The UK Government has concluded its first Spending Review since 2021, which sets out the departmental limits for spending over the medium term. This Spending Review sets resource (day to day) spending limits up to 2028-29, and capital (investment) spending limits up to 2029-30.
At the 2024 Autumn Budget, the UK Chancellor set out the broad “spending envelope” which sets out the overall UK government spending profile. The Spending Review makes departmental allocations within this overall envelope. The UK Government has described the spending review as “zero-based”, which means rather than take current levels of spending as the starting point, all commitments have been assessed for value for money. According to the UK government, this is the first time for 18 years that such an approach has been taken for a Spending Review.
The decisions taken by the UK Government will contribute to the resources available for the Scottish Budget in the coming years. This blog will provide an overview of the key announcements and set out what we know about the implications for Scotland.
Context for the Spending Review
Alongside the Autumn Budget in 2024, the UK Government announced two fiscal rules which would limit spending over the medium term. These two rules were announced while Labour was in opposition and set the parameters for the overall spending envelope.
The first rule is that day-to-day, or resource, spending must be met by revenues from taxes and other income, while the second rule is that debt must be falling compared to GDP by 2029/30. In other words, the UK Government will only be able to borrow to cover investment spending, and this borrowing will be limited by the size of the economy.
The UK Chancellor also announced a change in the specific measure of public debt used for the fiscal rules. This change could increase the potential investment spending by £53 billion according to the Institute for Fiscal Studies.
Aside from the rules around borrowing, the UK Government has already made several policy commitments which will impact resource allocations in the coming years. Significantly, on 2 June the UK Government published its strategic defence review, which sets an ambition to increase defence and intelligence spending to 2.6% by 2027, and to 3% in the next Parliament “when fiscal and economic conditions allow”.
What are the headline messages in the Spending Review?
In keeping with many recent fiscal events, several of the highest profile decisions were leaked or announced prior to the Spending Review concluding. In addition to the increasing defence spending, there have been announcements of £15.6 billion of infrastructure investment in metro mayor regions (announced a week earlier on 4 June), an increase in the availability of free school meals in England (also announced on 4 June), a partial U-turn on the cut to the winter fuel allowance in England, which will now be available to 75% of pensioners (announced on Monday 9 June), a £750 million investment in a supercomputer in Edinburgh (announced on 10 June), £14.2 billion for the Sizewell C nuclear power plant (announced on 10 June) and that support would be provided to the Acorn Carbon Capture, Utilisation and Storage (CCUS) project in Scotland (first reported on 10 June).
In the Spending Review statement, the UK Chancellor highlighted her 4 priorities:
- Increasing defence spending to 2.6% of GDP from 2027. This includes a £600 million real terms increase in the budget for intelligence agencies.
- A £29 billion real terms increase in NHS resource spending by 2028-29, equivalent to an average real terms increase of 3% each year. Capital funding for the health service also increases by £2.3 billion in real terms by 2029-30 (a 20% real terms increase over the spending review period).
- Aiming to drive economic growth, the Spend Review includes plans for £120 billion additional capital spending compared to the Spring Budget 2024, including £39 billion for a 10-year affordable housing programme, the £15.6 billion for infrastructure investment in metro mayor regions announced last week, and £14.2 billion for the Sizewell C nuclear power station.
- A £3.25 billion Transformation Fund aims to achieve efficiencies through public sector reform, shifting toward a more preventative approach. This is supported by investment in digital and artificial intelligence across public services.
With respect to Scotland, the Spending Review makes several announcements of UK government spending directly in Scotland:
- £8.3 billion investment in GB Energy over the course of this UK Parliament term, which will be invested across the UK by the Aberdeen headquartered public body.
- That “development funding” will be provided for the Acorn CCUS project, with a final investment decision due to be taken later in the UK Parliament term.
- A new “local growth fund” which will invest in deprived communities across the UK. The level of Scottish funding from this will be “the same overall level in cash terms as under the UK Shared Prosperity Fund in 2025‑26”
The Spending Review also confirmed a number of commitments such as to City Region growth deals, investment zones and green freeports.
Alongside the Spending Review, the UK Government also published the findings and actions from the Green Book Review. The Green Book is guidance on the costs, benefits and risks of investment decisions. There had been a perception that this methodology had a bias towards developments in London and the South East. The UK Government states that “The review has not found conclusive evidence that the methodology set out in the Green Book is itself biased towards certain regions”, but does suggest issues to be addressed including insufficient emphasis on place-based objectives, and ineffectiveness at assessing transformational change.
What impact does this have on public finances in Scotland?
In the current financial year, there are only minor changes which result in an additional £7 million in funding compared with what had previously been allocated for 2025-26. Total resource and capital funding through the block grant in 2026-27 will increase by £1.7 billion compared to 2025-26 (3.4% in cash terms), by a further £1 billion in 2027-28 (2.0% in cash terms), and by a further £1.3 billion in 2028-29 (2.4% in cash terms).In preparing their recent economic and fiscal forecasts last month, ahead of the outcome from the Spending Review, the SFC noted that while we know the overall spending envelope, how this is allocated across reserved and devolved areas could have an impact on the funding available to the Scottish Government:
We have assumed that spending in devolved areas grows broadly in line with planned total growth in departmental budgets, with an adjustment to capital spending for announcements on defence spending. However, should the UK Government choose to allocate less to devolved areas, such as by further prioritising defence, it will result in funding being lower than we forecast.
The Fraser of Allander Institute published a blog comparing these block grant allocations to the recent Economic and Fiscal Forecasts published by the SFC in May. This comparison shows that resource funding is lower than had been assumed in every year of the forecast; the difference grows to around £600 million by 2028-29. Capital funding is nearly £300 million higher than assumed in 2026-27, but lower in the later years of the forecast. Financial transactions are slightly higher throughout the forecast, but this is not enough to offset the lower than anticipated capital funding.
The SFC will publish an updated set of forecasts later this month, alongside the Scottish Government’s Medium-Term Financial Strategy. This will reflect the impact of the UK government’s Spending Review and any policy decisions taken by the Scottish Government.
In terms of a specific outcome for Scotland, the Scottish Government has pledged to provide financial support to the Acorn CCUS project in Scotland, provided this project was supported by the UK Government. In the 2025-26 Programme for Government, the Scottish Government stated that:
The Scottish Government has previously committed up to £80 million to make this happen if the UK Government, in turn, made the commitments necessary for the project to progress. Given the importance of this project for the Scottish economy, given its place at the very heart of the green reindustrialisation that is my ambition, and I trust the ambition also of all parties in this chamber, my government is now willing, as part of a wider package of investment in industrial transformation, to remove that cap and increase the amount of Scottish funding that is available to make Acorn a reality should the project be given the go ahead by the UK Government.
Now that the Spending Review has confirmed this support from the UK Government (albeit without providing the detail on the timeline of amount of the investment), there will be questions about how much support the Scottish Government will provide, and when.
Reaction to the Spending Review
The Scottish Government express their concern that Scottish block grant funding is set to grow less than the average of UK departments. The Fraser of Allander Institute (FAI) notes that while the spending review provides a total of £9.1 billion in additional Barnett consequentials, this is compared to a hypothetical scenario of no growth in block grant funding. FAI state that:
“A much more insightful – though perhaps less cheery – conclusion from looking at the SFC’s forecast is that by 2028-29, funding will be £0.7 billion lower than their central estimate published on 29 May.”
The Institute for Fiscal Studies noted that while the headline figures suggest an increase in departmental budgets over the parliament, the picture is more nuanced, explaining that:
The crux is that most departments will have larger real-terms budgets at the end of the parliament than the beginning, but in many cases much of that extra cash will have arrived by April. Eight departments will actually see cuts to their budget between this year and the end of the parliament. This is not an austerity Spending Review, though much of the government’s largesse, such as it is, was focused on the first two years of the parliament.
The Institute for Public Policy Research (IPPR) welcomed significant increases in infrastructure spending but warned that other pressing issues had been left unresolved:
There are much-needed big increases in investment in infrastructure, especially transport and housing, which will make a huge difference to the economy. […] But in other areas we have yet to hear how the government will solve the big challenges facing the country: social care, universities and local authorities all face tough years ahead.
Similar concerns about the day-to-day impact of the review were raised by the New Economics Foundation, which highlighted that while capital spending was welcome, it would not be enough to improve living standards:
While more money for new housing and energy infrastructure is very welcome, capital spending alone won’t improve people’s living standards. […] The government can’t cut its way out of this mess. It must consider freeing itself from the self-imposed fiscal rules that continue to hold us all back.
The Tony Blair Institute for Global Change expressed strong support for the increased investment in technology and the digital economy:
The announcement of £86bn for science and technology across the UK has the potential to unlock the green power, drug discovery and scientific breakthroughs needed for this country’s future. […] [It is] a vital step forward in building a thriving tech ecosystem.
What’s next in Scotland?
Now that the Scottish Government has clarity on the block grant position for resource funding until 2028-29 (and to 2029-30 for capital), the Scottish Government’s medium term financial strategy can set out with greater certainty what the funding position will be for Scotland over the next five years. This is expected to be published on 25 June, and will be accompanied by a Fiscal Sustainability Delivery Plan.
Later in the year the Scottish Government also plans to update its Infrastructure Investment Pipeline, and is considering its approach to the next Scottish spending review.
The Scottish Fiscal Commission will also provide an update to the recent Economic and Fiscal Forecast to reflect these updated block grant allocations.
Andrew Feeney-Seale, Senior Researcher, Financial Scrutiny Unit, and Sarith Fernando, Economic Futures Placement Student