Rachel Reeves cheered beleaguered Labour backbenchers with record investment in her spending plans as she unveiled major boosts for the NHS, social housing and defence.
In her long-awaited spending review, the chancellor also promised to save £1bn by closing all asylum hotels as she took aim at Nigel Farage and Reform.
But experts warned that she will have to break her manifesto pledge not to raise taxes or increase borrowing much further to pay for her promises.
In a damning assessment, Paul Johnson, director of the Institute for Fiscal Studies (IFS), said: “The chancellor’s speech was full of numbers, few of them useful.”
In particular, there were concerns over how savings will be made on housing asylum seekers amid a surge in small boat crossings, and there were questions over how pay rises for public sector workers will be met.
The chancellor said that across the review period – lasting until 2028-29 for day-to-day spending and 2029-30 for capital investment – departmental budgets would grow 2.3 per cent a year in real terms.
But that has been front-loaded by the cash injections made since Labour took office, meaning that from 2025-26 the increase is a more modest 1.5 per cent on average.
And the scale of the extra spending on the NHS in England – which will increase to £226bn by 2028-29, equivalent to 3 per cent annual increases – means squeezing other areas.
The chancellor’s speech was cheered by Labour backbenchers but elsewhere there were concerns, with Labour mayor Sir Sadiq Khan expressing disappointment over London’s settlement.
According to the IFS, eight departments were left facing real-terms cuts to their budgets, potentially fuelling further cabinet rows after tetchy negotiations saw a stand-off to the final day with home secretary Yvette Cooper.
Her department is facing some of the biggest cuts, with a 2.2 per cent real terms loss by the end of the parliament. Police chiefs lashed out, saying the increase of 1.7 per cent over the next three years was a “huge blow” that would leave forces struggling to meet their pledge to recruit 13,000 neighbourhood officers.
Cash to expand free school meals meant that the schools budget was “tight” while the Department for Environment, Food and Rural Affairs (Defra) and Department for Culture, Media and Sport (DCMS) are facing “outright budget cuts”, according to the IFS.
Meanwhile, questions were being raised over how Ms Reeves will meet the pay demands of public sector workers after telling government departments that increases will need to be funded from their budget settlements. Already, resident doctors are threatening to go on strike if the government fails to meet their demands for a 29 per cent rise.
Former government economist Jonathan Portes warned the spending outlined by Ms Reeves meant tax rises were “very likely”.
He said: “At present it looks very likely indeed that the spending totals today will mean that taxes need to go up in October so that the chancellor can meet the fiscal rules (in particular the target of balancing the current budget).”
Mr Portes suggested Ms Reeves may target savings, pensions and fuel duty. Meanwhile, the spending review allows local government to increase council tax above inflation by 5 per cent annually.
Mr Johnson suggested that the £445m investment in Welsh rail infrastructure, £14.2bn for the Sizewell C nuclear plant in the energy budget and extra funding for defence will mean Ms Reeves will have to reconsider her tight rules on borrowing.
He said: “If the government insists on accumulating the extra spending it’s planning over the full parliament, it seems only fair to also draw attention to the £140bn of extra borrowing we’re forecast to do over the same period. That borrowing incurs a cost in the form of additional debt interest – and one that’s bigger than it was a year ago.”
However, the chancellor insisted that she would meet all the government commitments with no extra tax or borrowing because of the “tough decisions” she made in her Budget last November.
In a defiant 40-minute speech, which appeared to be an attempt to answer critics from within her own party, she insisted: “My choices are Labour choices.”
It followed weeks of wrangling with other cabinet ministers, including deputy PM and housing secretary Angela Rayner and Ms Cooper, as they sought to avoid major cuts in their departments.
Denying her approach is “austerity 2.0”, Ms Reeves said: "This is a spending review to deliver the priorities of the British people: security – a strong Britain in a changing world. Economic growth – powered by investment and opportunity in every part of Britain.
"And our nation's health – with an NHS fit for the future. I have made my choices. In place of chaos, I choose stability. In place of decline, I choose investment.
"In place of pessimism, division and defeatism, I choose national renewal."
The chancellor took aim twice at Mr Farage in her speech, saying he should spend more time focusing on the priorities of the British people and less time in the Westminster Arms pub, as Labour continues to face the threat of the rise of Reform UK.
But opposition politicians were quick to criticise her plans.
Tory shadow chancellor Sir Mel Stride told MPs that Wednesday's spending review was a "fantasy" and "not worth the paper that it is written on". He warned: “She knows that she will need to come back here in the autumn with yet more taxes, and a cruel summer of speculation awaits.”
Liberal Democrat Treasury spokesperson Daisy Cooper MP said: “Behind the smoke and mirrors is a potential black hole for social care as local government budgets remain at breaking point. Putting more money into the NHS without fixing social care is like pouring water into a leaky bucket.”
Wealth fund managers also warned of tax rises leading to a flight of millionaires from the UK.
Head of investment analysis at AJ Bell, Laith Khalaf said: “Attention will now turn to what tax rises might be in the post”.
And Nigel Green, the chief executive of deVere, said: “Reeves is spending money she hasn’t got– and the tax reckoning will come this autumn.
“There’s simply no other path. The UK is already heavily taxed, growth is flat, borrowing costs are high, and the global appetite for gilts is thinning. The autumn Budget is where the axe will fall.”
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