The winners and losers in Rachel Reeves's spending review

Rachel Reeves's upcoming spending review will outline the Labour government's priorities for the next three years, with health, defense, and R&D expected to be winners, though the touted £86bn R&D boost is an aggregate over three years, not new funding. While schools will see a £4.5bn uplift, unprotected departments like the Home Office and the Department of Communities and Local Government are bracing for spending cuts, potentially impacting crime, housing, immigration, and local council budgets, as the government aims to balance fiscal rules while strategically loosening borrowing for capital investment in long-term infrastructure projects.

Analysis

The upcoming UK government spending review, to be unveiled by Chancellor Rachel Reeves, is poised to redefine fiscal priorities for the next three years, carrying significant implications across various sectors. Health services are anticipated to receive a substantial boost of up to £30 billion, and defense spending is slated for an increase, aligning with pre-existing commitments. However, the widely publicized "£86bn boost" for Research and Development (R&D) is an aggregated three-year figure, with the annual R&D investment set to reach £22.5bn by 2029-30, an uplift from the current £20.4bn, indicating much of this sum was previously allocated. Similarly, the schools budget will see a £4.5bn increase over three years (£1.5bn annually on an existing £63.7bn budget), which must also cover costs such as extended free school meals and promised teacher pay rises. Conversely, unprotected departments, notably the Home Office and the Department of Communities and Local Government, are bracing for a significant spending squeeze, potentially impacting crime and policing priorities, housing and immigration promises, and the budgets of already cash-strapped local councils. The Chancellor aims to adhere to fiscal rules for day-to-day spending while strategically loosening rules around borrowing to fund capital investment, evidenced by the £15.6bn allocated to regional transport projects. The moderately negative sentiment (-0.45) and cautious tone associated with the review underscore concerns that the narrative may be dominated by the impact of these cuts, despite targeted investments.

Key Decisions for Investors

• Investors should closely evaluate sector-specific exposures, anticipating potential tailwinds for companies in UK defence, R&D-intensive fields such as life sciences and advanced manufacturing, and infrastructure, particularly those aligned with the £15.6bn regional transport funding.
• Exercise caution with investments heavily reliant on funding from unprotected UK government departments, including those servicing local councils or linked to Home Office and Department of Communities and Local Government budgets, given the expected real-terms spending squeeze.
• Monitor the detailed departmental allocations when released to discern the true net fiscal impact beyond headline figures, especially considering the government's emphasis on 'value for money' and the distinction between day-to-day spending constraints and capital investment flexibility.
• Consider the potential broader economic impact if warnings of 'austerity 2.0' materialize, which could affect consumer confidence and sectors sensitive to cuts in public services and employment.