The UK Government is preparing for further departmental spending cuts as the Chancellor signals a tougher approach to public finances, warning that ministers will face “hard decisions” over competing priorities at next year’s spending review.
The warning exposes the growing tension at the heart of the Government’s economic strategy: funding higher defence spending and protecting key public services while attempting to control borrowing, ease the cost-of-living crisis and contain a rapidly rising welfare bill.
Defending his first Budget against criticism that it lacked ambition, the Chancellor insisted it represented a significant intervention. “I’d fundamentally contest that this is not a significant Budget,” he said.
But opposition politicians and leading economic think tanks questioned whether the measures would deliver meaningful growth or address Britain’s deeper fiscal challenges.
Conservative leader Kemi Badenoch dismissed the Budget as “not good enough, not strong enough, not bold enough”, while Reform UK Treasury spokesman Robert Jenrick branded it a “nothing burger”.
The Institute for Fiscal Studies (IFS) said the package contained a “raft of fiddly measures” unlikely to shift the dial on growth, while the Resolution Foundation argued that the Chancellor had “spread the jam thin”.
Defence spending puts pressure on departmental budgets
The immediate financial challenge centres on the Government’s commitment to increase defence spending to 3% of economic output by 2030 and cover a £4.7 billion shortfall in its defence investment plan.
According to the Budget documents, the shortfall will be funded through the reprioritisation of capital budgets. Government departments will be required to reduce capital spending by 1% annually between 2027-28 and 2029-30, raising approximately £3 billion.
The remaining £1.7 billion will come from an unallocated contingency in the Treasury’s capital reserve.
Speaking after the Budget, the Chancellor acknowledged that meeting the defence commitment required difficult choices within Government. He told Good Morning Britain that funding the investment plan involved “hard choices” and “reprioritising within Government”.
He also signalled that the same discipline would shape next year’s spending review, when ministers will determine how limited resources are allocated across departments.
“My Cabinet colleagues are demonstrating that they can also exert fiscal discipline and spending control, and we will take that into the spending review,” he told Bloomberg.
The review, he added, would be framed by the Government’s long-term national priorities, with ministers required to make judgements about which commitments should receive funding.
Public services face a tougher spending settlement
The scale of the potential squeeze was underscored by Office for Budget Responsibility chairman Jonathan Haskel, who warned that departments outside defence, health and education could face real-terms spending cuts of around 2.6% over the final three years of the forecast period if ministers meet their commitments in protected areas.
The figures illustrate the difficulty of reconciling ambitious spending promises with limited fiscal headroom. Even where overall departmental budgets rise, inflation and rising demand can leave public services facing pressure on their purchasing power.
The IFS warned that the Government’s borrowing reduction plans had been pushed further into the future, leaving their delivery dependent on spending settlements that have yet to be finalised.
Its director, Helen Miller, said the Budget contained little likely to transform growth, adding that history provided reasons to question whether tight spending plans for later years would ultimately be maintained.
Welfare bill emerges as another fiscal fault line
Welfare spending presents a further challenge. The OBR expects the benefits bill to rise substantially, from around 10.5% of gross domestic product to 11.5%, intensifying pressure on the public finances.
The Chancellor rejected suggestions that ministers had simply postponed difficult decisions on welfare reform, pointing to changes including the reinstatement of face-to-face assessments and adjustments to Universal Credit intended to avoid forcing people to identify themselves as too sick to work.
He insisted the benefits bill would fall, arguing that an ever-expanding welfare budget was neither good for Britain nor consistent with progressive politics. Treasury officials subsequently clarified that he had not committed to a specific timetable for reducing spending.
He also ruled out crude benefit cuts, warning that such an approach would place excessive pressure on people already struggling with living costs.
Conservative shadow chancellor Andrew Griffith argued that welfare spending should be considered as part of efforts to fund defence, questioning why the Government was struggling to find additional money for military commitments while the benefits bill continued to grow.
Budget faces questions over growth and living standards
The wider economic strategy has also drawn criticism over the effectiveness of cost-of-living support, including a £100 energy payment for households in council tax bands A to D.
Resolution Foundation chief executive Ruth Curtice described the Budget as relatively small compared with the challenges facing Britain, while interim chief economist Greg Thwaites questioned whether the energy payment was sufficiently targeted at households most in need.
The Government must now convince voters and markets that its spending commitments can be delivered without further borrowing or a damaging deterioration in public services.
With defence, welfare and living standards competing for limited resources, next year’s spending review is shaping up to be a critical test of the Chancellor’s fiscal credibility. The promise of difficult decisions may prove easier to make than to implement.
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