UK's Reeves sets out over 2 trillion pounds of spending to revive government

By David Milliken and Elizabeth Piper

LONDON (Reuters) -British finance minister Rachel Reeves prioritised spending on health, defence and infrastructure projects to drive economic growth in a bid on Wednesday to reboot the Labour government's offer of a brighter future to increasingly disillusioned voters.

Setting out day-to-day budgets for government departments from 2026 to 2029 and investment plans out to 2030, Reeves said the priorities of her spending review were those of the "working people" whose interests Labour has said it will focus on.

Keen to promote capital spending on housing, transport and cleaner energy projects, Reeves wanted to show the Labour government was delivering on its plan for change. But with more money going to health and defence, day-to-day spending in other areas of government will be squeezed.

"The priorities of this spending review are the priorities of working people - to invest in Britain's security, in Britain's health and to grow Britain's economy so that working people are better off," she told a noisy session of parliament.

Reeves set the overall total for spending in an October budget, financing her plan with the biggest tax rise in a generation and looser fiscal rules that make it easier for her to borrow for long-term investment.

Her choices must start paying off quickly if Labour is to achieve its goals of boosting Britain's growth rate and improving the quality of overstretched public services.

She said the government's departmental budgets would grow by 2.3% a year in real terms, offering a further 190 billion pounds ($257 billion) for day-to-day spending on public services compared with the previous Conservative government's plans.

Total spending over the period will exceed 2 trillion pounds, though much of the money has been front-loaded. Reeves' 2.3% figure refers to average annual spending growth since 2023-24, while after 2025-26 - the period covered by the spending review - real-terms growth slows to 1.5%.

Departments with above-average spending settlements include defence, where spending will rise 3.6% a year in real terms if 2023-24 is used as the baseline, and the health service, which accounts for nearly 40% of day-to-day government spending and got a 2.8% rise.

"Funding increases for health and defence are substantial. The corollary, of course, is a less generous settlement elsewhere," said Paul Johnson, director of the Institute for Fiscal Studies.

CUTS FOR FOREIGN AID, ASYLUM SEEKERS

Most areas of government will see at least some real-terms increase, including a 2.3% annual rise in policing resources.

But Britain's foreign ministry will see a 5% annual fall - reflecting an earlier decision to curb foreign aid funding - and interior ministry functions excluding policing will see a 4.5% annual cut, which the government hopes to fund in part through a cheaper system for handling asylum seekers.

All government departments will be expected to deliver at least 5% efficiency savings including at least a 15% reduction in administrative costs.

Financial market reaction was muted, as the outline spending figures were already known. Many economists already expect Reeves to have to raise taxes again later this year and note that she has little leeway to deal with unexpected costs.

"Considering the plans require large efficiency savings, departments may find it hard to stick to the targets. What's more, the government has offered no guidance on how it would adapt its spending plans if - as expected - NATO significantly raises its target for defence spending," Andrew Goodwin, chief UK economist at Oxford Economics, said.

Since its sweeping election victory last July, Labour has seen its popularity slide, and Reeves herself has seen her ratings slump after the government introduced cuts to winter fuel payments for pensioners and to disability benefits.

In October, the government placed the main burden of tax rises on employers and boosted workers' rights - something the opposition Conservatives said was to blame for the jobless rate hitting its highest in nearly four years.

The Labour government has since made a partial U-turn on winter fuel payments, but the right-wing Reform UK party, led by former Brexit campaigner Nigel Farage, is now ahead of Labour in opinion polls and outperformed it in English local elections last month.

Conservative finance policy chief Mel Stride said Reeves' plans were unachievable without further tax rises at an autumn budget.

"She will have to come back here in the autumn with yet more taxes, and a cruel summer of speculation awaits," he told parliament.

Among the projects announced on Wednesday was a 39 billion-pound 10-year programme to build lower-cost housing - almost doubling existing annual support.

Other previously announced proposals included 86 billion pounds for research and development, 14 billion pounds for a new nuclear power station and more than 16 billion pounds for regional public transport.

($1 = 0.7386 pounds)

(Additional reporting by Muvija M, Sachin Ravikumar, James Davey, Suban Abdulla, Andrew MacAskill and Alistair Smout; Writing by David Milliken and Elizabeth Piper; Editing by Hugh Lawson, Aidan Lewis)