Analysis

What does the 2025 Spending Review mean for the NHS?

Published 26 June 2025

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About 9 mins

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Earlier this month, the Chancellor set out departmental public spending plans through 2028/29 (and to 2029/30 for capital funding), shaping the fiscal landscape for the bulk of the parliament. By most accounts, the NHS emerged as a relative ‘winner’, receiving more funding than many anticipated. However, the uplift remains modest by historical standards and NHS services are under major strain.

In this analysis, we assess how far this funding will stretch in the face of various NHS pressures and the government’s policy ambitions.

What did the Spending Review allocate to DHSC?

The Department of Health and Social Care (DHSC)’s total budget will increase by 2.8% per year in real terms between 2025/26 and 2028/29 – a rate below the long-term historical average of 3.7% and far below the major increases seen during the 2000s under the last Labour government (averaging 6.8%).

This increase is allocated to the NHS in England, which will receive an additional £18.5bn in day-to-day spending (NHS Resource Departmental Expenditure Limit (RDEL)) by 2028/29 in real terms (3.0% real-terms growth). Non-NHS day-to-day spending (RDEL) will fall by 4.5% each year in real terms. This will put pressure on other elements of spend, particularly the public health grant, which we have argued needs further investment if it is to recover to 2015/16 per person levels. The capital budget that funds buildings and equipment (DHSC Capital Departmental Expenditure Limit (CDEL)) is flat in real terms between 2025/26 and 2029/30, albeit following a 14% increase in 2024/25. The government announced that £10bn would be spent on technology and transformation over 3 years from capital and revenue budgets.

Is the day-to-day funding for health sufficient?

The government’s decision to prioritise the NHS in this Spending Review reflects its ambitions for improving health care. This includes reducing the elective care backlog to restore the 18-week treatment standard by 2029, tackling long A&E waits and ambulance delays through the recently published Urgent and Emergency Care Plan 2025/26, and improving access to general practice. The government is developing a 10-year plan to improve the health system with the overall aim of shifting focus from treating illness to preventing it, from analogue to digital services, and from hospital-based care to more support in the community.

These ambitions set a high bar for what the extra funding is expected to deliver. Our analysis suggests the day-to-day funding allocated may be sufficient to deliver some improvements over the next 3 years (Figure 1), but only if the NHS can deliver sustained productivity gains and make progress on reducing pressure on hospitals by investing in community and primary care. Even so, there are a number of uncertainties that pose risks to how far this day-to-day funding increase will stretch.

Figure 1

Rising demand

Demand on the NHS rises for various reasons. A significant driver is England’s ageing population. We project that the number of people in England living with major illness, such as diabetes or cancer, will increase by 2.6 million by 2040 (nearly a 40% rise compared with 2019 levels). Our demand projections suggest that delivering current levels of care to this future population will require annual increases in NHS output of around 1.6% by 2034/35. However, these projections were based on trends in illness and health care use from before the pandemic, and there is a risk that population health has deteriorated in ways not fully accounted for in our analysis.

Other factors not related to population ageing have an impact on demand and activity – for instance, performance targets. Our funding projections are based on the extra activity needed to tackle the current elective care backlog (7.4 million treatment pathways) but over a decade rather than the government’s more ambitious aim of 5 years. More broadly, the adoption of new treatments or changes in clinical practice also lead to intensifications of care – increases in the cost or volume of care. Our projections assume this can be constrained, including lower growth in A&E attendances, based on improved primary care services, and lower growth in expensive specialised services. The latter implies difficult decisions about who gets what, something that NHS England recognised in the development of its new strategic commissioning framework.

Rising costs

Staffing is the largest budget pressure in the NHS, accounting for around 70% of costs. Health care pay has been a flashpoint in recent years following a decade of relative decline compared with the wider economy, which resulted in a period of sustained industrial action. This was partially addressed through pay increases in 2023/24 and 2024/25, but upward pressures on pay will persist in the medium term. Our projections assume a gradual recovery in earnings, but there is a risk that pressure builds for faster pay rises. Resident doctors are currently balloting for strike action over the 2025/26 pay award.

Other pressures include the cost of new and branded medicines, which have been rising but may increase more rapidly following negotiations over the voluntary scheme for branded medicines pricing, access and growth (VPAG). The rising cost of energy has added to providers’ cost base in recent years. Finally, financial pressures may arise from the recently announced restructure of the NHS – such as the merger of NHS England with DHSC and reductions in the number of integrated care boards and cuts to their staff headcount. Reports suggest any redundancy costs may have to be covered within existing budget envelopes.

Productivity gains

Productivity measures how well inputs (such as staff) translate into outputs (such as more appointments and procedures) and outcomes. NHS productivity suffered an unprecedented decline during the pandemic and, for a complex mix of reasons, has only partially recovered. As of 2022/23, health care productivity in England remained 7% below 2018/19 levels. There are varying estimates for what has happened since then, with NHS England data suggesting a return to pre-pandemic productivity but Office for National Statistics experimental data pointing to a more persistent shortfall.

Looking ahead, the NHS has committed to delivering 2% annual productivity growth. This is ambitious, given that average productivity growth over time has been just 0.6% per year and with capital growth – a critical enabler of productivity – set to remain flat in real terms. Gains averaging 2% per year were sustained between 2010/11 and 2014/15 but with exceptionally low growth in staff numbers and pay. Growth closer to the historic average could see the planned budget fall short.

Is the capital funding adequate?

Even if the NHS has enough staff, medicines and other resources (covered by the day-to-day budget), the flat real-terms capital budget falls short of what is needed to reverse a decade of underinvestment, which risks undermining the government’s ambitions. While the announcement of targeted investment in digital technology is welcome, the remaining capital budget won’t cover all the essential maintenance repairs and upgrades to estates, beds and diagnostic equipment. Our 2024 funding projections estimated the growth in capital needed to catch up with the capital investment seen in comparable countries and the level needed to catch up with underinvestment from 2010. The capital allocation made in this Spending Review period falls short of both (Figure 2).

Figure 2

The health service is already capacity constrained following a decade of underinvestment in the 2010s. One of the clearest signs of strain is persistently high hospital bed occupancy. Over the past year, acute bed occupancy averaged above 90% – well above the level considered safe, and higher than the 88% average in 2013/14 when the 4-hour A&E target was last consistently met. This leaves the NHS with a very limited margin to absorb surges in demand, especially during winter.

This has been exacerbated by changes since the pandemic: NHS staffing increased by 26% but the number of hospital beds by just 4%. This mismatch between workforce growth (enabled by revenue funding) and physical capacity (dependent on capital) risks deepening operational inefficiencies and restricting system flow at a time when the service badly needs to boost productivity.

Overcoming misaligned resources

The Spending Review tells us how much funding the NHS can expect. But, with the government’s 10-year plan for health expected imminently, critical decisions are still to be taken about the direction of the health service and how that money is allocated to improve care.

A critical question is where resources are directed. Workforce growth since 2019 has disproportionately been in hospitals, with the growth in hospital consultants (23%) outpacing the rise in community health nurses (19%), while the number of fully qualified GPs has fallen (-1%). The NHS will need to prioritise investment in primary and community care to achieve its plan to shift care out of hospitals, including increasing the number of permanent, fully qualified GPs and expanding the community-based nursing workforce and other clinical roles in the community. An update to the NHS Long Term Workforce Plan is expected to focus on these areas. And it is not only staffing: the primary and community sectors will require investment in buildings and equipment if the government’s aim of ‘neighbourhood’ health care is to become a reality.

At the same time, the intense pressures on the hospital sector cannot be neglected. To overcome existing capacity constraints, the government’s urgent and emergency care plan must deliver tangible improvements to hospital flow to avoid winter crises and free up local health care systems to transform care. Several promising interventions have already been identified in national strategies. These include the continued rollout of virtual wards and hospital-at-home services, which have the potential to reduce pressure on beds and keep patients safely supported in their own homes. It also covers the expansion of elective surgical hubs to help tackle the elective backlog more efficiently and protect planned care from urgent care pressures.

Finally, though this analysis covers health care, investment outside of the NHS will also be important. There are significant pressures on the adult social care system, which have knock-on implications for health, and the public health budget is still well below where it needs to be. Restricted funding in both sectors will make it harder for the NHS to deliver the government’s ambitions.

Conclusion

While the NHS received a more generous settlement than most departments, funding growth is limited by historical standards. The NHS is still recovering from the pandemic, facing huge performance challenges and grappling with an ageing population. The forthcoming 10-year plan will set out the priorities for reform to the NHS: the key challenge will be converting relatively limited resources allocated in the Spending Review into meaningful service improvements.

Our analysis shows that the funding announced for day-to-day care may be enough to meet the needs of a growing and ageing population and make some improvements to care, but it will need to target resources where they can have the most impact. Even then there are several risks, from cost pressures to ambitious productivity targets. Further, the long shadow of underinvestment in capital will remain a drag, with the NHS operating close to capacity and with limited new funding for investment in equipment and buildings.