Political and Economic Outlook for Local Government after the Budget
In this month’s Time to Talk, our External Affairs advisors Rebecca Delahunty and Dennis Tatarkov spoke to a selection of our clients about the political and economic outlook for local government following the new Labour government’s first Budget.
The new Labour government has had a rocky start
Rebecca started by summarising the new government’s first 100 days in power, often thought of as the most opportune time for new governments to set the course for their parliamentary period. The new Labour government has not had the smoothest of starts, with Keir Starmer’s approval ratings dropping significantly since starting in his post; however, the expectations of the incoming government have been overwhelmingly high.
The positive developments have been the new pay deal for junior doctors which ended the long-running dispute and was received warmly by the general public; as was the suspension of arm sales to Israel. Less well-received was the discontinuation of the winter fuel allowance; 68% of the population felt this was a poor move. Early release of prisoners to free up spaces and the freebies scandal also dented some of the initial goodwill.
KPMG representatives attended both the Labour and Tory party conference. Rebecca noted that the Labour party conference had the feeling of having picked up a tough legacy, and less optimistic than previously. The Conservative conference was, in comparison, notably poorly attended which is reflective of now being ‘a party in waiting’. The leadership candidates and their speeches were the big focus of the event. A common theme was that both were policy light.
Delving into the Budget
As the first Labour budget in 14 years, the Chancellor faced immense pressure to deliver. The Budget announced an additional £70 billion of annual spending over the next 5 year; partly funded by £36 bn of annual tax increases. The Labour party tied their hands when it came to potential measures through some of their manifesto commitments, and faced a bigger black hole than initially anticipated. Businesses have borne the brunt of the tax increases, accompanied by inheritance tax and capital gains tax. The burden on small businesses has somewhat taken the shine out of the message that this was a government for economic growth; and the fuel duty freeze felt contradictory to the promises around net zero.
The big winner, in terms of budget allocation, was the NHS – this was met positively by the general public. Most government departments received very little, if any, increases in spending, and will have to prove they are providing value for money and deliver the government ambition in tight financial constrictions.
The budget also delivered for local and devolved governments. The £1.3 billion awarded to local authorities was accompanied by a relaxation of restrictions on how to spend it; and there is more to come – the Labour government has committed to additional settlements to mayoral authorities from FY26 onwards. Overall, our attendees noted a more welcoming attitude to regions within Whitehall and a greater emphasis on locality working.
We discussed the controversy around the inclusion of local authority held companies in the employer’s NI rises. Local authorities have warned this will have especially negative implications around adult social care, where provider fees are already crippling council budgets.
Other than the Budget, the Industrial Strategy is likely to bring additional business benefits to regions
The Industrial Strategy, announced at the 2024 International Investment Summit, has been met positively by UK regions. The strategy, currently a Green Paper, is cluster focused and strengthens the potential of cities and regions; building upon existing strengths. The Paper identifies eight growth sectors to invest into and local authorities will have a significant opportunity to input into the shaping of the details of this strategy.
The Budget’s foremost focus is on public services
Our economic analyst, Dennis Tatarkov, spoke about the implications of Labour’s first Budget on the wider economy. The budget represents a significant increase in government spending. This carries some risk; the Chancellor has made changes to fiscal rules, which create additional headroom for more borrowing, but the level headroom is tight and unlikely to cover potential wider shocks to the economy. External economic pressures or an increase in interest rates or inflation could lead to the need for additional revenue.
This is also a budget that clearly prioritises some areas of spending over others. Local government and the NHS are receiving a large proportion of the announced increases; as is the MOD, as their spending increases annually to the 2% of GDP commitment under NATO. This means other departments are likely to lose out on additional funding and have to do with less, potentially facing cuts in the last three years of this government. However, it is unlikely this will happen in practice and most often departments see a top-up in later budgets.
The front-loaded nature of the spending increase in the Budget has profound implications for the wider economy; it represents a significant increase of demand next year which may be difficult for the economy to meet, leading to an increase in inflation. Early OBR predictions are that we could see an increase of 0.5% in inflation as a result of this budget, slowing down the pace of Bank of England’s interest rate cuts in 2025. Market predictions are that interest rates are expected to settle at around 4%.
With higher interest rates, consumer spending is likely to take longer to recover and private business investment is likely to slow. This is the negative consequence of the budget; the public sector spending may crowd out the private sector in the short term. For those who expected more pro-growth policies from the new government, they have been disappointed. The overall supply side of the economy is still likely to grow as a result of this budget, but this will be in the longer term.
