The government is delivering a radical rebalancing of funding towards more deprived councils

The detail is extensive in this week’s announcement about funding allocations for councils – the Local Government Finance Settlement. But the most important point is that the government is ensuring that more deprived authorities will benefit the most from rising local government funding over the course of this parliament. Between 2024/25 and 2028/29 core spending power (the amount of funding available to councils to spend on services) will increase by 24.6% in real terms for the most deprived decile of local authorities. In contrast, the 10% least deprived local authorities will see a much smaller real-terms increase: only 3.4%.

The logic for this is sound. Those local authorities tend to have higher need for services, particularly the acute, expensive services such as social care and homelessness. More deprived local authorities also received larger cuts than better off peers during the 2010s.

This isn’t the first settlement in which a government has directed more funding to more deprived councils; both Conservative and Labour governments followed that pattern between 2019/20 and 2025/26. What is different this time is that the government is also reforming the funding formulae that determines grant allocations, meaning that all else being equal, more deprived authorities should receive funding that is more closely matched to their need beyond 2028/29.  

Larger settlements for some councils mean smaller ones for others. For some local authorities – 11 out of 152 upper- and single-tier local authorities for which there is data – it means their spending power will fall in real terms between 2024/25 and 2028/29.  

Hit particularly hard are councils in inner London. Six out of 14 (42.9%) will see their spending power cut in real terms between 2024/25 and 2028/29, with Wandsworth suffering the largest cut among upper-tier local authorities at -6.8% in real terms.  

The cut would be larger for some of those local authorities except central government has given them permission to raise council tax rates by more than other authorities in 2027/28 and 2028/29. For most local authorities that deliver social care, the government caps annual increases in council tax at 5%. However, central government has removed the cap for six authorities: Wandsworth, Hammersmith and Fulham, Windsor and Maidenhead, Kensington and Chelsea, Westminster and the City of London. Central government has done that because they will receive large cuts to grant funding and have below average levels of council tax.  

As a result, central government forecasts that income from council tax will increase by much larger amounts for those local authorities. Compared to the 19.0% average real terms increase for other upper-tier local authorities between 2024/25 and 2028/29, council tax income is forecast to rise by almost 80% in real terms in some of those councils (79.7% in Westminster and 77.7% in Wandsworth). If those councils choose not to raise council tax rates by as much as central government expects, then their spending power will be lower than currently forecast. 

Those six local authorities have kept their council tax much lower than comparative councils. In the case of Westminster and Wandsworth, their band D council tax rate is just over two-fifths the median level of single-tier authorities in England (44.3% and 43.4% respectively). 

It's too early to tell if these reforms will stabilise councils’ finances 

As Institute for Government work from earlier this year showed, local government is going through a protracted period of financial instability. Local authorities are increasingly relying on unsustainable sources of funding such as reserves, asset sales and borrowing to fund day-to-day spending.  

It is not clear yet whether the allocations announced this week will reverse that trend. One indication that it might is that some of the most financially distressed local authorities will receive some of the largest increases in spending power. Since 2018/19, 37 out of 153 upper-tier local authorities have claimed ‘exceptional financial support’ (EFS, emergency funding to plug budget gaps) – a clear indicator of severe financial pressure. Among those local authorities, core spending power is set to increase by 18.5% in real terms between 2024/25 and 2028/29 compared to 13.4% for local authorities that have never needed EFS.  

That may not be enough to fully stabilise the sector, however. There are reports of more local authorities applying for EFSi and for permission to raise council tax by more than 10%. And as we reported in our Public Services Performance Tracker, there is substantial demand and cost pressure on local authorities’ budgets. Demand for homelessness and special educational needs and disabilities (SEND) services are rising rapidly. And the cost of delivering adult and children’s social care are likely to continue to outstrip inflation.  

Ultimately, there may just not be enough funding given the pressures from statutory duties and how services are currently delivered. If that is the case, then redistribution alone – though a sensible decision – may not be enough to end the ongoing crisis in local govt finance.

The government continues its sensible approach to managing councils’ funding

The amount of money that central government provides to local authorities matters, but so too does the way that it allocates funding. The Conservative government became overly reliant on single-year settlements for local government, making it very hard for councils to plan their spending beyond the end of the financial year. That makes this multi-year settlement (the first since 2016/17) a welcome move from central government.  

The last government also increased the number of small, ringfenced pots of money that it gave to local government. That approach tied councils’ hands. Last year, this government started the process of consolidating some of those pots into larger, un-ringfenced grants. It has gone further this year, rolling grants such as the new homes bonus and the market sustainability and improvement fund into funding that is allocated according to its updated formulae. That funding will come with fewer conditions and reporting burdens attached, freeing councils up to spend that money where they see fit.

This settlement demonstrates the government’s willingness to make difficult and politically fraught reforms. It should be applauded for doing so. Whether it will be sufficient to return the sector to financial stability will become clear over the coming years.