ICAEW chart of the week: Spending Review 2025

My chart for ICAEW this week looks at the government’s priorities as expressed through departmental budgetary allocations over the next three years.

A bar chart showing the average annual real-term percentage increase in departmental spending over the three years to 2028/29.

Defence +3.8%. 
Security +3.7%. 
Business & Trade +3.0%. 
Health +2.7%. 
Local Government. +2.6% (central funding +1.1%, balance from local taxation). 
Justice +2.0%. 
Overall average increase +1.5%. 
Science +0.9%. 
Education +0.8%. 
Devolved administrations +0.7%. 
Energy & New Zero +0.7%. 
Home Office +0.5%. 
Cabinet Office +0.4%. 
DWP -0.2%. 
Transport -0.5%. 
Culture, Media & Sport -1.4%. 
HMRC -1.5%. 
Hm Treasury -1.9%. 
Agriculture & Rural Affairs -2.3%. 
Foreign & Development -8.3%. 
Asylum -13.1%. 

13 Jun 2025. Chart by Martin Wheatcroft. Design by Sunday. Source: HM Treasury, 'Spending Review 2025'.

The Spending Review 2025 establishes base operating budgets for government departments for the three financial years from 1 April 2026 (2026/27, 2027/28 and 2028/29) and base capital budgets for four financial years (extending to 2029/30).

Departmental budgets for the current financial year ending on 31 March 2026 (2025/26), total £648bn and are expected to rise to £678bn in 2026/27, £697bn in 2027/28, and £717bn in 2028/29, an increase of 10.6% over the three years or 3.4% a year. This is equivalent to an average increase of 1.5% a year in real terms after adjusting for inflation of 1.9% a year on average over the spending review period.

The totals can be analysed between operating or ‘day-to-day’ budgets of £517bn, £536bn, £552bn and £568bn in 2025/26, 2026/27, 2027/28 and 2028/29 respectively and capital budgets of £131bn, £143bn, £145bn and £149bn. These are real terms increases of 1.2% and 2.4% a year on average over three years. 

The capital budget in 2029/30 is £152bn, a cut in real terms that reduces the average annual increase in capital budgets over four years to 1.8% a year on average.

My chart this week highlights how the 1.5% average annual real increase over three years in total budgets (operating and capital) has been allocated across departments, starting with the Ministry of Defence, which leads the pack with an average increase in its budget of 3.8% a year, followed closely by the security services, with an average annual increase of 3.7%. This reflects the elevation of national defence and security to the top of the government’s priorities since the general election last year, even though this increase will only move defence and security spending from 2.3% of GDP currently to 2.6% of GDP by 2027, a long way off the proposed 3.5% of GDP new minimum to be discussed at the NATO summit.

Economic growth and the NHS are the next highest priorities for the government and so it is perhaps unsurprising that the Department of Business & Trade does well with an annual average increase of 3.0%, closely followed by the Department of Health & Social Care, which receives 2.7%. The latter is the biggest increase in cash terms, at £31bn in total or about £12bn more in 2028/29 after adjusting for inflation.

Local government finances are in a parlous state and so the government has pencilled in a 2.6% average annual increase in core budgets for local authorities in England over the next three years. However, it is only increasing central funding by 1.1% a year on average, implying the balance will need to be made by local taxation, principally council tax.

The Ministry of Justice has been awarded 2.0% a year on average as the government seeks to tackle significant backlogs in the courts, overcrowded prisons and significantly under-resourced probation services.

The Department of Science, Innovation and Technology has received a below average annual increase of 0.9% over the next three years, but this follows an almost 12% increase over the past two years as the government has sought to increase investment in research and development to boost economic growth.

Despite being a key priority for the government, the Department for Education has only received a 0.8% average annual increase, partly because of falling primary school rolls in line with a significant fall in the birth rate over the last decade.

The devolved administrations – Scotland (0.8%), Wales (0.7%) and Northern Ireland (0.5%) – are budgeted to receive an average of 0.7% a year over three years as a consequence of the Barnett formula that links UK national government spending in England to the block grants provided to each devolved administration, adjusted for relative changes in population among other factors.

The Cabinet Office is expected to receive just 0.4% on average reflecting the contribution that planned efficiency savings are expected to contribute to administrative budgets. This is also the reason for the 0.2% a year real-terms fall in the Department for Work and Pensions (DWP) budget as automation helps reduce the cost of administering the welfare system.

The budget of the Department for Transport is expected to fall by 0.5% a year overall, but this partly reflects a fall in spending on High Speed 2 as it comes closer to completion. If that is excluded, the department’s budget is expected to increase by 0.5% a year on average. The actual increase in spending should be even higher, as the budget is net of passenger revenues that are expected to grow at a faster rate over the next three years.

Extra money for housing was found within the spending review, but this wasn’t enough to stop the budget for the Department of Housing, Communities and Local Government from shrinking by an annual average of 0.6% a year as other activities are cut back, while the Department for Culture, Media & Sport (-1.4% a year on average) has also been asked to cut back its activities.

HMRC (-1.5% a year) and HM Treasury (-1.9% a year) see their budgets reduced significantly, with digitisation and efficiency savings expected to contribute significant sums.

The Department for Farming, Agriculture, and Rural Affairs (-2.3%) is also expected to see significant cuts over the next three years, as is the Foreign, Commonwealth and Development Office (-8.3%), although in the latter case that is principally driven by the decision to reduce overseas development assistance from 0.5% of GDP to 0.3% of GDP although some will come from back office savings.

Not shown in the chart are small and independent bodies and the government legal function, which are together expected to increase by 0.4% a year on average, although this comprise a -0.5% annual reduction in the former and a 5.3% average annual increase in the latter. The net changes after inflation are a fall of less than £0.1bn and an increase of just over £0.1bn respectively, which are rounding errors in the hundreds and hundreds of billions of pounds spent by government departments each year. 

Test and trace in England falls short despite £22bn budget

11 December 2020: Despite achieving significant increases in testing activity, the Department of Health and Social Care’s test and trace service failed to meet recommended effectiveness rates, according to the NAO.

The rapid scale-up of COVID-19 test and trace service saw 23 million tests carried out, 630,000 of 850,000 people testing positive reached and 1.4 million of their contacts traced up to 4 November. However, at 66% the close contact trace rate is below the 80% needed to be effective.

The National Audit Office (NAO) has issued an interim report on the NHS Test and Trace Service set up by the Department of Health and Social Care (DHSC or the Department) to test for COVID-19 and to trace close contacts of those testing positive. 

The NAO reports that between 28 May and 4 November 2020, only 41% of test results were provided within the target time of 24 hours and only 66% of close contacts of those testing positive were reached and asked to self-isolate, compared with the 80% rate recommended by the Scientific Advisory Group for Emergencies (SAGE) for an effective test and trace system.

Test and trace programmes are a core public health response in epidemics that can be used with other measures, such as social distancing, barriers (such as masks) and handwashing, to reduce infections. At the start of the COVID-19 outbreak, Public Health England carried out comprehensive testing and tracing on the relatively low numbers of initial infections, but this was suspended at the start of the first national lockdown in mid-March. The Department scaled-up testing capacity from April onwards and on 28 May 2020 launched the NHS Test and Trace Service covering England.

The NAO’s key findings include:

  • The Department has achieved significant increases in testing activity, set up a national contact tracing service scratch and has tested millions of people.
  • The delivery model chosen for the national test and trace programme, which excluded local public health teams from the response, was only documented in a retrospective business case written in September 2020.
  • The Department spent £4bn up to October 2020, around £2bn less than forecast, due to underspending on laboratories, machines and mass testing. The total budget for 2020-21 is now £22bn with a significant expansion in mass testing planned in the remaining months of the financial year ending in March 2021.
  • 407 contracts worth £7bn have been signed with 217 public and private organisations, with a further 154 contracts worth £16bn expected to be signed by next March (this includes spend going into the next financial year). An internal government review of test and trace systems in 15 other countries confirmed that the UK approach was atypical, as although some countries had used private sector outsourcing to increase testing capacity, none had done so to increase tracing capacity, which was generally built up from existing public health expertise.
  • Connecting discrete services provided by different organisations into an effective end-to-end process has been challenging, with the initial focus on creating a ‘minimum viable process’ shifting to refining, integrating and stabilising the process so it operates reliably at scale.
  • Accountability is unclear, with the executive chair of the test and trace service reporting directly to the Prime Minister and the Cabinet Secretary, bypassing normal reporting lines within the Department.
  • There are now 593 testing sites and 15 laboratories, with plans to add a further 15 lighthouse laboratories and two high-capacity ‘mega-laboratories’ in January 2021. Testing capacity expanded rapidly in line with the public target of 500,000 available tests per day on 31 October, but the average number of tests since May has been only 68% of capacity, below the 85% expected level. The ambition is to increase testing capacity to 800,000 tests a day by the end of January.
  • Turnaround of test results peaked in June with 93% of community (pillar 2) test results provided in 24 hours, but this had deteriorated to 14% around mid-October before improving to 38% by the beginning of November. Turnaround times for hospital and care homes have consistently been about 90%, albeit measured on a different basis.
  • The Department did not plan for a sharp rise in testing demand in early autumn when schools and universities reopened, resulting in the number of tests available being limited, longer turnaround times and extra assistance being commissioned.
  • Initial problems in sharing data with local authorities have now been largely resolved, but there are a number of significant data risks to be managed pending a planned upgrade of contact tracing software scheduled for January 2021.
  • High reported levels of non-compliance with self-isolation rules represent a key risk to the success of test and trace, and national and local government have been trying to increase public engagement.

The NAO concludes by commenting that although a rapid scale-up in activity has been achieved with new infrastructure and capacity built from scratch, issues with implementation and potentially the initial choice of delivery model mean that the government is not yet achieving its objectives.

The NAO also highlights the most significant risks remaining, including in how to increase utilisation of testing capacity, manage spikes in testing demand and expand the use of local authority public health teams. There are challenges to be overcome in delivering mass testing across the country, increasing public engagement to improve compliance with self-isolation and in ensuring contracts awarded contain sufficient flexibility to respond to changing requirements at reasonable cost.

Finally, the NAO stresses the importance of embedding strong and sustainable management structures, controls and lines of accountability, addressing arrangements where accountability does not clearly align with organisational and strategic objectives in other aspects of the government’s COVID-19 response.

Alison Ring, director for public sector at ICAEW, commented: “While the need to move quickly in response to an out-of-control pandemic was always likely to prove extremely challenging, the NAO has highlighted how consequential the initial decisions made under pressure can be. 

The NAO hints (without being explicit) that the choice to exclude local public health teams and local expertise from the initial roll-out of national test and tracing was a major mistake that the government is still struggling to recover from. They also do not sound entirely comfortable with the governance arrangements for the test and trace service and intend to look at value-for-money and contract management in their second report expected in spring 2021.

Despite an eye-watering £22bn price tag, the investment in test and trace will be worthwhile if it saves lives ahead of the roll-out of vaccines and enables restrictions on our freedom and on economic activity to be lifted as quickly as possible in 2021.”

Read the full report here.

This article was originally published on the ICAEW website.

ICAEW chart of the week: public sector employment

25 September 2020: The #icaewchartoftheweek is on headcount in the public sector, which increased by 115,000 to 5,508,000 in the year to June 2020.

Chart showing change in headcount from June 2019 to 2020: NHS +88k, other health & social work -7k, education -9k, police +12k, forces +4k, civil service +11k, public admin +8k, other +8k = +115k.

Employment on a full-time equivalent (FTE) basis also increased over the last year, with an increase of 118,000 from 4,485,000 FTEs in June 2019 to 4,603,000 FTEs in June 2020.

The NHS workforce jumped by 55,000 in the first six months of 2020 and by 88,000 in the year to June as the coronavirus pandemic accelerated recruitment of health workers. The NHS is the one part of the public sector that has seen consistent headcount growth over the last decade, with 1,782,000 employees at June 2020 compared with 1,558,000 a decade ago. This has been partly offset by a fall in other health and social workers of 7,000 to 208,000 in the year to June, which is 191,000 lower than the 399,000 employed in June 2010.

Public employees working in education also fell by 9,000 to 1,487,000 in June 2020, bringing the total fall over the last decade to 198,000, driven by a combination of cuts in education funding and the reclassification of further education colleges to outside the public sector.

Police numbers (including civilian staff) have started to increase again, with a headcount of 261,000 in June 2020, up 12,000 over a year previously. However, this is still significantly below the 292,000 that were employed in June 2010. HM Forces numbers also started to increase again after a long period of decline, with the approximately 4,000 service personally added to reach 156,000 still substantially less than the 197,000 serving in June 2010.

Civil Service numbers increased by 11,000 over the year to 459,000, with Brexit being a major contributor to the increase from the low-point of 416,000 employed in June 2016, by still significantly below the 517,000 civil servants working in June 2010. Other public administration headcount increased by 8,000 to 614,000 in June 2020, down from 682,000 a decade previously.

The number of other public sector workers increased by 8,000 in the year to 541,000. This is substantially below the 1,105,000 employed in other categories in June 2010, principally because ten years ago the public sector included housing associations, Royal Mail, Direct Line, Lloyds Banking Group and Northern Rock all of which have since been reclassified to the private sector. (Royal Bank of Scotland and Bradford & Bingley remain in the public sector).

Adjusted for reclassifications, total public sector headcount is 215,000 lower than it was a decade ago, reflecting an increase of 224,000 in NHS employees and a net decline of 439,000 across the rest of the public sector.

With Brexit preparations accelerating and the NHS under severe pressure as we approach winter, it is likely public sector employment will continue to rise in the near future.

This chart was originally published on the ICAEW website.

Treasury announces extra £9.5bn for public services

14 April 2020: the Chancellor has increased the coronavirus emergency response fund to £14.5bn to cover the escalating costs of dealing with the pandemic.

Easter Monday saw Rishi Sunak announce an extra £9.5bn for the NHS and public services, adding to the £5bn already included in the emergency package announced with the Spring Budget on 11 March 2020.

This brings additional funding for the NHS and public services to £14.5bn, comprising £6.6bn for health services, £3.5bn to keep the railways running, £1.6bn for local authorities, and £0.9bn for food packages and other support for clinically vulnerable people, together with £1.9bn for the devolved administrations in Scotland, Wales and Northern Ireland.

Altogether, this brings the estimated cost of fiscal measures announced by the Government in response to the coronavirus pandemic to somewhere in the region of £95bn. In addition to the £14.5bn for the NHS and public services, £27bn has been announced in business rates discounts and small business grants, £5bn in enhancements to Universal Credit and housing benefit and £750m for charities. The costs of the employee furlough and self-employed income replacement schemes will depend on take-up, with estimates that these could cost around £40bn and £9bn respectively for their initial three-month terms.

This does not include the effect of collapsing tax revenues and higher welfare spending on the public finances, nor any potential costs from the £330bn of loans and guarantees being advanced to support business. As a consequence, the fiscal deficit this financial year is now almost certain to exceed £200bn, compared with the baseline of £55bn set out in the Spring Budget just over a month ago.

Martin Wheatcroft FCA, adviser to ICAEW on public finances, commented: “This is probably not going to be the last announcement of additional funding for the NHS and public services this year given the extraordinary challenges posed by the coronavirus pandemic. 

“It is positive that the Chancellor has made it clear that money will be made available to front-line services as needed, an important signal for budget holders conditioned by a decade of austerity to manage resources carefully, rather than to spend whatever it takes to achieve a critical objective.

“We can and will worry about the bill later, when the need for a long-term fiscal strategy to put the public finances onto a sustainable path will be more important than ever before.”

This article was originally published by ICAEW.

Health Secretary recapitalises NHS with £13.4bn write-off

3 April 2020: Surprise move puts NHS trusts into a much stronger financial position, saving them hundreds of millions in interest payments every year.

The Health Secretary Matt Hancock has announced that he is writing off £13.4bn of debts owed by NHS trusts at 1 April 2020.

These write-offs will save the NHS trusts concerned hundreds of millions in interest each year, providing an immediate financial boost to hospitals across the country. It will also put them on a sounder footing for the long-term, without the need to find cash to repay these debts in the future.

Although the transaction is described by the Government as neutral to the public finances because the loans concerned are all internal within the Department of Health & Social Care, it will increase the £130bn annual cost of the NHS going forward to the extent that interest charges and debt repayments no longer flow back to the Exchequer.

The department also announced that it is introducing new funding arrangements for the NHS with a ‘simpler internal payment system’ to help NHS trusts in responding to COVID-19.

The loans being written off principally relate to borrowing to fund deficits (interim revenue debts and working capital loans) and borrowing to finance shortfalls in capital funding (interim capital debts). ‘Normal course of business’ loans and external debts embedded in private-finance initiative (PFI) contracts will continue as liabilities of the NHS trusts concerned.

The debt write-offs will take the form of a capital contribution with outstanding loan balances at 1 April 2020 converted into equity, adding £13.4bn to the net assets of the 107 NHS trusts affected.

The pressures that the NHS is under from the coronavirus have highlighted the problems with the existing funding model and the Health Secretary has also written to NHS trusts letting them know that should they need extra cash during the coronavirus emergency that this will also be provided as an equity injection, rather than building up new debts.

Martin Wheatcroft FCA, adviser to ICAEW on public finances, commented:

“Although writing off debts owed by the NHS has no net effect on the public finances in theory as the balances are all internal to government, it will have very real-world effects on the ground. By relieving NHS trusts of a significant financial burden, the Government is putting each of them into a much better financial position to deal with the coronavirus and to invest in services for patients.

The news that funding arrangements for the NHS are being revisited is also welcome. Many of these debts arose because of an overcomplicated system of funding that meant that many hospitals were not receiving sufficient income to cover their operating costs. A simpler funding model will make a big difference to the ability of NHS trusts to manage their finances effectively and hence the quality of the health care that they can provide.”

This article was originally published by ICAEW.