The news has been littered with stories of what we can and might expect to see in the Spring 2025 Governmental Spending Review, and I didn’t have a clue what it was, so thought I’d have a look and write an article for those of you who are equally unaware.
Rachel Reeves will be presenting the Spring 2025 Government Spending Review on 11 June.
I want to say that I don’t think this is going to be a good announcement for most of us. Genuinely, my opinion is that Labour will make a lot of hard decisions in it’s first 2-3 years, most of which will make us all worse off, and then in the last year or two it’ll flood us with money to win back voter confidence and give them the ability to say “look at how amazing everything is now”. Based on that philosophy, I’m expecting some announcements on taxes from this spending review. Some experts have noted that there is a chance that inheritance tax could be in the cross-hairs and that a further/extended freeze on income tax thresholds could be expected.
In one final middle-finger to the masses before they left power in 2024, the Conservatives abolished the Lifetime Pension allowance. The abolition of this allowance benefited around 0.4% of the richest people in the country. Effectively, before it was abolished, Lifetime Pension Allowance charged a 55% tax on any pension withdrawals over £1,073,100. Obviously, the majority of the country (around 99.6% of us) do not have pension pots over a million pounds, so this never affected us, but the conservatives decided to help themselves out before leaving government. There are rumours that this might be brought back into existence to raise a little extra tax income. It’s unlikely to be very effective though, I’ve personally only known one person to hit this allowance and they just stopped contributing to their pension because it wasn’t tax-effective for them, instead they’d pay income tax (which was lower than this 55% tax) and invest the money. Anyway, lets move on.
What is a Government Spending Review?
So a governmental spending review happens every few years, they do not have a definitive timeline on when they have to be completed. The last few occurred in 2007, 2010, 2015, 2020 and 2021, so you can see the times vary wildly and can be impacted by what is happening in the world, such as Covid causing spending reviews in consecutive years.
The spending review is led by the Chancellor of the Exchequer, Rachel Reeves, and the Chief Secretary to the Treasury, currently Darren Jones.
Each department of the Government will produce a budget request for their next three years of spending, which needs to detail how much money they’ll need and what it is to be spend on. As some projects and expenditures will involve multiple departments, there needs to be collaboration across government departments to ensure the process runs smoothly.
The Treasury will then review the requests, make a judgement on how they align with the government’s priorities and make sure they offer decent value for money for taxpayers. Finally, the Chief Secretary will the meet with the Secretaries of State to discuss and agree final budgets, before the Chancellor of the Exchequer gives a final approval and allocates budgets.
One final piece of information that is necessary to know is that government spending is split into two parts. The first part is what I’ve just described above, know as the Departmental Expenditure Limits, which accounts for about 40% of a government’s annual spending and is covered by the Spending Review. The other part is known as Annually Managed Expenditure, which is the government spending that is more difficult to plan for, such as welfare, pensions and debt interest payments that all vary due to demand. The Office for Budget Responsibility manages this budgets for this type of expenditure.
How is the Spring 2025 Spending Review Different?
Apart from the change up in frequency, there are a couple of differences with this spending review compared to others.
Firstly, and probably most importantly, this budget is being “zero-based”. That means, rather than looking at previous departmental budgets and deciding whether to increase or decrease them, the government will be starting each department budget at zero and will assess all spending for its value for money. I’m actually impressed with this approach, it should show a more thoughtful approach to budgeting taxpayers’ money, actually analysing whether every piece of expenditure is going to be beneficial for the country as a whole.
A second change to the normal spending review process is that this one has been done in two phases. Phase 1 was announced in Rachel Reeves’ Autumn 2024 budget, where she laid out the budgets for 2025/2026. Phase 2 started in December 2024 and is the plan for the subsequent years, 2027 – 2030. This is an interesting way to split the review, as it allows for tighter control of government budgets, hopefully leading to less wastage.
During that Autumn 2024 Budget announcement, Chancellor Rachel Reeves announced that the new Labour government would be changing the system and running spending reviews on alternating years, with each spending review looking to a minimum planning horizon of three years.
What are we Expecting to see from the Spring 2025 Spending Review?
Labour are going to have to run a tight budget. Rachel Reeves has already hinted that the government will be tightening the purse strings over the next few years.
We already know that Keir Starmer has committed to increasing defence spending to 2.5% of GDP and that the plan is to cut foreign aid budgets to fund this increase. But there is a lot we don’t know.
Energy
There has been some controversy in government over the Department of Energy Security and Net Zero’s (DESNZ) support for a move to zonal pricing of our energy system. There is widespread support in labour for this move, which is reported to save over £52bn in energy costs between now and 2030, including £27bn of infrastructure upgrades that won’t be needed if we move to zonal pricing. The controversy however is that this move will save huge amounts of money for people in northern areas of the UK, closer to generation sources, but will result in southern regions having higher bills than those in the north. That being said, bills should still drop for people in the south, just not by as much. Additionally, many companies in the energy industry oppose this move as they say it will reduce profitability, which will lead to lower external investment in the UK energy industry and ultimately mean that we will not hit our net zero targets.
In a move to reduce government expenditure, last year Labour removed the Warm Home discount for millions of pensioners, a very controversial decision at the time. The public uproar from this decision has been deafening, to the point that Keir Starmer has recently indicated a U-turn on this decision is soon to be announced. The likelihood is that Labour will increase the number of people eligible for the Warm Home Discount, as it currently cuts off at anyone earning roughly £12,500 a year or more, so they’ll likely increase the annual income eligibility criteria to cover more than it currently does.
Should the government decide to move ahead with zonal pricing and increasing the number of people eligible for Warm Home Discount then we are likely to see an increase in budget here, but where will we see budgets fall?
Other departments
The government haven’t made any announcements on our justice departments, spending on prisons, courts and police departments. This has led some experts to believe we might see a tightening of the purse strings here. These departments have been struggling in recent years, particularly since the pandemic, and have faced lower and lower budgets over the last few years, so any further reduction in prices here is likely to lead to ever worse performance.
Not much has been said about education either, though I’m not confident that the government can justify reducing spending on education at any point.
There are other ways the government can cover its predicted spending. Labour have previously announced that one of its core priorities is to improving the productivity of public services. The aim here is to get the same level of productivity for less money, although they will have to invest in productivity improving schemes to start with. This leads to a bigger conversation that is likely to be occurring at the moment: public sector pay and employment. In order to improve productivity whilst lowering costs, it is possible that the government would be looking at reducing either the average pay for public sector employees, or reducing the headcount. Either of these measures would improve public sector budgets but may lead to a reduction in the quality or availability of certain public services.
The government may also look at cutting certain NHS services, increasing charges such as university tuition fees or introducing means-tested access to certain services (possibly bus passes for the elderly).
Not matter what is announced on 11 June, it is certain to be a difficult time for the Labour party. I’ll be back on Wednesday to give an overview of what is announced and my thoughts on how the announcements are likely to affect different groups.
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Richard Winstone
The Regulator Guy.
