Rachel Reeves’ 2025 Budget: A Blow to Local Government Disguised as Reform

Chancellor Rachel Reeves delivered her second Budget today, pitching it as “fair and necessary choices” to rebuild a “stronger, more secure Britain.” Yet beneath the rhetoric sits a package that raises £26bn in new taxes, pushes the overall tax burden to a record ~38% of GDP by 2030–31, and extends fiscal drag well into the next decade while leaving local authorities exposed to rising demand, complex new levies, and still‑uncertain structural reforms. The OBR leak an unprecedented early publication of the watchdog’s economic and fiscal outlook only underscored the sense of chaos around a statement that was supposed to restore confidence.

A “Smorgasbord” of Tax Rises and the Stealth Squeeze on Households

Reeves’ centrepiece is a freeze of personal income tax thresholds for a further three years from 2028 a continuation of fiscal drag that, as wages nominally rise, will pull millions into higher bands and quietly lift effective tax rates. Sky News reports the OBR expects this and related measures to take the UK’s tax burden to an all‑time high, with the threshold freeze alone a major component of the £26bn tax package announced today.

In her pre‑Budget address, Reeves insisted she would not “return Britain back to austerity,” but conceded “I am asking everyone to make a contribution.” That “contribution” is largely paid by working households through stealth measures: threshold freezes, cuts to cash ISA allowances (from £20,000 to £12,000, with an exception for over‑65s), and NI charged on salary‑sacrifice pension contributions above £2,000 direct hits to saving and take‑home pay.

“I will not return Britain back to austerity… I will push ahead with the biggest drive for growth in a generation.”   Rachel Reeves, Budget day address and Commons statement.

The political cost is clear. Reeves had pledged not to raise income tax, VAT, or NI; she now maintains that rates are unchanged but the freeze guarantees higher bills for millions, making the pledge moot in practice. Even sympathetic analysis brands this approach as a stealth rise that “breaks the spirit” of the promise.

The “Mansion Tax” and Tourism Levy: Local Revenue or Local Headache?

The widely‑trailed “high‑value council tax surcharge” (mansion tax) will charge owners of homes valued above £2m between £2,500 and £7,500 annually from April 2028 (indexed to CPI). Crucially, revenues flow to central government, not directly to councils, diluting the local fiscal benefit and adding complexity to valuation, disputes, and collection interfaces. The OBR estimates the measure will raise ~£0.4bn by 2029–30.

Separately, mayors in England will be empowered to impose a tourist tax on overnight stays. Westminster City Council urged that such levies must be reinvested in local services rather than becoming general Treasury revenues an early warning that design and hypothecation will make or break public acceptance. For smaller destinations and visitor economies already fragile post‑pandemic, the levy risks dampening demand while layering on new administrative burdens.

Welfare and Cost of Living: A Social Win with a Fiscal Sting

Reeves scrapped the two‑child benefit cap from April 2026 a policy change widely welcomed across local government and anti‑poverty networks given its projected impact in reducing child poverty. The OBR and Sky News put the cost at £2.3–3.0bn by 2029/30. For councils, this will mitigate demand pressures in housing, social care, and early help but is funded via stealth taxation rather than from productivity‑led growth.

Reeves also highlighted cost‑of‑living relief: maintaining the 5p cut in fuel duty until Sept 2026 (then unwinding in stages) and cutting household energy levies. These moves partly offset the broader tax squeeze, but they are temporary and reversible, and the net medium‑term effect remains fiscally contractionary for households.

Economic Backdrop: Stagnation, Policy Instability, and the OBR Leak

The budget lands against weak growth and rising borrowing costs. Revised outlooks point to GDP growth roughly 1.4% (2026) and 1.5% (2027), subdued by productivity underperformance, wage‑pressure inflation, and constrained fiscal headroom. The OBR’s early leak publishing details ~40 minutes before the Chancellor rose was labelled a “serious error” by Reeves and interpreted by markets and media as a confidence knock.

Institutes and commentators note Reeves’ “iron‑clad” fiscal rules have translated into policy instability as buffers remain thin; when forecasts deteriorate, the Treasury reaches for tax raises and ad‑hoc levies to hit the rules, rather than undertaking coherent tax design or a genuine growth strategy.

Roads, EVs and Local Infrastructure: The Per‑Mile Trap

The budget introduces a per‑mile levy for EVs from April 2028 3p/mile for battery EVs and 1.5p/mile for plug‑in hybrids while promising to double local road maintenance funding in England by the end of the Parliament. Auto Express frames this as replacing lost fuel‑duty revenue but warns the “devil is in the details,” including compliance, privacy, and administration (MoT‑based mileage checks versus self‑declaration). Councils get more road cash, but the political heat of a new motoring tax will be felt locally; it risks undermining net‑zero narratives if perceived as punishing early adopters.

Devolution Headlines, Distribution Questions

Reeves announced what the government calls a “historic commitment to fiscal devolution,” devolving at least £13bn of SR25 funding to seven major combined authorities and creating £902m over four years for local growth funds in 11 Northern and Midlands city regions. Additional Barnett consequentials include £820m (Scotland), £505m (Wales), and £370m (Northern Ireland) over the spending review period.

This looks impressive, but distributional equity remains the elephant in the room. Non‑mayoral and rural councils many facing acute financial stress are largely out of scope, and the flexibility of single‑pot settlements depends on Treasury conditions. Without a Fair Funding Review reflecting inflation and demand (social care, homelessness, temporary accommodation), this is selective empowerment, not systemic repair.

SEND: A Promise Tomorrow, Pressure Today

Reeves signalled that future SEND costs would be managed centrally once the Statutory Override ends (2027–28), with more detail promised in the Local Government Finance Settlement. That is welcome if it lands. For now, councils still carry historic high needs deficits, and officers remain unclear on eligibility, conditions, and timelines for support. The risk is a multi‑year gap where deficits continue to accrue, squeezing general funds, reserves, and capitalisation options.

What This Means for Local Government

1) Demand Increased, Fiscal Space Reduced

The freeze on income tax thresholds until 2031 and the introduction of new levies such as NI on certain pension contributions and reduced ISA allowances will erode household disposable income. For councils, this translates into heightened demand for core services:

• Debt advice and welfare support as more families struggle with rising living costs and stealth taxation.

• Homelessness prevention and temporary accommodation as fiscal drag pushes borderline households into crisis.

• Children’s services and early help as the economic squeeze compounds vulnerabilities.

While Reeves insists there is “no return to austerity,” the reality for councils outside devolved city regions is stark: real-terms funding remains fragile, and inflation-adjusted budgets are shrinking. The Fair Funding Review remains delayed, meaning authorities with high deprivation and demographic pressures will face widening gaps between statutory obligations and available resources. This is not just a financial issue it’s a capacity crisis, forcing councils to ration discretionary services and rely on reserves that are already depleted.

2) More Complexity, Not More Autonomy

The mansion tax and tourism levy are presented as tools for local empowerment, but the design raises serious concerns:

• Valuation disputes for properties over £2m will require specialist expertise, increasing administrative costs.

• Compliance and enforcement for tourism levies could burden councils with new systems and staff training.

• Reputational risk: If revenues are not ring-fenced locally, councils could face public backlash for charges they do not fully control.

This is a classic case of responsibility without resource. Councils may bear the political heat for unpopular levies while the fiscal benefit flows to the Treasury or is diluted through conditional grants. True autonomy would mean retention of proceeds, flexibility in use, and streamlined governance not piecemeal powers tied to central conditions.

3) Infrastructure Optics vs. Reality

Doubling road maintenance funding sounds positive, but the mechanism EV mileage taxation is fraught with risk:

• Public trust hinges on transparent design and privacy safeguards. Mileage-based taxation raises concerns about data collection and enforcement.

• Behavioural impact: Penalising EV drivers could undermine the government’s net-zero narrative and local climate strategies.

• Delivery gap: Councils will need to demonstrate visible improvements in road conditions to justify the levy, or risk being seen as complicit in an unpopular tax.

This is a textbook example of optics over substance: a headline promise of investment funded by a politically sensitive measure. Councils must prepare for communications challenges, ensuring residents see tangible benefits linked to the levy.

4) SEND Relief But Not Yet

Reeves’ commitment to manage future SEND costs centrally after 2027–28 offers hope, but the lack of detail leaves councils exposed for years:

• Historic deficits continue to accumulate, eroding general funds and forcing capitalisation directions.

• Uncertainty around eligibility, timelines, and conditions for support undermines financial planning.

• Risk of cliff-edge: Without interim relief, councils could enter 2026–27 with unsustainable deficits, triggering Section 114 notices in the most vulnerable authorities.

SEND remains the single biggest pressure on many council budgets. A promise of reform tomorrow does not solve the crisis today. Councils need immediate clarity in the Local Government Finance Settlement and a phased funding plan to stabilise high-needs budgets before the override ends.

A Sector-Led Response: Practical Actions for Officers & Members

1. Press for Hypothecation & Local Control

The introduction of new levies such as the tourist tax and the high-value property surcharge presents both opportunity and risk. If these revenues are absorbed into central coffers, councils will shoulder the political burden without tangible benefit.

• Action: Lobby for statutory ring-fencing of these revenues for local service budgets, with clear rules on allocation and transparent reporting.

• Why it matters: Hypothecation ensures that residents see a direct link between new charges and improved local outcomes whether that’s better roads, enhanced visitor infrastructure, or strengthened social care.

• Tactic: Work through LGA and CCN to push for legislative guarantees and publish case studies showing how locally retained levies can transform services.

  
  

2. Demand a Timetabled Fair Funding Review

The current funding formula is outdated and fails to reflect inflationary pressures, demographic shifts, and demand drivers such as temporary accommodation, adult social care, and children’s services.

• Action: Press DLUHC and Treasury for a time-bound review, with sector input and transparent milestones.

• Why it matters: Without recalibration, councils in high-need areas will continue to face structural deficits, forcing Section 114 notices and service rationing.

• Tactic: Mobilise regional networks to produce impact assessments showing the gap between statutory obligations and current funding, and use these to influence parliamentary committees and media narratives.

  
  

3. Accelerate Income Generation & Invest-to-Save

With fiscal space shrinking, councils must scale commercial strategies and preventative programmes to protect core services.

• Examples:

  • Expand housing-led temporary accommodation reduction schemes to cut spiralling TA costs.

  • Invest in early help and family support to reduce high-cost interventions in children’s services.

  • Develop commercial property portfolios and energy generation projects to create sustainable revenue streams.

• Why it matters: Every pound invested in prevention can save multiple pounds in crisis response.

• Tactic: Share best practice through sector forums, and build business cases that demonstrate ROI to elected members and auditors.

  
  

4. Prepare for EV Levy Politics

The new EV mileage tax is politically sensitive and could undermine public trust if mishandled. Councils will need a proactive strategy to manage perception and compliance.

• Action: Develop a communications plan that explains the rationale, privacy safeguards, and how receipts will fund visible improvements in local roads.

• Why it matters: Without clear messaging, councils risk being seen as complicit in a “green penalty,” damaging climate commitments and resident confidence.

• Tactic: Partner with motoring organisations and local media to frame the levy as a fair contribution to infrastructure renewal, and publish before-and-after road condition data to evidence impact.

  
  

5. Secure Immediate SEND Support

SEND remains the single biggest financial pressure for many councils. Reeves’ promise of centralised cost management after 2027–28 is welcome but historic deficits and current overspends cannot wait.

• Action: Coordinate across CCN and LGA to codify terms for historic deficit support and the post-override model, and press for interim relief in the 2025–26 settlement.

• Why it matters: Without immediate clarity, councils will continue to burn through reserves and risk insolvency before reforms take effect.

• Tactic: Produce scenario modelling showing the financial cliff-edge if SEND deficits remain unmanaged, and use this to influence Treasury negotiations.

Bottom Line

This Budget shifts risk from the centre to localities. Councils cannot afford a passive stance. By demanding clarity, securing autonomy, and accelerating innovation, the sector can turn a reactive position into a proactive agenda one that safeguards services and strengthens local resilience.

Conclusion: Fairness Requires Honest Accounting And Real Localism

Reeves’ 2025 Budget claims fairness and growth, but delivers a stealth squeeze on households, reactive revenue instruments, and selective devolution that risks widening spatial inequalities. Scrapping the two‑child cap is a genuine social advance; yet without stable, sufficient local funding and clear SEND relief, councils are being asked to do more with less again.

Local government cannot withstand another cycle of short‑term fixes and opaque funding. The sector should speak with one voice: insist on clarity, equity, and real autonomy because without them, today’s Budget is not reform. It’s redistribution of risk from the centre to the localities.