Chancellor announces additional capital allocation but with tight departmental spending increases in the Spending Review

The Chancellor of the Exchequer, Rachel Reeves, delivered the Spending Review 2025 on 11 June. In it she continued the government’s approach to public investment, allocating an additional £115 billion in capital investment over the period to 2029-30.

Most importantly for London, the review cements an integrated funding settlement for the capital, aligning London with the funding mechanism used by some other combined authorities. The GLA will receive a consolidated budget (rather than separate allocations for specific policy/programme areas) to then allocate funds according to local priorities.

Other London funding decisions included a commitment to provide Transport for London (TfL) with the largest multi-year settlement for London in over a decade, with £2.2 billion of funding between 2026-27 and 2029-30 for its capital renewals programme. Another commitment was made to explore “options for delivery” of the Docklands Light Railway (DLR) to Thamesmead, while allocating £25.3 billion to progress delivery of HS2 from Birmingham Curzon Street to London Euston. 

Other national announcements may also have a large consequence for London such as the expansion of childcare support for working parents and direct assistance via the Healthy Starts scheme. The Review also allocates over £1 billion in industrial support to sectors where London retains a national and global competitive advantage (e.g., creative industries and life sciences) as well as ones where London is experiencing acute labour-market shortages (e.g., construction).  

Beyond this £39 billion in additional investment (over ten years) was also announced for a new Affordable Homes Programme, aiming to support the delivery of 1.5 million new homes across England. While the programme is a national one, London’s housing sector and stakeholders have welcomed the announcement, but exactly how much of the funding will be allocated to London remains uncertain.

The review also includes £950 million for local authorities to provide “good-quality” temporary accommodation, which is particularly relevant for London boroughs facing high costs for housing homeless residents. Although Local government funding will increase by an average of 3.1% in real terms across the review period, London Councils have highlighted that this may not fully address the capital’s specific funding shortfalls, given the high cost of services and housing in London. Total departmental spending will grow by 2%-3% in real terms over the course of the current parliamentary term, although there is wide variation between departments.

UK’s GDP contracts in April

The latest monthly UK GDP data from the Office for National Statistics (ONS) pointed to a 0.3% contraction in April 2025 (Figure 1), a sharper deceleration than anticipated, following robust Q1 growth of 0.7%. This monthly decline, the steepest since October 2023, was primarily a result of a sharp contraction in service sector output, a sector of high importance to London.

Figure 1: Contributions to monthly UK GDP growth, April 2024 to April 2025

Source: GDP monthly estimate from the ONS

The contraction’s timing coincides with significant policy interventions affecting business input costs and household consumption. April saw the implementation of increased employers’ National Insurance contributions, water bill rises, and council tax increases – all of which could have dampened economic activity. More significantly, the introduction of US trade tariffs led to the largest monthly decline in exports to the US on record.

For London, this UK contraction is particularly concerning, given as noted the capital’s concentration in services and trade-sensitive sectors. The city is exposed to both tariff impacts and broader uncertainty effects – and we’d expect eventual data on London’s output to reflect timelier UK data. The divergence between robust first quarter growth and April’s contraction reiterates the volatility facing London’s economy – and the cautions raised in our latest forecast for London, that recent growth may just reflect temporary factors, with the broader economic environment still subject to ongoing uncertainty, volatile inflation trends, tight monetary policy, and ongoing trade frictions.

UK inflation drops only slightly in May

The ONS has also published data on May’s Consumer Price Index (CPI) inflation this month. This showed that CPI inflation fell slightly to 3.4% in the 12 months to May 2025, down from 3.5% in the 12 months to April (Figure 2). Inflation thus remains significantly above the Bank of England’s central symmetrical target of 2% ±1%.

Figure 2: CPI, goods, services and core annual inflation rates, UK, May 2020 to May 2025  

Source: ONS, GLA Economics

Looking at the data in more detail the ONS observed that the largest downward contribution to inflation “came from transport; the largest, partially offsetting, upward contributions came from food, and furniture and household goods”.

Beyond the headline inflation figure other inflation measures generally dropped back a touch. Core CPI (excluding volatile energy, food, alcohol and tobacco prices) inflation slowed to 3.5% over the year to May 2025, down from 3.8% in April. The CPI goods annual rate however rose to 2% up from 1.7%. Still the CPI services annual rate slowed to 4.7% in May down from 5.4% in April.

Trade uncertainty leads to sharp downward revisions to the World Bank’s forecast

The World Bank’s latest Global Economic Prospects report was published this month and contains sharp downward revisions to global growth. The downgrade affects 70% of the global economy (including the UK) and is driven primarily by policy uncertainty and trade tensions. Global trade growth is projected at just 1.8% in 2025, down from 3.4% in 2024 and substantially below the 5.9% average of the 2000s.

Regarding London specifically, the report’s findings have two critical implications. First, it projects a slowdown in emerging market growth, from an average of 6% in the 2000s and 5% in the 2010s – to 3.8% in 2025. This will affect the capital’s financial services revenues (and output), which are increasingly involved in emerging market flows, with London’s financial sector (roughly 18% of output) facing reduced demand for cross-border financial services and investment products.

Second, although harder to accurately quantify, the reported policy uncertainty is still the most substantial growth constraint. The capital’s financial sector needs predictable, long-term international frameworks – as business investment (and activity in general) thrives when returns on capital are “secure”. Word Bank reporting notes that if trade disputes were resolved with eventual agreements halving current tariff levels, global growth could be 0.2 percentage points stronger.

Ultimately, the report (alongside consensus thinking) highlights how London’s economic performance is increasingly captive to geopolitical developments beyond domestic policy control. A summary of UK forecasts (OBR and BoE) and global forecasts (OECD and IMF) is available in chapter 3 of our latest London’s Economic Outlook report.

London productivity drops below pre-pandemic levels

London was the only UK region to see a decline in its productivity as measured by output per hour worked between 2019 and 2023 according to ONS data published this month. London’s output per hour worked declined by 1.1% over the period (Figure 3). The UK as a whole saw growth of 2.8% over the same period. Analysts have said a number of factors affected London’s performance, with these including post-pandemic constraints in the financial sector, difficulties in attracting talent (in part due to Brexit and high living costs), and weaker investment in high-growth areas. Some caution is advised in analysing these results as they could also be impacted by the ONS’s ongoing issues with labour market survey responses post the pandemic with these statistics being labelled by the ONS as “official statistics in development”.

Figure 3: Growth in output per hour worked by International Territorial Level (ITL1) region, UK, 2019-2023

 Source: ONS

Despite this the ONS observes that “labour productivity, whether measured by output per hour worked or by output per job, was higher in London and the South East than the UK average in the latest 2023 figures; in London, output per hour worked was 28.5% above that of the UK average (represented by 0.0%), and output per job was 35.3% above that of the UK average”.

City Business Investment Unit launched by the Corporation of London

The City of London Corporation launched the City Business Investment Unit (CBIU) on June 12th, a proactive institutional response to intensifying global competition (and forecasted reduced demand) for financial services. This “concierge-style” service will provide investors in high-growth sectors (FinTech, RegTech, green finance, artificial intelligence) with (1) support for navigating City processes, (2) strategic market intelligence to guide investment decisions, (3) structured relationship management with key stakeholders, and (4) evidence-led promotion to attract high-value businesses.

The launch follows recent robust economic performance in the City, with annual economic output exceeding £100 billion, major banks and tech firms recently reaffirming their long-term presence in the City, and Grade A office vacancies remaining at just 1.5%. 

For London’s medium-term growth, the CBIU marks a significant step in recognising that maintaining global competitiveness in financial services isn’t a given. It requires active intervention in a period of global uncertainty and trade tensions that threaten London’s traditional role as a bridge between European and global markets.

Lower Thames Crossing receives funding commitment

Separate to the TFL and integrated London settlements in the Spending Review, the government also announced £590 million in funding for the Lower Thames Crossing (on June 16^th). This funding, part of a broader £1 billion structures renewal programme, moves the UK’s most significant road project in a generation from planning limbo toward construction.

The project is modelled to add £40 billion to the UK economy, primarily through (1) reduced congestion and subsequent increases in supply chain throughput, and (2) adding 400,000 jobs within an hour’s commute of local communities (expanding London’s accessible labour market and easing housing affordability pressures). It is also expected to improve freight connectivity between South East ports and manufacturing centres, strengthening London’s role as a logistics and distribution hub.

The government is actively pursuing private sector participation for funding the Crossing to deliver the project at pace – through either (1) a hybrid model requiring around £4.3bn in private capital, or (2) a regulated private entity, with a private company financing, building, and operating the project and requiring £6.3bn in private capital. For London’s financial sector, this represents potential opportunities in infrastructure finance and project delivery.

GLA Economics will continue to monitor all these and other aspects of London’s economy over the coming months in our analysis and publications, which can be found on our publications page and on the London Datastore.

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