The government is making tentative steps towards local government finance reform

The government’s newly-published local government finance policy statement is the clearest view that we have had of its plans for local government finance reform – and is a welcome one.

The statement focuses on the need to rebalance funding to “where it is most needed” and says it will use deprivation as a proxy for need. A new one-off £600m “Recovery Grant” will be “highly targeted” at places with the greatest need, meaning that some authorities will receive nothing. This focus is the right one, given funding cuts have fallen most heavily on the most deprived authorities since 2010.

Deprivation is often a good proxy of demand for many local authority-provided services, but a question remains about how the government plans to measure it. The Indices of Multiple Deprivation (the measure of deprivation produced by MHCLG) may not provide a truly contemporary view of need given it was last updated in 2019. ⁹ www.gov.uk/government/statistics/english-indices-of-deprivation-2019

While the Recovery Grant is only a one-year fund, the government has made clear that it intends to design a more permanent solution to the problem of mismatched funding and need. It says that it will adjust the funding formula from 2026/27, building on the ‘Fair Funding Review’. That would be a much-needed step; the funding formula was last updated in 2013/14, and the Fair Funding Review was launched in 2016, with implementation delayed multiple times. The government has also committed to “resetting” the business rates retention scheme to “match funding to where it is needed most”.

There are hints of the government’s agenda for public service reform

While the government’s agenda for public service reform is not fully fleshed out, this statement offers some clues.

Prevention is a theme that runs through this policy paper. The section on public service reform starts: “Reform and prevention are critical if we are to turn around the cycle of system failure and cost escalation.” As previously announced in the budget, there will be a £250m children’s social care prevention grant, £233m for homelessness services (intended in part to prevent homelessness), and a focus on a making adult social care more preventative. What form this takes is still unclear and the government says that it will set out the conditions for how local authorities can spend the children’s social care prevention grant “alongside the final settlement”. That could be an interesting first view of the government’s approach to prevention across all public services. Regardless of how it defines prevention, it will be difficult for local authorities to fund preventative services in the face of rising acute pressures, without a significant increase in funding or rationing of acute services.

Funding stability and flexibility for local authorities is also a priority. The recent trend has been for the government to provide local government with single-year settlements – an approach which makes it difficult for them to plan spending effectively. As previously announced, the government intends to provide a multi-year finance settlement from 2026/27 and to reduce the number of funding pots “so that councils have more certainty and flexibility to judge local priorities”.

Finally – and most vaguely – the document lays out the government’s intention to “give the sector greater autonomy”. It wants to “set out and measure progress on the key services and outcomes we expect local authorities to deliver”, with local government expected to deliver continuous improvement and value for money in return. One strand of this will be reform of the local government audit system – a pertinent topic considering the National Audit Office’s decision this week to disclaim the whole of government accounts due to the backlog in local government audit. ¹⁰ www.nao.org.uk/press-releases/spending-watchdog-disclaims-governments-accounts-for-the-first-time/  As a first step, the government committed to establishing the Auditing, Reporting and Governance Authority (ARGA) in the King’s Speech, a body designed by the previous government.

More unclear is how exactly the government intends to ensure local government autonomy while delivering minimum standards of performance. The previous government established the Office for Local Government (Oflog) to ostensibly play that role. Oflog was instantly unpopular in the sector, and it is unclear what the new government plans for the body. We have previously argued that a reformed Oflog, designed correctly, could effectively performance manage local government.

Reform alone will not solve all the issues in local government

The unspoken tension in this document is between the ambitious reform agenda and the overall amount that the government is willing to spend on the sector. The government decided to increase grant funding by £1.3bn at the budget. If all local authorities increase council tax by the maximum allowed, core spending power (CSP) is due to rise by 3.2% in real terms in 2025/26 – an amount that is in line with average annual increases since 2019, but which still leaves CSP roughly 9% lower in real terms than in 2010. 

Funding is tighter still beyond 2025/26. CSP is due to increase by only 1.2% between 2025/26 and 2029/30, which would leave local government funding approximately 4% lower in real terms at the end of this parliament than it was 20 years before, in 2010.

At the same time, the government also increased the national living wage (NLW) and employer national insurance contributions (NICs) at the budget without providing local authorities funding to offset higher fees from the private providers of services. Nuffield Trust forecasts that this will cost local authorities £2bn more for adult social care alone, ¹² www.nuffieldtrust.org.uk/news-item/will-the-autumn-budget-push-the-social-care-sector-beyond-breaking-point  consuming more than half (55.5%) of the £3.6bn cash terms increase in CSP in 2025/26.

Given the relatively limited increases in CSP for 2025/26 and beyond, it is understandable that the government should direct funding towards the authorities that need it most. But it must also accept that some local authorities will therefore be unhappy with their settlements next month. For example, the abolition of the Rural Services Delivery Grant means that rural local authorities may consider themselves hard done by, while deprived urban authorities see larger than expected increases in CSP.

One way around these difficult distributional issues would be to provide substantially more funding to the sector, either through more grant funding or by providing local authorities more flexibility on council tax. Neither of these options seem likely in the near term. In the absence of that increase, and given substantial rising pressure on local authority finances, it will be difficult for the government to meet its objectives on service reform and improvements in service performance through redistribution alone.

Attention now turns to the finance settlement (the provisional round of which is due in the middle of next month) and then the spending review next June. Whether or not the government intends to rely purely on redistribution will be clearer after those two events.