What do the changes in the UK economy mean for local councils?

The economic and political situation in the UK, and much of the world, has been unstable in the past few years, rocked by persistent crises. The economy has not yet recovered from the headwinds caused by the COVID-19 pandemic, which has been followed by unrest in Russia and now Gaza, impacting the global economic and political climate, and with it, the health of the UK economy.

This week’s Autumn Statement, and the release of warning by the Office of Budget Responsibility downgrading its forecast for the UK economy’s growth, has laid out some measures the current government has in mind to stable the ship. However, most opinion polls suggest there is likely to be a change in government following the next general election.

In this Time to Talk event for local government, we heard from KPMG’s Chief Economist and the KPMG External Affairs team on their predictions for the future of the UK economy and politics and considered what this is likely to mean for local authorities.

Yael Selfin, KPMG’s Chief Economist

While headline inflation has come down from 6.7% to 4.6%, it remains well above the Bank of England’s target of 2%. This means that interest rates are likely to remain high well into the next year. Interest rates are unlikely to return to the low levels before the COVID pandemic, but settle around 3% over the medium term.

Levels of household debt generally remain lower than during the 2008/9 recession. Additional savings generated during COVID due to lockdowns were a useful cushion for many households, though these are in the main likely to have been spent by now. Coupled with persistent, though easing, inflation, this means the next year or so is likely to bring more pressures on households’ purchasing power.

In a rare piece of positive news, wage growth has been increasing steadily in the past year. This increase is likely to gradually ease over the next year. The demand for labour is easing, and competition for workforce isn’t quite as fierce.

Due to policy uncertainty and expectations of low growth, the business investment is expected to remain weak.

For additional detail and analysis of the short term UK economic outlook, you can read our report here: UK Economic Outlook - September 2023 (kpmg.com)

While there are some positive economic news in slowing inflation, and a likely gradual fall in interest rates in the medium term, this will not necessarily result in stronger economic growth. The UK needs to drive growth through an increase in productivity. This can be achieved through investment in skills, infrastructure, and a range of business investment ventures.

Some future developments such as AI are going to have an impact on employment. Most jobs are not expected to be directly impacted. The labour demand will hollow out slightly, with mid-skilled workers are likely to be impacted most. AI has the potential to have a very positive impact on productivity, but what that impact will look like is difficult to say at this early stage. We have previously published a report looking at Generative AI and its impact on the UK labour market; you can read the report here: Generative AI and the UK labour market

KPMG provide advice to lots of businesses on how to integrate AI into their strategy; if you would like more information about this, take a look at the team’s website here: AI For Business | Benefits For Your Organisation - KPMG UK

The new way of hybrid working could have an impact on local areas’ town centres and transport requirements. This may mean planning for demand on high streets and transport at different times of day and week than previously. In terms of productivity, it may mean we can condense businesses closer in an area, as each business will need less office space.

Rebecca Delahunty, KPMG External Affairs team

We are now entering a crucial period in UK politics. A general election will take place next year, and with the Labour Party currently polling a comfortable lead, we may have a change of government on the horizon. Business leaders will face a fast-changing political and economic landscape over the next eighteen months, both in the UK and globally, with government decisions affecting many aspects of their operations.

The Autumn Statement on the 22 November has met come commentator predictions and defied others. The Chancellor, as predicted, focused a lot of initiatives around welfare and encouraging people into employment. While there has been a lot of appetite for tax cuts, especially to income tax and inheritance, most did not expect them to be revealed in this Statement; the inclusion of a £10bn National Insurance cut has been a surprise and are likely to be seen as a giveaway ahead of the general election.

So, what might the future Labour government provide for public services? It is likely that they would focus on transport, specifically considering rail nationalisation. There are also likely to be more devolution deals, particularly in Scotland and Wales. Due to the state of public finances a potential Labour government would inherit, there are unlikely to be large increases in public spending, instead the focus will be on improving public procurement processes and making services more efficient.

In terms of policies impacting local government, the Levelling Up Agenda was largely welcomed by the sector, with regional inequality being a persistent problem in the UK, which many parliaments have tried to address. Lessons from previous attempts show that we need a holistic and coordinated approach, involving a variety of partners from housing providers to transport and infrastructure companies. A future Labour government is likely to continue focusing on regions. They would do well to increase the partnership they consult on potential policies, including local communities and educational institutions.

The single largest complicating factor for future spending by a Labour government will be the dire state of public finances, and the levels of UK debt. Any future government is unlikely to increase funding to local authorities and local businesses, instead the focus will be on efficiency and greater control over spending outcomes.

Local investment zones, part of the economic Growth Plan 2022 by the Conservative government, has promised lowered taxes and liberalised planning frameworks to encourage business investment in local areas. This policy is unlikely to be delivered by a future Labour government.

Generally, we are expecting that the first year of a potential Labour government will be aimed at crisis management, especially in social care and the NHS. £200bn has already been announced by the current government for health and social care, divided across all NHS Trusts and local authorities in the UK. There have also been smaller pots of funding announced, such as the Youth Investment Fund - £300m for children’s preventative services (Youth Investment Fund). Local authorities should keep abreast of these smaller funding opportunities and ensure they are taking advantage where possible.

The second budget, which would be delivered in 2025, will be more revealing of the Labour long-term plan. Their long-term plan is likely to include thinking around ‘good jobs’ and how we bring this to all parts of the country. It’s likely there will be a lot of further education reform with more focus on apprenticeships, technical colleges, and other shorter term educational courses which will allow local populations to upskill quickly or upskill while working.

At KPMG, we always aim to be embedded in local communities as much as possible; for example, in Leeds we play a large brokerage role between government and local businesses. We also are a member of several alliances with which we take offers into both the public and private sector.