Local government funding in England

What do local authorities in England do?

Local authorities in England deliver social care for children and adults and other services such as public health, libraries and waste collection, and some aspects of transport, housing and homelessness services, and education.  

How is local government funded in England?

Local authorities have three main sources of revenue:

• government grants – money from central government for local services
• council tax – a property tax levied on residential properties
• business rates – a property tax levied on business premises.

In 2024/25, local authorities in England received 32% of their funding from government grants, 46% from council tax, and 22% from retained business rates.

Unlike central government, local authorities cannot borrow to finance day-to-day spending, and so they must either run balanced budgets or draw down reserves – money built up by underspending in earlier years – so as not to exceed their annual revenue.  

Local government in England has limited revenue-raising powers compared to other wealthy countries. In 2022, every other G7 nation collected more taxes at either a local or regional level. ²⁴ https://www.oecd.org/tax/federalism/fiscal-decentralisation-database/ Tax revenue as percentage of total general government tax revenue [Table 9: 1965 - 2023]  5% of the UK’s taxes were collected, or intended to be collected, locally that year. The next two lowest countries were Italy (11% collected locally (or federally) and France (14%). In Canada, the country with the highest level, almost 50% of taxes were collected regionally or locally. 

How has local government funding changed since 2010?

Local authority ‘spending power’ – the amount of money authorities have to spend from government grants, council tax and business rates – fell by 22.6% in real terms between 2010/11 and 2019/20. Since then, funding has recovered somewhat, though in 2025/26 was still 8.2% lower in real terms than in 2010/11. Spending power will increase further throughout this parliament but will still be 0.5% lower in real terms in 2028/29 than in 2010/11. When accounting for population growth, spending power fell 27.5% in real terms between 2010/11 and 2019/20 and will still be 13.7% lower in real terms in 2028/29 than in 2010/11. 

The fall in spending power is largely because of reductions in central government grants. Central government cut grant funding by 40.1% in real terms between 2009/10 and 2019/20, from £51.8bn to £31.0bn (2025/26 prices). That downward trend reversed from 2020/21. That was partly the result of the Covid pandemic, during which central government made more grant funding available to local government. But grant funding continued to rise after the pandemic and in 2024/25 was 18.8% lower in real terms than in 2009/10. 

While grants from central government were cut, rates of council tax, set by individual councils, were allowed to increase. Local authorities raised 31.2% more council tax, in real terms, in 2024/25 compared to 2009/10.  

The proportion of local authorities’ income from council tax rose from 34.1% in 2009/10 to a high of 52.0% in 2019/20. It has since fallen back (to 45.6% in 2024/25) as grant funding growth outpaced the growth in income from council tax over that period. In 2024/25, 45.6% of local authorities’ funding came from council tax, 22.3% from retained business rates, and 32.1% from central government grants.

The Localism Act 2011 – which came into effect in 2012/13 – included a clause that prevented local authorities from raising council tax rates by more than 2% annually without holding a referendum. ²⁵ https://researchbriefings.parliament.uk/ResearchBriefing/Summary/SN05682  Central government has changed the level of this ‘referendum principle’ since 2012/13. And in 2016/17 introduced the ‘social care precept’, an additional amount that local authorities with responsibilities for social care could increase council tax by in a year. Since 2023/24, central government has set the total limit at 5%, for authorities with social care responsibilities ²⁶ https://scambs.moderngov.co.uk/documents/s53508/Review%20of%20Statutory%20Duties.pdf  – with 2% from the social care precept and the remaining 3% for discretionary spending under the referendum principle.  

Between 2010 and 2015, the coalition government encouraged councils to freeze council tax rates by offering them higher grants. In effect, councils who froze council taxes did not lose revenues. In some years, these grants were a ‘one-off’ – local authorities were given additional money for a single year – whereas in others they were permanently ‘rolled in’ to central government grants to local authorities. 

How have changes affected different local authorities?

All local authorities have had to find ways to do more with less in the face of cuts to their spending power. But the size of the cut since 2010 has varied across the country, with the largest cuts falling on the most deprived local authorities 

Grant funding was cut by a uniform percentage across all local authorities in the first half of the 2010s, but because grant funding made up a greater proportion of more deprived local authorities’ funding compared to less deprived authorities, this approach meant that their spending power fell by more.  

As a result, spending power fell by 33.3% in real terms between 2010/11 and 2019/20 in the most deprived fifth of upper- and single-tier local authorities, compared to 15.2% in the least deprived fifth. By 2025/26, funding was just 0.7% lower than 2010/11 levels in real terms in the least deprived fifth of authorities, while the most deprived fifth still had spending power that was 17.3% lower in real terms.

The local government finance settlement in December 2025 (the first which used updated funding formulae) provided local authorities’ funding allocations until 2028/29. That showed that spending will rise fastest in the most deprived 20% of upper- and single-tier authorities between 2025/26 and 2028/29 (15.1% in real terms) and by the least in the least deprived quintile (3.1%). 

How does local government spend money?

Local authorities are legally responsible for providing a wide range of services. There is no definitive list for the number of statutory responsibilities that local authorities have to meet, but one government review from 2011 estimated that there were more than 1,200.

While local authorities are legally required to deliver many services, in practice they have some flexibility about the level of provision. For example, local authorities closed 33% of library sites between 2009/10 and 2019/20 while still arguably meeting their statutory duty “to provide a comprehensive and efficient library service for all users”. ²⁹ https://www.instituteforgovernment.org.uk/sites/default/files/publications/neighbourhood-services-under-strain.pdf , p.29

Since 2009/10, local authorities have spent an ever larger proportion of their budgets on more acute, demand-led services such as adult and children’s social care. Local authorities spent just over half (53.0%) of their budgets on those two services in 2009/10, compared to more than two-thirds (68.5%) in 2024/25. More recently, local authorities’ budgets have come under pressure from rising demand for homelessness and special educational needs and disabilities (SEND) services.  

As a result, local authorities’ spending on the more universal services such as road maintenance, waste collection, libraries and youth services has fallen, in some cases extremely steeply. Local authorities cut spending on the last two services by 49.1% and 59.7% in real terms between 2009/10 and 2023/24. 

How much financial pressure is local government under?

Between 2018 and 2023, seven local authorities issued a total of 10 section 114 notices (in effect declaring ‘bankruptcy’) because they could not balance their budgets – a legal requirement for all councils. Only two had issued those notices in the preceding 30 years. Local authorities only take this step when there are no other options available to them – it is the most extreme indication of financial distress.

Since the end of 2023, there have been no further section 114 notices issued because a council could not balance its budget. That has happened because local authorities are increasingly relying on unsustainable sources of funding to meet financial obligations. 

A government programme which was launched during the pandemic, and which is known as ‘exceptional financial support’ (EFS), is one of the key sources of funding for financially distressed local authorities. EFS is permission from central government for councils experiencing extreme financial pressure to use capital budgets (funding for buildings and equipment), borrowing, or the sale of assets to fund day-to-day spending. In 2025/26, central government granted EFS to a record 28 local authorities, worth £1.3 billion. Some local authorities have been clear that without EFS, they would have had to issue a section 114 notice.  

Local authorities are also increasingly relying on their reserves to finance ongoing costs. Reserves are pots of money that councils build up over time to respond to unexpected spending requirements. Unsure of the path of future grant funding, local authorities built up their reserves in the 2010s as a contingency against more cuts. This reached a peak in 2021/22, when upper- and single-tier local authorities held usable reserves that were equivalent to 52.7% of their service spending in that year. Usable reserves have fallen in every year since. At the end of 2024/25, reserves in those authorities sat at 34.5% – the lowest of any year since 2011/12.  

By the end of 2024/25 almost half (48.2%) of upper- and single-tier local authorities had drawn down their reserves for three or more consecutive years, the highest level on record. The highest proportion before the pandemic was 13.4%, in 2016/17.  

More local authorities than ever have taken the decision to use near to the full increase in council tax from the referendum principle and the social care precept. In 2024/25 and 2025/26, 93.1% and 70.8% respectively of upper- and single-tier local authorities increased their band D council tax by near to the limit imposed by central government. In contrast, the maximum level before the pandemic was 32.8% in 2015/16. 

How will local government funding change over the rest of the parliament?

Funding since the 2024 general election

The Labour government set its first full year of funding for local government in 2025/26. In the local government finance settlement for that year, the government laid out plans for a 4.1% real terms increase in spending power between 2024/25 and 2025/26. However, that included £502 million to compensate local authorities for the rise in employers’ national insurance contributions announced at the 2024 autumn budget. Excluding that funding, spending power rose by 3.3% in real terms.

The government also used the 2025/26 and 2026/27 to 2028/29 local government finance settlements to consolidate several small, tightly ringfenced pots of money into larger grants. For example, it merged six previously separate funding streams into a single Children and Families Grant worth £414 million. ³⁰ https://www.local.gov.uk/parliament/briefings-and-responses/provisional-local-government-finance-settlement-202526-day  This is designed to give local authorities more flexibilities over how to spend funding.

In the Spending Review 2025, the government set day-to-day budgets for the years 2026/27 to 2028/29. This included local government core spending power projections. Under government spending plans, core spending power for local authorities would increase by an average of 2.7% per year in real terms between 2025/26 and 2028/29.

Fair Funding Review 2.0

In 2016, the Conservative government launched a review ³⁶ https://researchbriefings.parliament.uk/ResearchBriefing/Summary/CBP-7538  – formally, the Review of Local Authorities’ Relative Needs and Resources ³⁷ https://www.gov.uk/government/consultations/review-of-local-authorities-relative-needs-and-resources  – xiiiof local authority need for funding and the means of allocating grants to match that need. The review recognised that the last time the baseline for funding formulae was reset was in 2013/14, meaning that allocations were out of date. Consecutive Conservative governments delayed implementing those proposals, meaning that they left office with the system unreformed.

Between June and September 2025, the Labour government ran a consultation on a reform plan it called “the Fair Funding Review 2.0”, building on the work started under the previous government. ³⁸ https://www.gov.uk/government/consultations/the-fair-funding-review-20  The outcome of that consultation will inform local authorities’ grant allocations starting from April 2026.  

The review will, first, update the formulae that central government has been using to calculate an area’s need for various council- provided services. It proposes updating existing formulae – for example the adult social care relative needs formula – and introducing new formulae to estimate demand for services such as road maintenance and home-to-school transport for children with special educational needs.

It will also assess the extent to which local authorities can raise revenue themselves and adjust grant funding accordingly. Under the government’s proposed approach, and all else being equal, local authorities that have larger council tax bases will receive lower grant allocations than those with lower council tax bases.  

The review will also include adjustments for the relative costs of providing a service around the country. For example, it is generally more expensive to provide services in a local authority in London than in other parts of the country.  

These changes will not be implemented in a single year. The government will instead take a phased approach, moving local authorities to their new allocations gradually between 2026/27 and 2028/29. This is supposed to ensure that no local authority faces a large fall in their income in the first year of the transition. As discussed above, these changes result in more deprived local authorities receiving larger funding increases over the course of this parliament than the least deprived local authorities. xvii

Council tax

The current council tax system is heavily regressive, with residents in more deprived areas paying more council tax as a proportion of their property value than in less deprived areas. This is partly because a property’s council tax is determined by its value when the system was launched, in April 1991.  

The government has not yet made any steps towards a substantive reform of the council tax system. In the 2025 autumn budget, it announced a “high value council tax surcharge” on properties worth more than £2 million from April 2028. ³⁹ https://www.gov.uk/government/publications/high-value-council-tax-surcharge/high-value-council-tax-surcharge  But in contrast to council tax, local authorities will not retain that income. Instead, they will collect surcharge income alongside council tax payments, before transferring that money to central government. Government will then use that income “to support funding for local government services”. ⁴⁰ https://www.gov.uk/government/publications/high-value-council-tax-surcharge/high-value-council-tax-surcharge

In the absence of other reforms, it seems that central government will continue to allow local authorities to raise council tax by a limit every year.