'Heartbreaking' plans to raise council tax by up to 11%

Somerset Council is negotiating with the UK government to seek permission to raise council tax by up to 11%, which would lift the average Band D bill from £1,857 to £2,060, as the authority warns it could face a c.£73m overspend driven by rising adult social care, children’s services and homelessness costs. The council—normally limited to 5% increases and previously allowed 7.49% in Feb 2025 while some areas have received 10% caps—says its rates remain below the national average; the proposal has prompted political pushback and signals potential service cuts or further local fiscal measures if approval is not granted.

Analysis

Market structure: An 11% council tax option shifts spending from local discretionary consumption toward taxes and social services. Winners are outsourced social-care providers and inflation-linked social-infrastructure trusts (stable contracted cashflows); losers include local retail, leisure and regional housebuilders exposed to Somerset-level demand, with council-level bond spreads likely to widen relative to sovereigns if fiscal stress becomes systemic.

Risk assessment: Tail risks include (A) central government refusal forcing deep cuts and local demand collapse, or (B) widescale permission for above-guideline hikes prompting political backlash and eventual central transfers—both could swing municipal credit spreads ±100–300bp. Immediate (days) risk is headline shock to local assets; short-term (3–6 months) is pressure on regional consumption and mortgage delinquencies; long-term (12+ months) is structural reallocation toward private social-care exposure and capital recycling into contracted infrastructure.

Trade implications: Favor defensive, contracted cashflow exposures (social-infrastructure / PPP trusts) and selective age-focused consumer services while de-emphasising regional housebuilders and high-beta UK retailers. Use short dated equity tail hedges (3–6 month puts) rather than long sovereign bets; municipal dynamics will be idiosyncratic so prefer liquid proxies with clear revenue linkage to social-care budgets.

Contrarian angles: Consensus focuses on household pain; investors may under-appreciate that material tax increases make outsourced providers and inflation-linked PPP assets more valuable and that central government may ultimately backstop councils, tightening spreads. Historical parallel: 2010s UK austerity led to outsourcing winners; a similar dynamic could repeat—avoid extrapolating one-council headlines into nationwide macro calls.

Key Decisions for Investors

• Establish a 2–3% portfolio long position in HICL Infrastructure plc (HICL.L) within 2 weeks — rationale: inflation-linked, contracted social-infrastructure cashflows; target +10–15% in 6–12 months, stop loss -8%.
• Add a 1–2% tactical long in Saga plc (SAGA.L) over 30 days to capture older-demographic service demand and insurance upsell; target +12–15% in 6–12 months, stop loss -10%.
• Reduce exposure to UK regional housebuilders by 40–60% (examples: Persimmon PSN.L, Barratt BDEV.L) within 30 days; reallocate proceeds into HICL and SAGA to lower cyclical risk ahead of 3–6 month demand pressure.
• Buy a 3–6 month 5% OTM put spread on the iShares Core FTSE 100 UCITS ETF (ISF.L) sized at ~0.5% of portfolio as a low-cost hedge against regional fiscal spillover into UK equities; widen to 1% if >5 councils request >7.5% rises in next 60 days.
• Trigger checklist: If UK Dept for Levelling Up signals approval for >7.5% increases to multiple counties by Mar 2025, increase HICL/SAGA exposure by another 1–2%; if central government announces direct bailouts to councils, close housebuilder shorts and trim equity hedges within 10 trading days.