Rachel Reeves will need to wield the axe and make nearly £5bn worth of cuts to balance the books in the wake of Labour’s spending review, new analysis has revealed.
It comes as the chancellor will vow to “invest in Britain’s renewal” as she announces funding until the next election in 2029 after a bitter cabinet civil war over what was being dubbed “austerity 2.0”.
Top of an eyecatching list of capital investments is £39bn for a 10-year settlement on social housing.
But experts have warned Labour will have to make billions of pounds of cuts to ensure Reeves can fulfil her spending plans — with areas such as housing, policing and border control expected to be in the line of fire.
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The revelation comes after the Treasury was forced to impose a squeezed budget on the Home Office after a row over the settlement. Yvette Cooper’s department is expected to take the brunt of spending cuts, despite being tasked with delivering three of Sir Keir Starmer’s flagship pledges, with fears the Home Office may be forced to cut police numbers.
Savings are also expected to come from tighter budgets on local government, foreign aid, culture and the civil service.
As part of the spending review, the chancellor will announce plans for billions of pounds of investment in projects across the UK that will create jobs, prosperity, and put more money in people’s pockets.
The chancellor will also insist that the detailed financial plans come after the Autumn Budget and Spring Statement fixed the foundations of our economy to deliver stability. “The choices in this spending review are possible only because of the stability I have introduced and the choices I took in the autumn,” she will say.
Ahead of her statement Ms Reeves announced a £39bn 10-year plan for social housing investment in what was seen as a big win for deputy prime minister Angela Rayner. Councils and housing associations had been pressing for the investment and certainty to prevent a crisis in the sector.
Other investments will include £15.6 billion for public transport projects in England's city regions; £16.7 billion for nuclear power projects, including £14.2 billion for the new Sizewell C power plant in Suffolk; £680 million in funding for new border police and surveillance; an extension of the £3 bus fare cap until March 2027; and £445 million for upgrades to Welsh railways.
In a note of defiance to critics including fellow minister, Ms Reeves will add: “I have made my choices. In place of chaos, I choose stability. In place of decline, I choose investment. In place of retreat, I choose national renewal.
“These are my choices. These are this government’s choices. These are the British people’s choices.”
However, the analysis, carried out by researchers at the House of Commons library commissioned by the Lib Dems, found that unprotected departments — which excludes NHS England, the core schools budget and defence — could see real-terms cuts worth nearly £5 billion in total by 2028/29.
The calculation, based on Reeves’ promise that will not hike taxes, was made before the chancellor committed a further £1.25bn a year to reversing cuts of winter fuel payments to pensioners, a U-turn which was confirmed on Monday. It also does not take into account another potential U-turn on ending the two child benefit cap, which could cost a further £3bn.
While Ms Reeves has insisted she is not bringing in cuts, the chancellor has been in a battle with major departments including deputy prime minister Angela Rayner’s Ministry of Housing, Communities and Local Government (MHCLG) and the Home Office.
Ms Reeves only settled with Ms Rayner on Sunday evening, a week after a Treasury deadline for agreement had been originally set. It is understood there are ongoing concerns about a squeeze on finances for social housing and local government.
Meanwhile, the Home Office was locked in talks with the Treasury until Monday evening, when Downing Street said the talks had come to end.
It is not clear whether the Home Office reached a deal with the Treasury, or whether the Treasury brought an end to negotiations without reaching a deal both sides were happy with.
But on Tuesday Downing Street was forced to deny that Ms Cooper is on the verge of resigning over the settlement she received in the Spending Review. Asked if the home secretary was on 2resignation watch”, the prime minister’s official spokesman said: “No”.
The Independent understands that funding allocations following the settlement with the Treasury have not yet been done. But Home Office sources didn’t rule out looking at cutting police numbers, despite warnings from police chiefs that Sir Keir will not be able to deliver his flagship pledge to cut crime without serious investment.
Only health, defence and the schools budget are protected from cuts in what Ms Reeves’.
Major departments could be in line for large cuts, with concerns that unprotected elements of the education budget covering areas such as adult education and apprenticeships could face real-terms cuts worth over £685 million by 2028-29.
Meanwhile councils, who are responsible for social care provision, could see their central government funding squeezed even further, with potentially £350 million in real-terms cuts to the MHCLG across the next three years.
DEFRA and the Home Office could also be hit with funding cuts ranging around £110 million and £490 million over the next three years respectively. It comes after several police chiefs said any spending cuts could have “far reaching consequences” with some services already having been “pushed to the brink”.
The analysis used the Office of Budget Responsibility (OBR)’s assumptions from the Spring Statement about the overall real-terms cuts faced by unprotected government departments to estimate the impact on different budgets.
That comes off annual real-terms cuts of 0.8 per cent pencilled in by the OBR, effectively taking the budgets of these departments from around £216.5 billion in 2025-26, down to roughly £211.5 billion in 2028-29, once inflation is taken into account.
The analysis was commissioned by the Liberal Democrats but the House of Commons Library is politically impartial.
Spokesperson Daisy Cooper said: “After years of shameful Conservative neglect, it is household budgets and people relying on these services for vital support who are bearing the brunt. From social care to neighborhood policing, this Labour government is at risk of failing to deliver the change that people were promised.
“The best way to avoid this devastating spending squeeze is to generate meaningful growth, but the chancellor is acting more as a handbrake rather than an accelerator.”
Meanwhile, Tory shadow chancellor Mel Stride warned that the spending review would herald future taxes, even if Ms Reeves is holding off from imposing them now.
He said: “We’ll hear slogans, spin and self-congratulation - but not the truth. Don’t be fooled. Behind the spin lies a dangerous economic gamble that risks the country’s financial future.”
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