What Labour’s Spending Review Means for Markets

This week, Chancellor Rachel Reeves unveiled Labour’s first Spending Review, outlining the government’s fiscal blueprint for the years ahead. The review offers an early glimpse into Labour’s economic priorities, from healthcare and defence to environmental spending, and sets the tone for how the party hopes to balance ambition with fiscal discipline.

We unpack what this means for the economy and its market impacts below.

What were the main policies in the spending review?

• NHS: 3% rise in annual spending, which came in above expectations. This rise in spending alone, will take up more than half of the cash increase in the government’s overall expenditure plans.

• Environment: Annual day-to-day spending at the Department for Environment, Food and Rural Affairs will drop 2.7%.

• Defence: The Labour government had already announced, but reaffirmed that, Defence spending will rise to 2.6% of GDP by April 2027. This comes following a recent strategic defence review highlighted that the UK would need to spend about £68bn to prepare its armed forces for modern warfare.

What is the economic impact?

In the short-term economic data suggest that the UK economy is struggling. Month on month GDP data showed that the UK economy contracted by 0.3%, more than forecasted. Yet growth forecasts for the UK have grown in the medium term: GDP growth is expected to accelerate to 1.9% in 2026, and 1.5% in 2027.

Labour have pledged to ‘deliver economic stability’ and boost investment in the UK in their economic policy. How their philosophy is put into practise determines if this pro-business approach will revive our economy.

Compared to US growth prospects of around 2.5% in 2026, the UK still lags behind, highlighting the need for continued reform and private sector stimulation

What was the market reaction?

This spending review announcement didn’t have a significant market impact, as the overall package was well anticipated by the market, and the news was really about digging into the detail. UK equity markets ticked up 0.2% on the day and the sterling held near a three‑year high after the announcement, to US$1.352 as the market digested the review. While 10‑year gilt yields remained elevated at around 4.57%. The announcements were largely “priced in”.

Overall, this spending review was not a game-changer. It reaffirmed Labour’s pivot toward long-term renewal - backed by above‑forecast NHS and defence budgets - while trimming down day‑to‑day operational spending across other departments.

The Noise

• Recent US economic data shows that inflation rose less than expected in May, up 2.4%. Many have cited that tariffs will put undue pressure on consumers who ultimately bear the cost, yet the recent data coming in lower-than-expected suggests that tariffs haven’t materially impacted inflation (yet). This said, economists still expect inflation to rise in the coming months.

• The dollar hit a 3-year low due to continued tariff turmoil this week. In the latest barrage of tariff related news flow, Trump claimed that he would send letters to trading partners outlining new tariff rates in the next couple of weeks. The US currency has fallen past the low it hit in the wake of Trump’s “Liberation Day”, when he announced reciprocal tariffs which shook markets at the beginning of April. While trade tensions have continued to weigh on the dollar, global equites have since rebounded materially from the tariff-induced drawdown in April.

• Global equity markets rose modestly at the beginning of this week, until Friday (13th) morning, when markets were more reactive to rising geopolitical tensions in the Middle East on the news of Israel’s attack on Iran’s nuclear facilities and programme. Stocks slid, oil prices surged up c.7% and investors moved towards safe haven assets such as gold and reserve currencies including the dollar, Swiss franc and euro, all of which have since seen an uplift at the time of writing. Outside of oil prices, the relatively muted reaction in markets so far suggests investors see this as another negotiating tactic for the US, as Trump implores Iran to “make a nuclear deal” in order to avoid further attacks.