Chancellor Rachel Reeves faces a tough road ahead with a spending review expected in June, as economic growth remains stagnant and public finances strain

Chancellor Rachel Reeves is bracing for a significant challenge as she prepares for the government’s upcoming spending review, set for June 2025. With the UK economy showing little to no growth, the review will be a crucial moment for the government to manage public finances and allocate resources efficiently.

The most recent data from the Office for National Statistics revealed that the UK economy contracted by 0.1% in October, following a similar decline in September. This marks the first instance of two consecutive months of economic contraction since the early months of the pandemic. The outlook for the final quarter of 2024 is equally grim, with the Bank of England forecasting zero growth for the period between October and December.

In response, Reeves has ordered a detailed line-by-line review of government spending. Departments are being tasked with identifying efficiency savings of 5% of their budgets. The Office for Budget Responsibility has projected modest growth of 2% for 2025, although independent forecasts suggest a lower figure of just 1.3%, which could affect government revenue and public spending.

Carl Emmerson, deputy director of the Institute for Fiscal Studies, has highlighted the difficult road ahead for the government. He praised Reeves’ focus on long-term investment, but warned that any failure to stimulate growth in the short term would lead to increasing pressure on tax policies and public finances. The lack of flexibility in the government’s fiscal targets could force tough decisions, especially in a time of economic uncertainty.

The upcoming spending review will need to strike a delicate balance, with many areas of public spending requiring attention. While Reeves has allocated substantial funds for areas like the NHS, climate change, and justice, critics argue that these areas do not directly address the immediate need for economic growth.

Labour leader Sir Keir Starmer has reiterated the importance of ensuring that people feel the tangible benefits of growth, rather than just focusing on GDP figures. However, a report from the Resolution Foundation think tank suggests that the government’s strategy may not significantly improve living standards for many households, especially given the rising costs in housing and council tax, and the real-terms cuts to social security payments.

Mike Brewer, interim chief executive of the Resolution Foundation, noted that while non-pensioner households in the bottom half of the income distribution could see slight improvements in their real living standards, the wealthiest households would likely experience a decline. Additionally, the rising costs of living, including inflation which reached 2.6% last month, further exacerbate the challenges facing low- and middle-income families.

Despite the grim outlook, Reeves remains resolute, stating that the government’s plan for change, supported by increased investment and reforms, would ultimately lead to sustainable growth and improvements in public services, helping to address the long-standing neglect of the economy and public finances.