Spending Review: The Implications for Economic Development, and Economic Growth

Upon being announced as the Labour Chancellor, Rachel Reeves set out a mantra that economic growth would be central to the new government’s decisions. Her first budget established her fiscal rules, which created a framework that allowed for greater levels of capital expenditure to be funded. Yesterday’s Spending Review set out where this capital headroom would be allocated.

Macro Position

The economic growth element remains an integral part of the logic chain. The capital to be invested will be funded through borrowing, and the proceeds of growth are supposed to fund the repayments.

Over the past year, however, the geopolitical environment has deteriorated to the extent that the most significant increases in government capital expenditure will occur in defence (up 7.3%). Transport (up 3.9%) and energy security (up 2.6%) are two other areas where capital expenditure is expected to rise significantly. Housing, another focus of the Spending Review, does not directly involve government capital expenditure.

The day-to-day resources to manage expenditures will be limited. Over the period to 2029, the most significant increases in expenditure are expected to be in science, innovation and technology (up 7.9%) and health and social care (up 2.8%). Health and social care will account for nearly half of all government operational expenditure by 2029. Importantly for economic development professionals, there will be shrinking budgets at, amongst others, MHCLG (down 1.4%)  the Department for Business and Trade (down 1.8%), and the Department for Environment, Food and Rural Affairs (down 2.7%).

Local government, important to many of our members, can gain a 1.1% increase in day-to-day expenditure after inflation if they elect to take the additional headroom provided to increase Council Tax.

In terms of economic growth, the big bets are on innovation to drive future prosperity, supported by improved transport connectivity and housing that is more closely linked to areas with growth potential.

Economic Development

For economic development professionals, the approach will necessitate a shift in activities. In England, the Shared Prosperity Fund will conclude at the end of 2026, to be supplanted by a Local Growth Fund. While details of this fund have yet to be disclosed, the emphasis will remain on Mayoral Combined Authorities, with the Spending Review assuring that the Local Growth Fund will encompass ‘a 10-year capital settlement from 2026-27 to 2035-36, for specific mayoral city regions in the North and Midlands with the highest productivity catch-up and agglomeration potential’.

A new initiative will build on the growing recognition that a hyper-local approach is necessary to address locations where deprivation is most entrenched. A programme aimed at 350 small neighbourhoods will be launched in England.

The government is also establishing a Growth Mission Fund to support local economic growth directly. This fund will invest £240 million of capital from 2026-27 to 2029-30 in projects that enable local job creation and the economic regeneration of local communities. It is unclear whether this is an England-only scheme, and there is an expectation that this will at least partly link into the Industrial Strategy, which will also be published this month.

What remains unclear with England’s shift away from the Shared Prosperity Fund is whether any business support and account management activities will be directly funded at the local level. The iED recognises the importance of this in maintaining relationships with companies that can benefit from, for instance, the wider government growth initiatives in innovation and those priority sectors within the Industrial Strategy. Any growth will rely on the participation of businesses across the UK, and local business support programmes have a significant role to play in unlocking that.

The shift in England away from the Shared Prosperity Fund is likely to lead to further differences in economic development programmes between England and the devolved administrations. Shared Prosperity funding will continue to be allocated to the devolved administrations at the same levels, with each having the discretion to determine its approach.

Industrial Strategy

The spending review has been published ahead of the Industrial Strategy, but wider announcements already made do start to inform its likely trajectory.

The eight sectors in the Modern Industrial Strategy Green Paper are again referenced in the Spending Review (advanced manufacturing, clean energy industries, creative industries, defence, digital and technologies, financial services, life sciences, and professional and business services). It is now clear that these sectors will be the focus of activity.

Statements in the Strategic Defence Review suggest that the reshoring of supply chains is a priority for the Government in all sectors, not just defence. It is also clear from the significant increases in innovation expenditure that proposed activities will align with the sectors earmarked as priorities.

In terms of the priority sectors, the Government has already published more details on its clean energy aspirations, and a defence industrial policy will now follow the Strategic Defence Review. The Spending Review sets out an intention to invest:

• £3bn in R&D and capital expenditure to support advanced manufacturing.
• £2bn to drive the AI Action Plan, including a 20-fold increase in support for computing capacity.
• £1.1bn in life sciences, including greater digitisation and support for manufacturing.

Skills Development

One area within the Spending Review which remains unclear is the read-across to skills development. It is hoped that the Industrial Strategy and a subsequent Skills and Employment strategy will outline a roadmap for how today’s workforce can transition into and fill the jobs of the future. This will be important in delivering productivity and delivering higher value employment.

The review allocated £3.5bn to employment support intended to provide a range of services and skills activity to reduce working age inactivity but the other references to skills are scattered through the report and make specific sector references to, for example, construction and digital skills.

More is required here before a clear picture can emerge.

Against the iED’s Priorities

In the run-up to the 2024 General Election, the iED published its Grow National, Grow Local manifesto. This document sought a statutory role for economic development, and this remains a priority.

The Spending Review has delivered on some of the asks of iED. Devolution remains a key focus of the Government, and greater powers and funding have been allocated to this area of work, as well as to the devolved organisations that have been established. The Spending Review has also provided a longer-term perspective on the programmes to be implemented and the funding that will be allocated.

One clear area of priority for the Government remains net zero and this was a further recommendation in the iED’s manifesto.

Less clear within the Spending Review is the commitment to business development activities, and linked to this, trade and investment. The iED recognises that this will be an essential aspect of delivering the ambitions of the upcoming Industrial Strategy.

The final area is how a national people strategy can develop skills at all ages and throughout entire careers, as well as support those who are economically inactive in returning to meaningful employment. At first glance, career support to continuously develop skills and facilitate greater flexibility to switch between sectors of employment as the economy evolves is a missing piece of the jigsaw.

Conclusion

The Spending Review 2025 is far more than a series of spending limits and borrowing projections. The document sets out a clear direction of travel for much of its economic policy until March 2029. As such, this document is crucial for all economic development professionals.

In terms of managing the delivery of future programmes, it is clear that day-to-day funding will continue to be tight. The effective delivery of programmes will be an essential element in delivering against the Government’s growth agenda, with no money wasted. This demonstrates the importance of economic development professionals within this plan and continues to illustrate why the profession will need to become a statutory function.

In the meantime, the Institute of Economic Development will continue to invest in its Continuous Professional Development materials to support members in delivering the changing agenda.

Nigel Wilcock is Executive Director of the Institute of Economic Development.