How a Spending Review sets government department budgets for years ahead

A Budget is mostly about tax. The question of how much each government department gets to spend is settled in a different process, the Spending Review. Its decisions can run for several years, which means the funding for schools, hospitals, courts and roads in a given year is often fixed well before that year begins.

Two kinds of public spending

The Treasury divides spending into two broad groups.

Departmental Expenditure Limits, or DELs, cover spending that departments can plan and control: staff, running costs, grants to local services and investment projects. These are the budgets a Spending Review sets.

Annually Managed Expenditure, or AME, covers spending that is harder to fix in advance because it depends on demand or on outside factors. The largest items are most social security benefits, the State Pension and interest on government debt. AME is forecast and managed each year rather than capped years ahead.

Each department's DEL is then split again. Resource DEL pays for day-to-day costs such as salaries and supplies. Capital DEL pays for investment, such as buildings, equipment and infrastructure. The two cannot be freely swapped, which stops long-term investment being raided to cover short-term pressures.

How the money is divided

A Spending Review starts with the total. The Treasury decides how much overall spending its fiscal rules and the economic forecasts will allow, then works out how to share it between departments.

Departments submit bids explaining what they need and what they would deliver. The Treasury tests those bids against government priorities and value for money, and the final settlements are agreed between the Chancellor and each Secretary of State. Ministers then announce the results in Parliament, usually with a document setting out every department's budget for each year of the review.

The 2025 Spending Review, published in June 2025, set day-to-day budgets for the years up to 2028-29 and capital budgets up to 2029-30. The government described it as the first zero-based review in 18 years, meaning every line of spending was examined rather than taking the previous budget as a starting point.

Scotland, Wales and Northern Ireland receive block grants from the UK government. Changes to those grants are largely calculated through the Barnett formula, which passes on a population-based share of changes in comparable spending in England. When the Spending Review increases or cuts an English department's budget in an area that is devolved, the block grants change accordingly. The devolved governments then decide for themselves how to spend the money.

Why multi-year settlements matter

Longer settlements let schools, hospitals, councils and contractors plan. A department that knows its budget for three years can sign longer contracts, recruit with more confidence and phase building projects sensibly. Single-year settlements, which were common at times of uncertainty, make that harder and often mean money is spent less efficiently.

The trade-off is flexibility. Once budgets are set, a sudden rise in costs, such as higher than expected inflation or pay awards, has to be absorbed within the same totals unless the Treasury agrees to top them up. Departments can also face pressure in the later years of a review, when budgets set years earlier meet costs that have moved on.

Reading the figures

Spending Review documents show budgets in cash terms and, often, in real terms after allowing for inflation. The real-terms figures are the better guide to what a department can actually buy. Parliament then approves the money year by year through the Estimates process, which is where any later changes to departmental budgets are formally recorded.

For anyone trying to understand what services will look like in two or three years' time, the most recent Spending Review is the place to start. It shows not only what has been allocated, but how much of the pressure on public services has already been planned for.