phase one of a spending review which will run until after the next election. Phase two, covering April 2026 to March 2030, will be announced in late spring next year – but there was plenty of insight within the Budget’s Red Book about what it could look like.
Here’s what we know so far about SR25.
Departments have been given a challenging spending envelope
While the Budget did not set out detailed departmental spending plans beyond 2025-26, it did set a spending envelope for the rest of the parliament. Departments will get an average real-terms increase in their day-to-day spending power of 4.8% in 2024-25 and 3.1% in 2025-26, but this drops down to 1.3% in the following three years.
The Office for Budget Responsibility warned that this could mean unprotected departments face budget cuts of around 1% before the government’s aims to get defence spending to 2.5% of GDP and overseas aid to 0.7% are accounted for.
OBR chair Richard Hughes told MPs last week: "There is no doubt that it sets up quite a challenging envelope for that spending review. and one where governments will have to prioritise between competing pressures on resources. It's a particular challenge when governments are not so much committing to deliver a particular service but when they're committing to deliver a level of spending.”
Labour wants a ‘fundamental’ change in approach to this SR
The Red Book promises that next year’s spending review will have this government’s stamp all over it.
It says SR25 “will deliver a new settlement for public services, marking a fundamental change in how the government approaches public spending, supports growth, and delivers public services”.
Phase two of the Spending Review will be “mission led, technology enabled and reform driven, and will take a long-term approach, supporting delivery of the government’s plans for a decade of national renewal”, it says.
Let's take a look at those in a little more detail.
Embedding the mission approach
A key part of Labour’s strategy is its mission-driven approach to government. Its general election manifesto set out five missions that the party would focus on in government: economic stability and growth, clean energy, NHS reform, safer streets, and improving education. It promised this would be “a new way of doing government that is more joined up, pushes power out to communities and harnesses new technology” and that focuses on “ambitious, measurable, long-term objectives that provide a driving sense of purpose for the country”.
The Red Book states that, to fundamentally change the way public services are delivered, “departments must work together to deliver key priorities in a more effective and efficient way, breaking out of silos and focusing on driving forward the government’s core objectives”.
It says the government will launch this approach in phase two of the spending review, with departments being asked to work together to develop a shared strategy for delivering the government’s missions.
Speaking at the Treasury Committee on Wednesday, Reeves said: “It’s really important in the second phase of the Spending Review that we’re not just looking at this department-by-department, but we are looking at the outcomes, and that’s what the mission boards and the mission approach to government should enable us to do.”
Reforming public services
The Red Book also makes clear that reforming the public sector will be a priority in phase two.
It says reforms will aim to “improve outcomes whilst keeping public spending at sustainable levels” and that the government will take a more preventative approach to public service delivery, and also focus on devolving more powers.
The Budget papers state that the spending review will prioritise: health; local government and devolution; children’s social care; SEND; homelessness; police; prisons; asylum; defence; transport; and – they listed it last but it was still in there – the civil service.
For the civil service, the focus will be on delivering a workforce plan. The Red Book states that the civil service is “a key enabler to support improved productivity across the UK’s public services”. It says the workforce plan will contain reform proposals for a more efficient and effective civil service, including “bold options to improve skills, harness digital technology and drive better outcomes for public services”.
Digitising public service delivery
Technology has been one of the government’s early focuses, with its biggest machinery of government change so far being its relocation of digital functions from the Cabinet Office to the Department for Science, Innovation and Technology.
The Red Book states that technology will also be important in the spending review. It says phase two will focus on ensuring the public sector makes the best use of technology, in order to digitise public service delivery, enhance productivity and improve outcomes.
DSIT will be instructed to drive a new strategy for digital transformation across the public sector to ensure that reforms in public services are “digital led”. This will inform a “centralised and coherent approach to digital investment” in phase two of the Spending Review.
Although the digital functions have moved to DSIT, the Red Book suggests that leadership of this agenda will be a shared-endeavour. It says the chancellor of the Duchy of Lancaster, technology secretary and chief secretary to the Treasury together lead the “digital centre” of government.
Starting from the bottom
The other key method that the government says it wants to embed in phase two is a “zero-based” approach.
“In the second phase of SR25, we’re going to be looking from the bottom up, the zero-based approach, to make sure that we’re driving value for money.”
Rachel Reeves
The Red Book says the Spending Review will “embed greater spending discipline by implementing a zero-based approach, ensuring that every pound of taxpayers’ money is targeted towards the government’s priorities”. A zero-based approach is a budgeting method where all expenses must be freshly justified each year. It aims to allocate funding based on current priority rather than budget history.
Speaking to MPs on the Treasury Committee on Wednesday, Reeves said every department will be asked to do a zero-based review during phase two of the Spending Review, “looking from the bottom up… to make sure that we’re driving value for money”.
The chancellor said departments will be asked to produce a hierarchy of their priorities and put more resources, time and effort into the higher priorities. Reeves said this will require difficult decisions “because obviously there will always be understandably vested interests to defend the things that exist”. But she said departments will not be able to start doing new things unless they stop doing things that are less of a priority.
Reeves said departments “shouldn’t be led by the Treasury” on this.