Pulled apart between rising geopolitical tensions and constrained public finances, Britain's finance chief Rachel Reeves is set to unveil feared trade-offs in a government spending review on Wednesday.
Prime Minister Keir Starmer is boosting the defense budget, and reports point to the National Health Service (NHS) being bolstered – forcing other key ministries to tighten their belts.
"Sharp trade-offs are unavoidable," said the Institute for Fiscal Studies (IFS), a respected think tank, of the spending plans through to 2029-2030.
Reeves, the chancellor of the exchequer, is to detail day-to-day spending plans in her review to Parliament on Wednesday.
An inaugural budget in October featured tax rises and big spending announcements on infrastructure, meaning belt-tightening has to come from elsewhere.
Already in March, Labour announced contested cuts to disability welfare payments, hoping to save more than 5 billion pounds ($6.8 billion) by the start of the next decade.
Thousands of protestors gathered in central London on Saturday, many holding placards that read "tax the rich, stop the cuts – welfare not warfare."
The government on Sunday announced 86 billion pounds of investment in science and technology and defense by 2030.
Reeves hopes the spending will boost sluggish growth, which risks added pressure from the tariffs trade war unleashed by U.S. President Donald Trump.
Reeves is set to announce a funding boost of up to 30 billion pounds for the NHS, according to The Times newspaper.
Britain's media has in recent days reported on tough, last-minute discussions between the Treasury and the interior ministry, particularly regarding the police budget, as well as with the energy department amid fears for the U.K.'s carbon-reduction commitments.
Reeves has amended her fiscal rules to allow the government more headroom for investment in the run-up to the spending review.
At the same time, she wishes to balance the books so that tax revenues match day-to-day spending, meaning the government borrows only to invest.
The chancellor has allowed the Treasury to borrow more, particularly for infrastructure projects across the vital housing and energy sectors.
This has handed her a windfall of 113 billion pounds over five years.
"When it comes to capital spending, government investment is set to be sustained at historically high levels in the coming years," the IFS noted.
"If spent well, this should help contribute to growth and to better public services in years to come."
Citing Russia's invasion of Ukraine, London has announced it will increase its defense budget to 2.5% of U.K.'s gross domestic product (GDP) by 2027 – and up to 3.0% by 2034, helped by cutting international aid.
"While going for growth and fixing the NHS will still be central to the Spending Review, bolstering the nation's defense is now considered an urgent pressing need," said Susannah Streeter, head of money and markets at Hargreaves Lansdown.
While seeking to cut costs, it has been reported that the Labour government may later this year announce plans to lift a cap on child benefits and reverse a decision to scrap a winter heating benefit for millions of pensioners, after a backlash over the policies from some of its party members.
In a major shift for deeply unpopular cuts, it was announced on Monday that Britain will make winter fuel payments to millions of older people this winter.
The reversal announced on Monday will restore those payments to 9 million pensioners, excluding only 2 million who earn above 35,000 pounds ($47,495) from the 200-300 pounds subsidy for heating bills in the colder months, a Reuters report said.
Possible "U-turns on benefit and welfare spending, increased pressure to ramp up defense spending and higher borrowing costs have left the chancellor, Rachel Reeves, in a sticky position," concluded Ruth Gregory, deputy chief U.K. economist at Capital Economics.
"If she wishes to avoid a political backlash and/or an adverse reaction in the financial markets, she probably has little choice but to raise taxes in the Autumn Budget."
The government has already hiked a business tax that entered into force in April.
