With public spending £150bn higher than before the pandemic and pressure mounting to raise £30bn in new revenue, Rachel Reeves’ second Budget will have big implications for local economies, property taxation and the Fair Funding Review. Jonathan Werran, chief executive of Localis, explores how the chancellor’s fiscal choices could shape local growth and investment for years to come.

The timing of this autumn’s Budget was designed to buy the Treasury and its advisers as much time and space as possible to address a most complex set of challenges for a UK state which is now spending upwards of £1.28tn annually. In our general wilful amnesia about the lasting impact of the pandemic, it must be noted that public spending is around 5% higher than it was in 2019 and has settled there. In cold cash terms, this translates as £150bn higher outlay each year than would otherwise have been the case.

Among the new brooms sweeping revenue raising ideas, the sweeper in chief is pensions minister Torsten Bell, the former adviser to Ed Miliband when Labour party leader during the coalition years until the Edstone and the rocky encounter with the 2015 general election. After this, Bell was a busy and media-friendly chief executive of the respected Resolution think tank, whose core mission to improve the living standards of low-to-middle income households matches to a tee Chancellor Rachel Reeves ambitions for a Budget whose headline intentions are to ‘address an economy that’s “not working well enough for working people”’.

To recap, our envelope for public spending was set in the June spending review. Not only did this establish multi-year settlements in day-to-day or revenue expenditure for 2028/29, but it also set in process the Fair Funding Review 2.0 which will redistribute local government allocations to the benefit in the main of the north and midlands and at the expense of London and the greater southeast. In the June spending review capital sums were fixed for 2029/30 and the local state emerged a winner with a £39bn boost to affordable housing and a £113bn uplift in capital expenditure for regional infrastructure projects.

However, the task in Reeves’ second Budget is to increase tax revenue to the tune of £30bn at the same time as she balances a whole set of other spending demands, not least the promise to scrap the two-children benefit cap and the giant scourge of debt interest which is second only to health service spending as the greatest single ticket item.

And on the other hand, to keep honest to Labour’s 2024 manifesto, this must be achieved without raising income tax, employees National Insurance or VAT. According to Jean-Baptiste Colbert, Louis XIV's finance minister: ‘The art of taxation consists in so plucking the goose as to obtain the largest number of feathers with the least possible amount of hissing’. The corporate geese of UK plc are hissing mad at the moment in the run up to November 26th, having taken great umbrage at the hike in employers’ National Insurance contributions last year and its impact on employment and staffing costs.

From a local government perspective, therefore, what will be most salient from the budget is what happens to the taxes on property and what any tax hikes or mitigations will mean for local economies and prospects for place-based growth and investment.

First in line is business rates. The chancellor is set to give an update on business rates reform with policy shifts directed to ‘support economic growth and entrepreneurship’. How this balances with the need for rates to remain a viable and steady source of revenue for local government, taking into account the impact of more regular revaluations, and the prospect for more progressive reform – an online sales tax or even localised corporation tax – remains to be seen.

With an eye cast back to the 2015 manifestos, other changes might recall the ‘mansion tax’ proposals from the Labour and Lib Dems to impose annual property charges on the most expensive private residences. Such a move has been circulating for a 0.54% levy on properties worth more than £500,000 and as a way of replacing stamp duty and negating the impact this tax has on preventing people moving for new jobs or giving elderly people in larger homes the confidence to downsize. What impact, if any, this would have on the Fair Funding 2.0 review already set in motion, and on property charges for homes valued at below £500,000 would be the stuff of financial modelling nightmares.

The Government’s national plan for growth is predicated on solving the post-war vampiric curse of low productivity, now encumbered by two decades of lost growth after the 2007 financial crisis and the concertina damage of the pandemic which squeezed the economy and drove public spending ever upwards.

In the current economic climate, the ability to restore business confidence and – in Keynesian language – ‘animal spirits’ will require the conjuring of some marvellous medicine. In this context, the threat by pharmaceutical giant AstraZeneca to end its investment in the UK unless the NHS coughs up more for how it pays for medicine is a cautionary one. Our local growth plans and the modern industrial strategy will live and die by their ability to draw in significant private investment. Without which more of our working people will lack a viable local economy in which to work in.

To read more about the upcoming Autumn Budget check out the first article in our Autumn Budget Insights series: Can reorganisation and finance move in step?