The UK’s 2025 Spending Review, set out by the Chancellor and detailed in a Commons Library briefing, outlines the government’s public spending plans from 2026/27 to 2028/29, with investment allocations through to 2029/30. For investors, this review signals both macroeconomic direction and sector-specific priorities, offering insights into where opportunities and risks may lie in the years ahead.
The UK government’s latest spending review presents a mixed picture for investors. On the one hand, the £113bn in extra capital spending, largely funded by borrowing, signals a boost for infrastructure, transport, and green energy projects — sectors that may see investment upside. The increased focus on research and development (£86bn over four years) could also support innovation-led growth, though this is expected to be flat in real terms.
However, the heavy prioritisation of health and defence — absorbing much of the spending increase — means other departments face real-terms cuts averaging 0.3% annually. This austerity in “unprotected” areas could limit broader public sector-driven economic expansion. Education sees a modest real-terms per-pupil uplift, but only due to falling student numbers.
Overall, while infrastructure investors may benefit, the constrained fiscal envelope and squeezed departmental budgets suggest limited room for broader pro-growth policies, which could temper investor optimism across the board.
Broadly, the Spending Review presents a mixed outlook: cautious optimism for sectors aligned with government priorities, and limited enthusiasm for areas facing tighter funding or efficiency mandates. Investors should track departmental allocations and related policy announcements—especially in the Autumn Budget—as these will determine where capital is likely to flow.
For bond investors, the government’s effort to shift from measuring debt using public sector net debt (PSND) to public sector net financial liabilities (PSNFL) may indicate a longer-term commitment to investment-led growth, potentially reshaping future borrowing patterns and gilt issuance.
While not revolutionary, the 2025 Spending Review subtly reorients public spending toward productivity-enhancing reforms and regional equity trends that savvy investors should be positioning for.
The most striking takeaway is the government’s commitment to fiscal prudence under tightening economic conditions. Government borrowing remains elevated—5.1% of GDP in 2024/25—with debt interest at levels not seen since the 1980s. Although the Office for Budget Responsibility forecasts borrowing to fall, the margin by which the Chancellor is meeting her fiscal rules is slim, with only £9.9 billion in “headroom” for discretionary decisions
Despite some expansion in capital investment, the pace of increase slows markedly after 2026/27. Investment spending is forecast to fall in real terms in 2028/29 and 2029/30
Coupled with a government-wide mandate for departments to deliver 5% savings and administrative budget cuts of 15% by the decade’s end, there’s a risk that some projects may stall or be cancelled if efficiency targets are not met.
For investors, this translates into limited fiscal flexibility in the short term. Expectations of major public sector-driven growth or stimulus should be tempered. Instead, the government is opting for a “zero-based” approach to budgeting, requiring departments to justify all spending from scratch—a move that could lead to strategic reallocations and reforms rather than across-the-board increases.
