Chancellor Reeves warned of ‘tough’ trade-offs ahead of spending review

Rachel Reeves has been warned that “tough trade-offs” await her at this summer’s spending review, as she has been urged to prioritise investment that “boosts” public services and standards for families.

A report from the Resolution Foundation has suggested that the Government should focus spending from its “limited pot” in areas such as health and housing if it wants to increase living standards.

The analysis by the think tank also urges ministers to examine investment at June’s spending review in the prisons system and public transport, but describes them as “secondary priorities”.

The Treasury is currently undertaking the review, which will set the budgets for Government departments for the next three years in terms of day-to-day spending.

The process will set the budgets for so-called unprotected departments, including local government, justice, transport and culture. Protected departments include defence, the NHS in health, and schools as part of the education envelope.

“The Chancellor must now decide how to allocate a limited pot of capital spending in a way that both addresses the UK’s legacy of frayed infrastructure and supports future ambitions for growth and higher living standards,” the report stated.

“Focussing direct government investment in health and housing would allow the Government to deal with the legacy they have inherited, while furthering their missions of boosting growth and raising living standards.”

Capital spending is money used to spend projects such as new hospitals or road schemes, rather than day-to-day running costs such as salaries.

At the budget in October 2024, Ms Reeves announced more money for capital spending, but also said that there would be “four key guardrails” introduced to ensure good value for money.

“Ultimately, if the Government wants to avoid dramatic cuts to departmental budgets, then it will likely have around £20-50 billion of capital spending to allocate over the next five years,” the Resolution Foundation report said.

It added: “The Government should prioritise investment based on areas of particularly acute historical under-investment, and the future impacts on living standards and economic growth.

“Investment that is likely to be well targeted across both of these criteria includes social investment in housing and health, with investment in the prison system and well-targeted transport infrastructure projects in the UK’s second cities being secondary priorities.”

Rachel Reeves told the BBC in March that “we can’t just carry on like we have been, spending on the same things that the previous government spent on”.

James Smith, research director at the Resolution Foundation said that the upcoming review “offers a unique opportunity to reverse Britain’s terrible record on public investment” but warned that “tough trade offs lie ahead” for the Chancellor.

He said that Ms Reeves “should look to prioritise investment that boosts public services, economic growth, and family living standards”.

“Affordable housing should be targeted in major cities with acute housing needs, where its scarcity limits living standards and economic potential. This investment will help cities to attract new firms and workers – especially if affordable housing is complemented by better commuter transport links,” he added.

A Government spokesperson said: “Since taking office the Government has committed over £100 billion in additional capital spending and is prioritising investment to drive growth.

“The spring statement increased capital investment by a further £13 billion, and the OBR concluded that the Government’s landmark planning reforms will result in UK housebuilding reaching its highest level in over 40 years, bringing the UK one step closer to its Plan for Change mission to build 1.5 million homes.”

Published: 29/04/2025 by Radio NewsHub