One year on from winning the General Election, the Labour Government have outlined its spending review for 2025.
Over the course of the Government’s first year, headlines about public finances have focused on tightening budgets. On the one hand, this Spending Review follows in a similar vein.
But there are also relatively significant increases in capital spending too, which reflect the Labour Government’s priorities.
A Spending Review of two halves
The Labour Government have been consistent in their messaging around sticking to its two fiscal rules. This includes a commitment for:
- Debt to fall as a share of the economy.
- Day-to-day costs to be met by revenues.
These two rules set the tone for the Spending Review as a whole.
On the one hand, there is an increase in funding for large infrastructure projects that aim to support the long-run economic growth of the UK. Examples include £39bn allocated for social housing in England, £22.5bn per year for research and innovation, £15.6bn for transport projects in English city regions, £11.5bn investment in nuclear energy at Sizewell C, and £7bn to build new prison spaces. A change in the definition of public sector net financial debt gives more leeway for the Chancellor to make these larger capital investments. Adding together the impacts of these large-scale, long-term investments should support an improvement in the long-term economic growth rate.
On the other hand, the fiscal rules also state a commitment to reduce borrowing. And, in order to keep a manifesto pledge of not increasing taxes on “working people”, the Government has chosen to reduce some departmental budgets. There are planned yearly decreases in budgets of the Foreign Office (down 6.9% year-on-year), Transport (down 5%), Environment and Rural Affairs (down 2.7%), Business and Trade (down 1.8%) and Home Office (down 1.7%).
Even amongst departments with budget increases, such as a 3% yearly real increase in NHS funding, this is still less than the 40-year long-term rate of 3.7%. A relative winner is the Department for Science, Innovation and Technology with a budget increase of 7.4%, however one of the factors in this decision is likely to do with the potential to boost long-term economic growth. Similarly, defence spending is set to increase from 2.3% in 2024 to 2.5% by 2027, although this is likely influenced by global factors rather than Labour’s fiscal rules.
In short, the motivations behind which departments are set to receive an increase in funding are, in the main, influenced by those with best placed to help meet the Government’s five missions.
Bringing a place-based lens to the Spending Review
The Spending Review predominantly looks at funding through a national lens, rather than at the local or regional scale. Even though every pound spent and policy decision outlined in the Review will have a geographical impact, there has been little analysis of what this means for addressing inequalities within the UK. For example, in the Chancellor’s fiscal rules, there is no consideration of the geographical impact. By ignoring the place-based impacts, there is a risk that the spending review not only fails to address existing inequalities, but increases them further.
Still, there is one announcement in the Spending Review that helps bring analysis of UK economic geography into sharper focus. The Treasury Green Book, a set of guidance to help make a business case for investment and how to appraise the spending public money, is being updated to include more focus on the place-based impacts of public spending.
The 2025 Green Book Review clarifies two important misconceptions around developing place-based business cases:
- “the Green Book does not endorse the use of arbitrary ‘BCR thresholds’. It will outline that a BCR of less than one does not automatically constitute poor value for money. HM Treasury does not simply rank different projects, with different objectives, by their BCRs as a means of allocating funding“.
- “The Green Book does not set government policy objectives. The Green Book makes clear that the government’s priorities should be established before officials begin developing a business case for a particular project”
The updated place element of the Green Book, and associated guidance on conducting value for money assessments, will help local and regional policy makers to more robustly and accurately appraise their projects.
The choices made in the 2025 Spending Review show:
- Labour is committed to sticking to its fiscal rules of falling debt share and balancing day-to-day spending with revenues.
- There is a clear focus on investing for the long term through large infrastructure investments.
- Whilst the foundations for long-term economic growth are being put in place, in the short term, budget constraints are very real.
- When faced with budget cuts to reduce day-to-day spending, the departments that are protected are the ones most closely aligned with the Government’s 5 missions and changing global factors.
- The risk of not conducting place-based analysis of policy decisions could lead to exacerbating existing inequalities.
- There is a commitment to improve understanding of place-based impacts through the updated place guidance in the Treasury Green Book.
What does the Spending Review mean for the West Midlands?
Integrated Settlements:
Five Mayoral Strategic Authorities will join Greater Manchester and the West Midlands, so that Mayors representing nearly 40% of people in England will have local control over a single flexible pot for growth and public services priorities. This supports the redistribution of funding beyond the greater Southeast.
Local Growth Fund and Local Growth Plans
A new Local Growth Fund is to be established, with guidance for Combined Authorities, such as the West Midlands, in developing Local Growth Plans. The 10-year capital settlement from 2026-27 to 2035-36, will help mayoral city regions in the North and Midlands with the highest productivity catch-up and agglomeration potential.
Transport Investment
The Government is investing in transport in city regions across England aiming at addressing historic underinvestment in the North and Midlands. West Midlands Combined Authority is set to receive including £2.4bn over seven years
Visa Reforms for International Students
The Government has set out an intention to explore introducing a levy on higher education provider income from international students. Although the intention is to be reinvested into the higher education and skills system, this could impact the 50,000 students at the 15 universities across the West Midlands, as well as the 680,000 international students across the UK.
AI and Research Talent
The government is exploring expanding eligibility of the High Potential Individual visa, looking to double the number of qualifying HE institutions. This can bring the West Midlands as a leader in the AI field.
R&D Funding Increase
The Government is increasing R&D funding to £22.6 billion per year by 2029-30, an above-inflation increase. They also remain committed to the greater distribution of this funding across the country. This includes a £410 million Local Innovation Partnerships Fund, giving local leaders a central role in co-creating R&D programmes to support local economies. Also, over £3 billion R&D and capital funding over the next four years to unlock investment across the UK in advanced manufacturing. The West Midlands is well placed to make the most of these increases in R&D funding.
Construction Skills
£625 million between 2025-26 and 2028-29 to train up to 60,000 skilled construction workers. The West Midlands needs to recruit around 2,500 construction workers each year to keep up with demand.
AI Skills Development
Develop new AI courses, launch new AI fellowships and establish a prestigious new AI talent scholarship. This helps build on existing AI strengths in the West Midlands.
This blog was written by Hannes Read, Policy and Data Analyst, City-REDI, University of Birmingham.
Disclaimer:
The views expressed in this analysis post are those of the author and not necessarily those of City-REDI or the University of Birmingham.