(Bloomberg) -- UK Chancellor of the Exchequer Rachel Reeves told ministers to seek savings amounting to 5% of their departmental budgets, as a difficult fiscal backdrop forces Keir Starmer’s Labour government to grapple with tough choices on public spending.
Kicking off the government’s latest spending review — which will allocate budgets for 2026 onwards, and which is expected to conclude in June — Reeves said she would take an “iron fist” to waste and that she expected ministers to stop spending on areas that don’t contribute to the government’s main priorities.
“We will inspect every pound of government spend so that it goes to the right places,” Reeves said in an e-mailed statement late on Monday, saying that “totally rewiring how the government spends money” would help Labour deliver on its election promises. On Tuesday, she told broadcasters that she had “no doubt that we can find efficiency savings within government spending of 5%.”
The spending review is another politically tricky moment for Starmer, who faced a backlash from his own cabinet at the last spending round in October when ministers pushed back on allocations that they felt were too miserly. This review is set to be even tougher because Reeves has only allocated an average 1.3% real terms increase in overall departmental spending for the period, meaning ministries outside of priority areas like health, education and defense are likely to face cuts.
Spending reviews cover day-to-day departmental spending and capital expenditure that in the current year are set to total about £600 billion ($766 billion).
Reeves will tell departments that they “cannot operate in a business-as-usual way” and that their spending plans will be subject to a “line-by-line review,” according to the Treasury statement. The government’s priority areas for spending include boosting economic growth, fixing the National Health Service, fighting crime and investing in clean energy.
Asked on Tuesday whether she’d be willing to provide funding for an assisted dying service — after MPs voted in favor of the idea, and which is now subject to further parliamentary scrutiny — Reeves declined to say.
“The government is neutral on the issue,” Reeves said in an interview with BBC Radio 5 Live. “The committee stage and the scrutiny of the bill will answer those questions.”
Another pressure impacting the spending review is the government’s tight fiscal position, which gives Reeves little room for maneuver. Some economists predict that the Office for Budget Responsibility, the government’s official forecaster, will say that Reeves is on course to breach her main fiscal rule when it delivers its next set of fiscal forecasts in the spring, due to a deterioration in the public finances linked to higher borrowing costs and a weaker growth outlook.
Should that occur, Reeves would seek to rectify the government’s position through spending cuts, people familiar with the matter have said.
Further complicating matters is that Starmer and Reeves have promised to set out a time-line for when the government will spend 2.5% of GDP on defense, and Reeves has warned that hitting that target would mean eating into other departments’ budgets.
Speaking at the CBI’s annual conference last month, Reeves said that the overall spending envelope had been set for this Parliament and that ministers would have to live within their means. She also said she wouldn’t be coming back with more borrowing or more taxes, after her controversial first budget hiked levies by more than £40 billion ($51 billion) and spurred a wave of criticism from businesses.
--With assistance from Andrew Atkinson and Alex Wickham.
(Updates with Reeves comments on assisted dying from seventh paragraph.)
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