Budget Trends and the Role of Managed Service Providers in the U.K. Public Sector

The U.K.’s public sector stands at a pivotal juncture. The 2025 Spending Review (SR) is the Labour Party’s plan to allocate day-to-day budgets for public services and long-term investment spending for the next few years. It outlines a vision for a more productive, agile and digitally enabled state, underpinned by targeted investments and a focus on efficiency.  

What does the budget mean for various sub-sectors of the public sector? What is the current state of public services – and what are its critical modernization needs? Let’s answer these questions and explore why the role of managed IT service providers will is so critical now. 

Budget Allocation Across the U.K. Public Sector  

The 2025-26 U.K. government budget is projected to reach approximately £1,335 billion, a sustained commitment to public services and infrastructure. Departmental budgets for everyday expenditures are set until 2028-29, with capital investments planned through 2029-30. During the SR period, total departmental budgets are anticipated to grow by 2.3%, with substantial allocations designated for critical areas, including healthcare, security, education and local government. 

The below table outlines the proposed budget and spending growth across key areas of public services. 

Current State of the U.K. Public Sector 

The U.K. public sector is navigating a series of challenges, including workforce pressures, new short-term policy and funding practices, rising demand and changing citizen expectations. At the same time, there are significant opportunities for public sector contract renewal.  

Productivity remains a central concern, with 2024 estimates indicating that public sector productivity is still 4.6% below pre-pandemic levels. This decline is especially pronounced in Healthcare, where, according to the Office of National Statistics, productivity lags by 9.6% compared to pre-2020 figures. In response, government departments are required to achieve at least 5% in savings and efficiencies by 2028-29, with a mandate to reduce administration budgets by no less than 16% in real terms by 2029-30. 

On the technology front, the U.K. government has prioritized investments in digital public infrastructure. Initiatives such as the rollout of the GOV.UK Wallet – an app for storing digital versions of official government-issued documents on smartphones – as well as the development of a new National Data Library – a secure, federated infrastructure for accessing and sharing high-value public data for public benefit, research and innovation – are designed to modernize public service delivery and improve citizen engagement.  

A substantial shift toward AI is also underway, with funding allocated for the creation of a single patient NHS record and the expansion of AI-driven solutions across various public services. The £3.25 billion Transformation Fund is a cornerstone of this digital agenda, supporting priorities such as shared services and the modernization of core government systems.  

Regionally, the devolved governments of Scotland, Wales and Northern Ireland have received their largest settlements since 1998, empowering local authorities to drive growth and invest in public service renewal. Major commitments to affordable housing, transportation and clean energy further reflect the government’s long-term approach to addressing economic and social challenges.

Figure 1: U.K. Public Sector Budget Growth 2025-2029 

Public Sector Areas in Need of Modernization 

Despite substantial investments and a clear strategic vision, several open areas for modernization persist in the U.K.’s public sector. A primary challenge is the ongoing reliance on legacy IT systems, many of which are outdated and out of support. This dependence hampers transformation efforts, resulting in under-digitization and a fragmented data infrastructure across departments. Currently, only about half of public services have been digitized, and, according to our calculations, digital expenditure remains approximately 30% below both industry and international benchmarks. 

Figure 2: U.K. Public Sector Modernization 

Cybersecurity and resilience have emerged as urgent priorities, given the increasingly hostile threat landscape. Public sector organizations face significant risks, necessitating robust investment in cybersecurity measures and technical resilience to maintain service continuity and public trust.  

Data integration is another critical area, as siloed data and fragmented digital services impede the delivery of seamless services. This fragmentation leads to inefficient processes and suboptimal user experience, underscoring the need for interoperable platforms, standardized data sharing and unified digital identities. 

Leadership and skills gaps, combined with salary constraints, in the U.K. public sector make it challenging to employ scarce resources at an affordable price. Digital leadership is inconsistent across departments, and there is a notable shortage of digital expertise at senior levels. The government has set an ambitious goal for one in 10 civil servants to occupy digital roles by 2030, supported by new recruitment and training initiatives.  

Funding and procurement models also require transformation, as traditional, project-based funding structures do not align with the iterative nature of digital change. Ongoing procurement reforms aim to unlock greater value, reduce duplication and create opportunities for innovative suppliers, including small and midsize enterprises. 

The Advantages of Working with Managed IT Service Providers 

Managed service providers (MSP) – specifically managed IT-enabled service providers that have both technology and business process expertise – are poised to play a transformative role in enabling the U.K. public sector’s modernization agenda. These providers offer the expertise and scalable solutions necessary to augment, support and accelerate digital transformation across government departments and agencies. By delivering secure, cloud-based digital platforms and supporting the migration from legacy systems, they can help integrate disparate data sources and ensure the seamless operation of critical public services. Their end-to-end service management capabilities, from design to operation, ensure consistent UX and robust performance, which are essential for building public trust in digital government. 

In the realm of cybersecurity, service providers often offer more advanced solutions that include better continuous monitoring, rapid incident response and proactive risk management than public agencies can maintain on their own. These services are vital for safeguarding sensitive public sector data and ensuring compliance with evolving regulatory standards.  

Service providers also help bridge the digital skills gap by providing access to specialized talent in areas such as AI, data analytics and cybersecurity. Through managed service models, they supplement specialized internal capabilities, support upskilling initiatives and foster a culture of innovation and continuous improvement within public sector organizations. 

Leadership and skills development are crucial components of the procurement teams in the U.K. public sector, which often require MSPs to ensure appropriate training and upskilling. This way civil servants can effectively collaborate and benefit from the services provided. MSPs leverage platforms that unify recruiting, learning, performance management and succession planning, enabling public sector organizations to identify and address critical skill gaps. Their solutions often incorporate advanced data analytics, benchmark best practices internationally and implement continuous employee engagement through integrated systems – all outcomes that are difficult for public agencies to produce themselves.  

Effective MSPs work with public sector clients to assess true competency needs, using models such as the Analysis, Design, Development, Implementation, Evaluation (ADDIE) model and the Kirkpatrick Model, a framework for assessing the impact of training and learning programs. They act as strategic partners, helping public sector organizations increase their capabilities, optimize resources for niche expertise and drive efficiency in delivery. Workforce planning strategies incorporate contingent labor, tailored sourcing approaches and flexible upskilling pathways to address both immediate and long-term needs. 

Furthermore, service providers drive value through procurement by enabling public sector entities to access economies of scale and advanced technologies. The expansion of procurement frameworks, such as the £16 billion Technology Services 4 initiative, which acts as a pre-approved catalogue of technology suppliers for the U.K. public sector, underscores the government’s commitment to leveraging service providers for digital consultancy, service integration, infrastructure management and transformation projects. By delivering outcomes-based solutions aligned with government priorities, service providers play a pivotal role as partners in delivering high-quality, efficient and resilient public services that meet the evolving needs of citizens and businesses. 

Next Steps for U.K. Public Sector Agencies 

The U.K. public sector is undergoing a significant transformation, driven by strategic investments in digital, data and technology. While substantial progress has been made, critical challenges persist, particularly in modernizing legacy systems, enhancing cybersecurity, integrating data and developing digital skills. Managed IT-enable service providers play a critical role in enabling the public sector to deliver efficient, resilient and highquality services that adapt to the evolving needs of citizens and businesses. The government’s mission-led approach, supported by targeted funding and procurement reforms, sets the stage for a more productive, agile and digitally empowered public sector for the years ahead. 

ISG helps public sector entities manage the demand for increased modernization. ISG supports public sector clients with strategy consulting, managed IT services and business process outsourcing, helping them navigate complex challenges and deliver critical services efficiently. We understand how to achieve digital transformation, public procurement compliance and innovative use of technology to improve citizen services and operational effectiveness. ISG's research and advisory capabilities also include benchmarking, market insights, and assistance with enterprise software sourcing and implementation, enabling public entities to optimize resources, adopt digital tools and meet rising public expectations. Contact us to initiate a conversation.