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Published 14.09.2025

The fiscal story of 2025 is a study in careful rationing rather than grand gestures. With the Spending Review on 11 June setting multi-year envelopes for departments, ministers now have a clearer map of where money should flow—and where it will be harder to find. The headline message is that overall spending grows modestly in real terms, yet the room for manoeuvre is narrow. The government has chosen to prioritise healthcare and national security, and that choice inevitably leaves other areas working with tighter settlements and bigger efficiency targets. The political debate through the rest of the year will revolve around whether that balance is deliverable without eroding service quality, and whether the autumn fiscal update can create even a sliver more space.

The review itself marked a return to medium-term planning after years dominated by one-off top-ups and emergency schemes. Day-to-day budgets now stretch to 2028–29, capital plans to 2029–30, and the centrepiece is a promise to protect certain services while asking the rest of government to fund more frontline delivery by slimming down administration. On paper, that means sustained improvements for the National Health Service and a renewed push on security and resilience. In practice, it means departments outside the protected core must find productivity gains to stand still, and sharper productivity gains to move forward.

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Independent observers sometimes frame these moments as a binary choice between austerity and largesse. That framing doesn’t quite fit. Total departmental spending inches up over the period, so this is not a throwback to the deepest cuts of the last decade. Yet the distribution of that growth matters more than the average. Where budgets rise, they often do so to meet real and growing demand; where they flatten, the pinch will be felt in per-person terms once inflation and caseloads are accounted for. The review is less about turning taps on or off and more about deciding which taps cannot be allowed to run dry.

The second strand of the 2025 narrative is the lack of fiscal cushion. Forecasts still point to only a slim buffer against the government’s own rules, and history shows how quickly that margin can be swallowed by revisions to growth, inflation, or borrowing costs. That is not a crisis call—merely a reminder that the Chancellor has limited ability to add new commitments unless the economic outlook improves. When headroom is thin, delivery becomes the strategy: prove the savings are real, make the protected spending work harder, and hope the macroeconomy does just enough to keep the arithmetic intact.

So far, the data have offered more reassurance than relief. Headline Consumer Price Inflation (CPI) was running at 3.4% year on year in May, a step down from earlier peaks but still above target. The composition of inflation has shifted too, with signs that services prices—the component policymakers watch closely for persistence—have cooled from their hottest readings. That matters for public finances in two ways. First, it takes pressure off interest costs linked to inflation. Second, it shapes pay rounds and procurement prices across the public sector. The path back to target will not be a straight line, but it no longer looks like a cliff face, and that alone reduces the odds of fiscal firefighting.

The labour market is drifting rather than lurching. Unemployment has nudged up toward the mid-fours, vacancies have eased from their peak, and pay growth is decelerating from the pace seen in the immediate post-pandemic period. For departments wrestling with pay settlements, this mix is more manageable than a year ago. For the Exchequer, the picture is nuanced: a cooler jobs market can bring wage pressures down and help departments live within their envelopes, but if the cooling reflects weaker demand rather than rising productivity, tax receipts don’t get the lift that would truly loosen the fiscal corset.

Growth completes the macro backdrop. After a robust first quarter, April’s GDP reading slipped, leaving the three-month rate up 0.7% but with the impulse fading as earlier one-offs unwind. High-frequency surveys through early summer paint a familiar picture: services expanding, manufacturing subdued, pricing power ebbing as firms find it harder to pass on costs. None of that screams downturn, yet none of it suggests a windfall in the making. For the fiscal position, the composition of nominal growth matters as much as the level. Stronger nominal incomes and spending raise revenues even when real growth is pedestrian; weaker nominal momentum does the opposite.

Layered on top of the cycle are deliberate commitments that carry their own price tags. Defence and national security sit foremost among them. The government remains on course to lift defence spending to 2.5% of GDP from April 2027, with an ambition to move higher over the next parliament, and has set out a broader vision that includes funding for resilience. The framing acknowledges a world of heightened geopolitical risk and the imperative to invest in domestic capabilities. But a pound spent on one priority is a pound not spent elsewhere unless the revenue base grows to match. Signalling today therefore shapes expectations across departments now, even if the largest costs land later in the decade.

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Health exerts a similar gravitational pull. The Spending Review champions continued investment to support the NHS’s recovery and reform agenda. Voters consistently say healthcare is their top priority, and demographics ensure demand will not ease on its own. The hard truth is that generous settlements for health in a world of modest overall growth redirect pressure onto unprotected areas. That doesn’t mean those areas face cuts in cash terms; it means that after inflation, population growth and rising caseloads, they may still be asked to do more with roughly the same resources. The emphasis on administrative savings is an attempt to square that circle, but experience suggests savings programmes are easier to announce than to land, and often require up-front investment to deliver recurring benefits.

Debt interest is the quiet swing factor. The pull-back in inflation has eased the mechanical uplift to the cost of servicing index-linked debt, and market rates are no longer at last year’s highs. Even so, the stock of debt is larger and the effective rate paid on that stock has reset higher after the tightening cycle. If bond markets were to turn choppier again, higher yields would flow through to interest costs far more quickly than in the era of ultra-low rates. That is one reason the interplay between central bank balance-sheet policy, gilt supply and investor appetite has started to matter to fiscal watchers as much as to monetary ones. The two policy spheres remain institutionally separate, but they share the same economic weather.

What does all this mean for households and firms? For households, the combination of easing inflation, a gentle loosening in the labour market and a cautious path for interest rates points to stability rather than upheaval. The risk of a sudden, recession-induced fiscal squeeze has faded, but the probability of big tax cuts or sweeping new programmes is low until the outlook improves. For businesses, the message is similar: plan for a steady, incremental policy environment with selective initiatives where the government has flagged priorities—national security, energy security framed through industrial policy, productivity improvements in public services—rather than a broad-based stimulus.

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As attention shifts to the Autumn Budget, three tests will determine whether the fiscal spotlight softens or becomes more intense. The first test is the trajectory of inflation and growth over the next few months. If Consumer Price Inflation (CPI) glides lower while nominal GDP holds up, debt interest costs will trend down and receipts will look healthier, giving ministers marginal flexibility. If inflation stalls above target or growth fades more sharply, the buffer could disappear and the Review will start to feel like a ceiling, not a floor. The second test is delivery against the savings and reforms promised in June. Credible evidence that departments are on track—fewer vacancies in critical roles due to smarter hiring, lower back-office outlays because processes have been digitised—will buy political patience and reduce the temptation to raid reserves for near-term fixes. The third test is clarity around the biggest, most expensive commitments. Transparent phasing for defence outlays and demonstrable progress on health productivity will anchor expectations and reduce the uncertainty that can paralyse planning in the rest of the system.

It is tempting in a tight year to hope for a silver bullet: a surprise growth spurt, an asset sale that solves everything, a tax change that pays for itself. The more realistic route to a better fiscal conversation is steadier and less dramatic. It runs through consistent disinflation, a labour market that cools without cracking, nominal growth that nudges revenues higher, and public-service reforms that do more than rename old programmes. The Spending Review set a course that can work under those conditions. It is not flashy and it is not easy, but it is coherent. If the economic weather holds, the government can navigate the narrow channel it has chosen; if the weather turns, choices will become starker and the spotlight harsher.

For now, the story of 2025 is of a state choosing to do a few things better rather than many things more. That makes sense when the headroom is slender and the shocks of recent years are still working their way through the system. The next few months will show whether the gamble on careful prioritisation and disciplined delivery pays off—or whether the Autumn Budget must redraw the map after all.