Chancellor Rachel Reeves has delivered her first Spending Review to Parliament, laying out the government’s funding plans for the next three years—and offering early indications of the new administration’s economic priorities focusing on ‘renewal’.
While high-profile commitments to the NHS and defence were widely expected, it’s the substantial investment in social and affordable housing, coupled with more targeted support for pensioners, that may carry broader implications for client portfolios and intergenerational planning.
Reeves also confirmed this week that the Winter Fuel Payment will become means-tested, extending support to an additional 7.5 million pensioners. For wealth managers, this marks a more interventionist stance on welfare policy, and could signal a shift towards more progressive tax and benefit reforms down the line.
The market response—particularly in gilts—will be closely monitored as investors weigh the fiscal implications of today’s announcements. The big question now is whether further tax measures will be required in the autumn Budget to underpin this ambitious spending programme.
Here’s how market watchers and industry commentators are responding—and what it could mean for wealth management strategies in the months and years ahead.
Commenting on today’s UK Spending Review, George Brown, Senior Economist, Schroders said: “While today’s Spending Review is long overdue, it contains little new information of note for investors, given the “envelope” was set out in October’s Budget.
“Instead, a more important development has been the raft of measures announced since the local elections, confirmed in today’s statement. This is likely to lead to a wider loosening of the public purse strings which, when set against the macroeconomic backdrop, is likely to wipe out the Chancellor’s £10 billion of fiscal headroom.
“As such, Rachel Reeves will have to make a choice. On the one hand, she could tweak her fiscal rules. The IMF has suggested cutting down the number of fiscal assessments from two to one. She could also include more flexibility on defence spending, an approach the EU appears to be leaning towards.“However, the Chancellor reiterated again today that her fiscal rules were “non-negotiable”. And so, tax rises appear increasingly inevitable to fund the additional spending pledges. But even this will be tricky to achieve given the manifesto pledges not to increase many of the biggest revenue raisers.”
Lindsay James, investment strategist at Quilter said: “The Chancellor’s spending review was geared up as a defining moment for the current parliament following a decidedly challenging few months. While the overall level of spending had already been announced, today’s review spells out exactly how it is being allocated, and the main focus is on the unavoidable areas of defence and healthcare.
“At the headline level, investors have been growing increasingly cynical about government spending plans and fiscal rules. We’ve witnessed a cycle of reduced growth forecasts from the OBR, for all sorts of reasons including some that are outside the government’s control. Shrinking fiscal headroom, leading to a round of tax increases and spending cuts has caused a growth slowdown, pushing a balanced budget even further out of reach.
“Since March we’ve seen the economy hit by the impact of these tax rises. Jobs data out this week showed that payrolled employee numbers fell by a staggering 274,000 year on year, while growth forecasts have been cut for this year and next. Certainly, concern around export tariffs have been a factor, but an increased tax burden is another.
“The high level of uncertainty around the next autumn budget, including what the shortfall will be and how it will inevitably be filled with tax rises, has also been weighing on growth. Yet the pressure to increase spending has continued, and today’s spending review will have done little to quell fears that further tax rises are still to come.
“While the Chancellor laid out her plans to spend, it’s not clear where any cuts will come from. For example, a 3% real terms commitment to the NHS implies real terms cuts will be needed elsewhere, yet there was simply no mention of this.
“Aside from the NHS, there is a clear priority to see the Midlands and the North reach its economic potential through investment in transport and housing, with value-for-money investment guidelines in the Green Book re-written in order to allow for a place-based approach. This growth-centric approach is encouraging, but recent experience suggests a healthy degree of cynicism is needed about the ability to deliver large scale infrastructure projects.
“The defence commitment avoided any mention of when the 3% level would be reached, but meaningful spending on munitions and nuclear submarine production facilities will be welcome by the defence sector. Energy has seen decisive backing for nuclear with both traditional nuclear and SMRs selected for investment, while education too has enjoyed a budget uplift amounting to around 7% over 3 years.
“Defence and healthcare have dominated today’s announcements, and arguably these are areas the government had to address. Looking ahead, the UK will need to see an uplift in growth before the government can be more ambitious beyond this.”
Niall McDermott, co-manager of Marlborough’s Bond Income and Global Bond Funds, said the Spending Review was never likely to dramatically alter the direction of the UK economy as he comments: “This was basically an allocation review rather than a macro event. Most of the announcements were just playing around the fringes while there’s little room for manoeuvre.” he said.
“The envelope doesn’t change, as the total spend was set ahead of time with the spring fiscal statement. So this was really about divvying up between government departments that have been jousting to not have their budgets squeezed.
“That being the case, market reaction was muted. In essence, most of the Review wasn’t going to be material for the overall direction of the UK economy – and gilt markets basically ignored it.
“Autumn is likely to matter more. For now, the UK remains on a tightrope, with Reeves balancing keeping promises to not increase taxes on the one hand with spending needs on the other.
“Ultimately, our view is that her fiscal rules are likely to end up becoming a headwind to growth. They leave such narrow room for manoeuvre that tax hikes look more likely.”
Oliver Faizallah, Head of Fixed Income Research at Charles Stanley, comments: “In the run up to the update from UK Chancellor Rachel Reeves on the allocation of funds, UK gilt yields edged slightly higher. While the spending review was not expected to unveil any new spending, it did put the spotlight on strained public finances when discussing how existing funds will be allocated. Markets remain nervous about the potential for either higher taxes or an increase in borrowing in the future. An increase in taxes may be seen as more ‘market friendly’, but would be politically damaging, while an increase in borrowing (funded through gilt issuance) would put further pressure on already elevated gilt yields.
“Following the spending review, there was a rally in longer dated gilt yields, with the UKT 10 year and 30-year gilt at 7bps in the hour following the announcement. The rally in gilt yields had nothing to do with the spending review but came on the back of a lower-than-expected CPI print in the US. This highlights the still high correlation of UK gilts to US treasuries, and while fiscal concerns in the UK will no doubt keep gilt yields higher for longer, daily volatility in gilt prices will also come from data and decisions from the other side of the Atlantic.”
Matthew Amis, Investment Director, at Aberdeen commented; “Today’s spending review was not a full-blown fiscal event like an Autumn Budget or even a Spring Statement, however after the last couple of years, any fiscal event leads to nervousness across the gilt market.
Going into today, the market was interested in two things; are tough decisions being made on day-to-day spending and will the investment plans generate much needed growth? After all growth and positivity is what the UK needs.
The answer is ‘enough for now’. Today’s Spending Review offered just enough detail and security for the gilt market to focus away from the UK’s fiscal situation until the Autumn at least.
What today’s statement doesn’t do is make the balancing act facing Chancellor Reeves in the Autumn any easier. Scrutiny will be high and any mis-step from the Chancellor will be reflected in higher gilt yields. Big decisions are required from Chancellor Reeves in the Autumn, all of those decisions will be made somewhat easier if gilt yields head lower from here.”
