UK Spending Review: Boost in Public Spending Announced

In the Spending Review, the first multi-year assessment since 2021, Chancellor of the Exchequer Rachel Reeves announced that total departmental budgets for public services are set to grow by 2.3% in real terms. While the Chancellor suggested that the review includes efficiency savings, these may not be adequate to offset higher expenditures, especially in the face of economic shocks. This situation could lead to more constraints on day-to-day spending in other areas or prompt the Chancellor to consider further tax increases in the autumn budget to adhere to her “non-negotiable” fiscal rules . In late May, the International Monetary Fund (IMF) warned that the UK’s limited budgetary flexibility might require additional taxes or spending cuts "if shocks arise," urging the Chancellor to maintain tight control over spending. Additionally, the Organisation for Economic Co-operation and Development (OECD) highlighted earlier this month that Rachel Reeves' constrained fiscal flexibility poses a significant downside risk to the UK economy, emphasizing the need to strengthen public finances as a priority. Overall, given the limited fiscal space, further tax increases in the autumn budget remain a possibility.