Spending review 2025: who are the winners and losers?

The UK Spending Review reveals a mixed bag for government departments, with significant capital spending increases for areas like net zero initiatives, transport infrastructure outside London, and defense, while most departments face day-to-day spending cuts. Health receives a substantial boost, but concerns remain about addressing backlogs and meeting pay demands; the Foreign Office faces the steepest cuts due to reallocating overseas aid to defense. Housing secured funding for social housing but local councils face financial pressures, and the Home Office struggles with police funding despite overall increases.

Analysis

The UK Spending Review outlines a dual fiscal strategy: significant capital investment boosts for priority areas alongside widespread day-to-day spending constraints for most departments. Net zero initiatives receive substantial backing with £13.2bn for home insulation and £8.3bn for Great British Energy, which includes small modular reactors, while transport infrastructure outside London sees a fourfold increase in local grants and funding for major rail projects. Defence spending is set to rise to 2.6% of GDP by 2027, with an £11bn cash injection. Conversely, health, despite an almost £30bn annual uplift (a 3% NHS rise including £10bn for technology), faces concerns over its adequacy for tackling backlogs and pay demands, as the increase is below historical averages. The Home Office grapples with police funding challenges despite a 2.3% real-terms annual rise, potentially impacting recruitment targets, and the Foreign Office faces the harshest real-terms cut at nearly 7% to redirect funds to defence. Housing secures £39bn for social housing over a decade, but local councils face a 1.4% real-terms cut, while education's 0.4% per annum real increase in its core budget struggles against rising costs and pay demands. This approach signals long-term investment priorities but implies austerity and potential service pressures in day-to-day public service delivery across multiple sectors.

Key Decisions for Investors

• Investors should identify opportunities in UK sectors benefiting from long-term capital expenditure, such as renewable energy, nuclear (Sizewell C, small modular reactors), specialized construction for home insulation and school rebuilding, and transport infrastructure, particularly outside London.
• Given the £10bn allocated for NHS technology and digital transformation, firms offering healthcare efficiency solutions may find a receptive market despite broader pressures on the health budget and concerns about its overall sufficiency.
• Caution is warranted for entities heavily reliant on UK government day-to-day operational spending or local council funding, as these face real-terms cuts and increased fiscal pressure, potentially impacting contract sustainability and service delivery capabilities.
• Monitor the UK defence sector and its supply chain for growth potential tied to increased spending commitments, while also noting the uncertainty regarding funding pathways for more ambitious long-term targets, such as 3.5% of GDP.
• The significant reduction in the Foreign Office budget, driven by aid cuts, may adversely impact UK-funded international development programs and associated organizations, necessitating a review of exposures in this area.