Overview

Like spending on the NHS, and schools, English council funding has increased over the current parliament. But that follows a decade of austerity in the 2010s. And despite funding increases, councils are again under significant financial pressure, with increases in spending outpacing revenues and reserves being drawn down. Some, very publicly, have had to take emergency measures to bolster their budget – most notably Birmingham City Council, Europe’s largest lower-tier council. And more generally, spending continues to be increasingly concentrated on services for a relatively small number of residents with the most acute needs. 

In this context, this report looks at how council funding and spending are set to have changed over the current (2019–24) parliament and puts these changes in a longer-run context back to 2010. What emerges is a picture of two interconnected challenges on the level and distribution of funding that the next government will need to grapple with – and which the worrying outlook for the overall public finances will make especially difficult to address. 

Key findings

1. Taking the period 2010–11 to 2024–25 as a whole, councils’ overall core funding is set to be 9% lower in real terms and 18% lower in real terms per person this year than at the start of the 2010s. The reduction is set to be larger for councils serving deprived areas (e.g. 26% per person for the most deprived tenth) than for the less deprived areas (e.g. 11% for the least deprived tenth). This reflects the fact that the funding increases seen since 2019–20 have offset only part of the overall cuts seen in the 2010s, which fell hardest on poorer areas. Average council tax bills are around 2% higher in real terms than in 2010–11, and little changed since 2019–20, with high inflation offsetting high nominal increases over the last few years. This compares with a real-terms increase of over 60% between 1997–98 and 2010–11. 

2. During the 2010s, councils’ overall core funding per person fell by 26% in real terms, on average, with higher council tax revenues only partially offsetting a 46% fall in funding from central government. But these cuts affected areas differently: in the most deprived tenth of councils, funding per person fell by 35%, compared with 15% in the least deprived areas. Councils in the North and London were also relatively harder hit. Councils responded by prioritising statutory services: while spending per person on children’s social care rose by 11% in real terms, per-person spending on culture and leisure, housing, planning and development, and transport fell by over 40%. Councils also offset some of these pressures by raising more from sales, fees and charges on service users.

3. Despite new responsibilities, increased costs and lower income from sales, fees and charges, a boost to central government funding meant councils’ financial position generally improved during the COVID-19 pandemic itself. Based on information reported by councils on in-year financial monitoring returns, the government provided approximately £9.7 billion in additional funding in 2020–21. However, we estimate that councils’ in-year financial reports overestimated the financial effects of COVID-19 by around £4 billion in 2020–21, meaning that councils were able to increase their reserves by around £5 billion (25%). A further £3.5 billion in COVID-related funding was provided in 2021–22, and enabled councils to further increase their reserves by around £2.3 billion (9%). This pattern of increased reserves was also seen in Scotland and Wales. 

4. Post-pandemic funding plans have been topped up several times in the face of high inflation, but councils’ spending has still outpaced funding increases over the last two years. No further COVID-specific funding was provided after April 2022. Following a front-loaded increase in core funding in 2022–23 to partially compensate for this, grant funding for existing services was set to be frozen for the remainder of the current parliament. In response to a surge in inflation and evident pressures on councils’ budgets, central government announced several substantial top-ups to these plans, amounting to approximately £7.5 billion extra in 2024–25. Based on economy-wide inflation, this has more than offset the impact of higher-than-expected inflation, and means that on average, funding per person in 2024–25 is set to be 10% higher in real terms than in 2019–20, with bigger increases for the most deprived councils (14% per person) than for the least deprived (5% per person). Despite this, spending increased by more than funding in both 2022–23 and 2023–24, leading councils to draw down their reserves by a forecast £3 billion. 

5. Acute services continue to be a major driver of spending, with user numbers growing and costs outpacing general inflation. For example, the number of children in secure units and children’s homes and the number with Education, Health and Care plans both increased by over 30% between early 2020 and early 2023, while the number of homeless households in B&Bs doubled between the end of 2019 and September 2023. The cost per placement in children’s homes increased by 20% between 2019–20 and 2022–23, while the cost of care home placements for adults aged 65 or over increased by 35% between 2019–20 and 2023–24 – in both cases almost double whole-economy inflation measured over the same periods. 

6. A combination of general cost pressures and specific local issues has pushed some councils into acute financial distress. Six councils have had to issue so-called Section 114 notices, preventing any new expenditure that is not needed to satisfy a legal duty, and giving councillors three weeks to agree emergency reductions to spending or income-raising measures. In each instance, as well as general spending pressures, there have been other financial issues involved, including a major equal pay claim in the case of Birmingham, and high borrowing and issues related to investments in the other cases. Since 2020, a total of 29 councils have requested and been granted permission to make use of capital funding and proceeds from land and asset sales to help support day-to-day spending. While less drastic than Section 114 notices, the use of such ‘capitalisation directions’ provides evidence of more widespread acute pressure on councils’ finances. 

7. The 2019–24 parliament has therefore not been one of austerity for local government. But it has only very partially undone the cuts seen in the previous decade. What might appear to be generous real-terms increases in funding have been absorbed by rising demands and costs for key services, placing a growing number of councils under severe financial pressure. With a highly challenging landscape for the overall public finances, the next government would struggle to boost funding for councils as much as over the last five years. As a result, real-terms cuts to spending on at least some council services are likely to resume, and unless demand and cost pressures abate, the number of councils being pushed to the financial brink will almost certainly increase.

8. The next government will also need to make a decision on whether to pursue reforms to council funding, which has become increasingly disconnected from the needs of different areas. After sensibly being postponed at the height of the pandemic, planned systematic reforms to the local government finance system were pushed back until 2025 at the earliest – nine years after work on them initially began.