Failing to fix local government could hurt Labour’s re-election chances

The Labour government inherited an unenviable situation in local government. Funding was approximately 15% lower in real terms in 2024/25 than in 2009/10, a number which is even worse when accounting for population growth.

The spending plans laid out by the Sunak government implied further cuts to grant funding – a situation Labour managed to avoid at last year’s budget and this year’s spending review by (among other things) raising NHS spending by less than expected. That means that local government funding – from a mixture of grant funding and council tax increases – will grow throughout this parliament, though will remain beneath 2009/10 levels in 2028/29.

Increasing local authority spending is predominantly being directed towards adult and children’s social care and homelessness services. As this year’s Performance Tracker shows, the problem for the government is that the cost of delivering all those services is rising much more quickly than economy-wide-inflation and more quickly than even relatively large real-terms funding increases. In short, local authorities are being forced to pay more for every person that they provide with social care and temporary accommodation.

There are signs of severe financial distress in local government

Local authorities have been dealing with tight funding for a decade and a half. Every council has been through round after round of savings drives and transformation programmes. As the recently elected Reform councils are finding, there are no meaningful cuts left to make that won’t result in politically damaging service reductions.

There are signs financial pressure is really starting to bite. In this financial year, the government granted 25 of 153 upper- and single-tier local authorities (16.3%) emergency funding powers. That means those councils have permission to sell assets (such as publicly owned libraries and leisure centres) and borrow to meet day-to-day budget pressures. That is a clearly unsustainable approach, which mortgages the future to paper over inadequate funding in the present.

Local authorities hold reserves – which they try to avoid relying on if possible – to bridge in-year funding gaps and meet unexpected financial pressures. Between 2021/22 and 2024/25, upper- and single-tier local authorities reduced the average levels of reserves they hold in each year. Reserves are now lower than at any point since 2011/12. By 2024/25, almost half of local authorities had drawn down their reserves for three or more consecutive years. As with emergency funding described above, the government cannot rely on reserves as a long-term source of local authority funding. 

It is clear that without a substantial shift in local government funding or responsibilities, more local authorities will end up in dire financial straits.

Welcome reforms may not be felt by most voters

Insufficient local government funding is a political issue for the government as well as a fiscal one. Local authorities’ decision to direct ever more funding towards services (adult and children’s social care and homelessness) supporting the most vulnerable people is logical given incredibly tight funding. The problem for the government is that most people have no contact with those services, meaning that residents see their council tax go up every year while potholes remain unfilled and the local authority closes more libraries and youth centres. Frustrations over how the government spends taxpayers’ money inevitably follow.

This year’s Performance Tracker shows that the government is making good progress on difficult policy areas in local government. It is simplifying financial flows to local authorities and providing more long-term certainty over funding. It is rationalising local government, abolishing shire districts to create unitary authorities across the entire country that it hopes will simplify service provision and achieve some savings. It is undertaking the Fair Funding Review, a programme which aims to redistribute funding between local authorities to better match money with need. It is launching the Local Audit Office to address the major backlog in local government audit. And it has launched reforms of children’s social care and intends to publish white papers on SEND and homelessness services this autumn. 

These measures are all welcome attempts to tackle tricky problems which, in many cases, the last government avoided. But there is a real risk that the median voter will never feel any benefit from these reforms, at least not in this parliament. Ultimately, money is vital. The people we spoke to who work in local authorities feel and understand voters’ frustrations and have no desire to cut spending on valued services. But there is little they can do given their statutory duties and limited funding. 

Every government faces competing demands and spending choices, but giving councils the financial headroom to invest in universal services – community centres, children’s centres, parks, libraries – that their residents want and value could help to restore trust. And the government clearly believes the same. At the end of last month, it announced its Pride in Place strategy  ⁴ https://www.gov.uk/government/publications/pride-in-place-strategy/pride-in-place-strategy  which will provide local authorities with £5 billion worth of funding over the next 10 years to invest in community spaces, public spaces, and revitalisation of high streets. Yet, at the same time, government is still encouraging local authorities to sell community assets to plug in-year funding gaps. The government should have the courage of its devolutionary commitments, providing this money directly to local authorities to spend as their residents wish.