I think the most likely outcome of an autumn 2007 election is probably a very small Labour majority, certainly of no more than twenty seats. If Labour won, let's say, 330 seats and a majority of ten, then that supposes the Tories make about 25 gains from Labour, and let's throw in another fifteen from the Lib Dems, who without a "debate situation" are likely to do get squeezed. Cameron's got his party an extra forty seats or so, which isn't really that many more than Howard managed in 2005. David Davis is, at this point, still a reasonably viable leadership contender, so I'd imagine there'll be murmurings against the Cameroons.
Assuming the by-elections in Crewe & Nantwich, Glasgow East and Norwich North follow a similar pattern (which isn't guaranteed if the Tories fall apart in 2007, but is not implausible) then the Government's majority will be down to four by the end of 2009: and of course that's not fully through the Parliament. IOTL, there was never a by-election in North West Leicestershire due to the sitting MP dying immediately before the GE, but ITTL there will be, which will almost certainly be another Conservative gain, taking Labour's majority down to two. ITTL, the Feltham and Heston by-election could well be won by the Conservatives, meaning Labour will limp towards the end of the Parliament without a majority. All of this of course assumes that various MPs pass away on schedule, and there are no further tragedies.
One big event that I can immediately think of going differently ITTL is the Lisbon Treaty. IOTL there were serious rebellions against this by Labour MPs, and in a situation where the Government's majority is so small, then I'd imagine it could well be defeated. That'd probably result in a referendum on the Lisbon Treaty in the spring of 2008, in which I'd be surprised by anything other than a rejection by the British public: the only situation where this might be different is if the Tories have gone into all-out civil war mode after a 2007 defeat.
The local elections in 2008 and 2009 were already terrible for Labour, so I'd say it's unlikely that things will get any worse for them. What will change is that Labour's revival in local government won't begin until a few years later ITTL, giving the Tories and LDs three more local election cycles to build up their council bases and thus the efficiency of their ground operations. That'll likely mean somewhat heavier Labour losses in any ATL 2012 election. Speaking of local elections, I'd imagine the SNP will take control in Edinburgh in 2011 as OTL, and Welsh Labour will get badly battered that year too: could an anti-Labour rainbow coalition take office?
Spending plans I imagine go as OTL, although without "austerity" until 2012. Britain will probably suffer a somewhat more serious IMF downgrade: although this might be balanced by somewhat stronger economic performance between 2010 and 2012. That said, as a Right-winger I'm sceptical that the economic difficulties of 2010-13 were all to do with spending cuts, although they probably played a part.
