The government is directing more investment to the most deprived councils
The government is embarking on the long journey of trying to end the crisis in local government finance.
Labour has followed through on its promise of providing more funding to the councils who need it most. But a single year cannot unpick more than a decade of unequal changes in funding, says Stuart Hoddinott
The government has made a flurry of announcement about local government finance in recent months. In October, it used the budget to set out top-line spending plans for the next year, and in November published a policy statement which gave a first glimpse of its longer-term reform plans for the sector. But December’s publication of the provisional local government finance settlement is the first time that Keir Starmer’s administration has had to confirm where the money will go.
The overall change in funding (known officially as core spending power, or CSP) for local authorities in 2025/26 is not a cause for surprise, with total CSP set to rise by £2.3bn in cash terms. This equates to a 3.5% increase in real terms, which is slightly higher than the 3.2% announced in the budget.
That will leave CSP 8.3% lower in real terms than in 2010/11. If the government sticks to current spending plans beyond 2025/26, CSP will be approximately 3.8% beneath 2010/11 levels by the end of the decade, according to our calculations. More interesting than the total level of funding, however, is how the government has chosen to distribute the money.
The government is right to direct more funding to deprived areas
In line with its pledge in the local government policy statement 25 https://www.gov.uk/government/publications/local-government-finance-policy-statement-2025-to-2026/local-government-finance-policy-statement-2025-to-2… , the government will direct far more funding to the most deprived local authorities in the country in 2025/26 – and the difference is large. The least deprived decile of upper- and single-tier local authorities will see their CSP grow by 3% on average in 2025/26, while the those in the most deprived decile will have an average increase of 6.4%.
The government used the newly created ‘Recovery grant’ (worth £600m in 2025/26) to target that funding, with the grant directing money towards the councils with the greatest “need” – calculated using deprivation, population and the size of the tax base. 26 https://assets.publishing.service.gov.uk/media/676186d6f666d2e4faef3999/Technical_note_on_Recovery_Grant_methodology_2025_to_2026.pdf That money is not ringfenced for any specific purpose, meaning local authorities will be able to spend it how they see fit.
The recovery grant was funded partly through the abolition of the ‘Rural services delivery grant’, which supported more rural areas, meaning more rural – but less deprived local authorities – may feel like they have lost out; the leader of Somerset council has already publicly claimed that the new allocation does not take account of the additional costs of providing rural services. 27 https://www.bbc.co.uk/news/articles/c9q7nn7q5pvo While her argument has some merit, the settlement directly targets those authorities that have experienced the worst combination of funding cuts and demand increases since 2010.
It will take years to fully rebalance funding towards more deprived authorities
Even with the heavy skew of funding towards more deprived authorities, it is not enough to offset the disproportionate cuts that have been imposed on them since 2010. Between 2010/11 and 2024/25, the most deprived decile of authorities had their funding cut by 20.1% in real terms. After this settlement, the cut between 2010/11 and 2025/26 will still stand at 15.3%.
That is to be expected. Without substantially more funding for the sector (difficult to do in the currently constrained fiscal environment), it would be unreasonable to expect the government to completely reverse the pattern that is the result of more than 14 years of policy making. In that light, this finance settlement is a good first step – but this increase may not be enough to offset rapidly rising costs
As we argued at the time, the government’s planned increases in employer national insurance contributions (NICs) and the national living wage (NLW) announced at the budget will harm local authorities which will not be compensated for the additional costs like other services. Nuffield Trust estimate that those two changes will increase local authorities’ cost of providing adult social care by £2bn 28 https://www.nuffieldtrust.org.uk/news-item/will-the-autumn-budget-push-the-social-care-sector-beyond-breaking-point , and local authorities will face rising costs – the full extent is harder to estimate – for the same reasons in other services.
The government will provide £515m in 2025/26 – not yet included in CSP figures – to offset some of the cost of the rise in employer NICs 29 https://assets.publishing.service.gov.uk/media/6762a0bf3229e84d9bbde758/National_Insurance_Contributions_Compensation_Methodology_Note__1_.pdf , but this increase is beneath the amount (£665m) that Nuffield Trust estimates it will cost local authorities from adult social care alone.
Councils have now experienced multiple years in which the NLW has outstripped inflation, with the disproportionate amount of the adult social care workforce employed at or just above the NLW meaning increases erode the value of settlements even when they rise in real terms. The government must consider the wider, above inflation cost pressures that local authorities experience when making allocations.
There were other important announcements alongside funding allocations
The settlement followed through on the government’s promise to reduce the number of ringfenced funding pots. For example, in children’s services the government is consolidating six separate funding pots from the Department for Education into the ‘Children’s and families grant’ which will be worth £414m 30 https://www.local.gov.uk/parliament/briefings-and-responses/provisional-local-government-finance-settlement-202526-day . This is a welcome step, and in line with recommendations that we have made in previous work.
Following the pattern of recent years, the government confirmed that councils will be able to continue to raise council tax to fund services. All local authorities will be able to raise council tax by 3% without triggering a local referendum. And local authorities with responsibility for social care will be able to raise council tax by an additional 2%. Both those amounts are the same as they have been since 2023/24.
The last government increasingly relied on the use of ‘Exceptional financial support’ (EFS) for local authorities that were struggling to balance their funding and spending. This involved a mixture of interventions including the use of capital budgets (for example selling buildings) to fund day to day spending and allowing local authorities to increase council tax by larger amounts. The Local Government Association (LGA) reports that the Labour government will consider local authorities’ requests for exceptional council tax increases where appropriate. 31 https://www.local.gov.uk/parliament/briefings-and-responses/provisional-local-government-finance-settlement-202526-day
Finally, the government announced a consultation on local government funding reform for 2026/27 onwards. 32 https://www.gov.uk/government/organisations/ministry-of-housing-communities-local-government This will seek views on how the government should go about more closely matching funding with need. The consultation document said that the government hopes to publish its detailed approach to reform after the spending review concludes in “late spring”.
That consultation is a reminder that the recent flurry of announcements are only the first – though vital – steps towards ending the crisis in local government finance.