Since 2010, the UK has pursued a policy of austerity characterised by public spending cuts and welfare changes. There has been speculation – but little actual research – about the effects of this policy on health inequalities. This paper reports on a case study of local health inequalities in the local authority of Stockton-on-Tees in the North East of England, an area characterised by high spatial and socio-economic inequalities. The paper presents baseline findings from a prospective cohort study of inequalities in mental health and mental wellbeing between the most and least deprived areas of Stockton-on-Tees. This is the first quantitative study to explore local mental health inequalities during the current period of austerity and the first UK study to empirically examine the relative contributions of material, psychosocial and behavioural determinants in explaining the gap. Using a stratified random sampling technique, the data was analysed using multi-level models that explore the gap in mental health and wellbeing between people from the most and least deprived areas of the local authority, and the relative contributions of material, psychosocial and behavioural factors to this gap. The main findings indicate that there is a significant gap in mental health between the two areas, and that material and psychosocial factors appear to underpin this gap. The findings are discussed in relation to the context of the continuing programme of welfare changes and public spending cuts in the UK. Keywords: Social determinants, Multilevel models, Survey, Mental wellbeing, United Kingdom, Welfare, Social inequality