Overview
English councils saw big cuts to their funding during the 2010s, with spending on some services down between 40% and 70% over the decade. And although like virtually all public services, funding for local government was increased during the 2019–24 parliament, councils’ finances are still under significant pressure. This reflects increases in demands and costs for key services that have often far outpaced economy-wide inflation, and has led to a growing number of councils requiring exceptional financial support.
Despite this, the main parties’ manifestos were virtually silent on their plans for council funding post-election. This means there is significant uncertainty about exactly what to expect over the next five years. This report therefore looks at a number of scenarios for councils’ funding – and what these might mean for service delivery and financial sustainability given the spending pressures councils face. It finds that, given the current fiscal environment and overall spending plans implicit in the main parties’ manifestos, cuts to some council services are highly likely unless spending pressures abate – even with big increases in council tax, and particularly in poorer parts of the country. There is also a real risk of significantly more councils being pushed to financial breaking point, joining the likes of Birmingham, Thurrock and Woking.
Key findings
- The increases in council tax that are allowed will likely matter more for councils’ overall funding outlook than changes in grants. This reflects that council tax makes up 57% of core spending power, compared with 15% for grants from central government. In 2025–26, 1 percentage point on council tax bills would therefore be equivalent to roughly a 4% change in grant funding across England as a whole. This means that the impact on funding levels of a decision to maintain grant funding in real terms as opposed to cutting it by 2.7% is around one-third of the impact of increasing council tax bills by 5% instead of 3% per year.
- The likelihood that councils will become increasingly reliant on council tax in the coming parliament means that unless grant funding were redistributed between councils, those in more deprived areas would likely fare financially worse than those in more affluent areas. This is because those in more deprived areas have smaller tax bases and instead rely on central government grants for more of their overall funding.
- Whether changes in funding are sufficient to meet changes in councils’ spending needs will depend critically on whether recent demand and above-inflation cost pressures slow down. If they do not, even 5% increases in council tax will not be sufficient, despite inflation being expected to average just under 2% a year over the next five years. If pressures do slow down, 5% increases in council tax may be sufficient in more affluent parts of the country, but would be unlikely to be sufficient in more deprived areas, unless grant funding were redistributed towards them. Even if demand and cost pressures do slow down, 3% increases in council tax would likely be insufficient to meet spending pressures even in more affluent areas.
The coming parliament will therefore likely be financially challenging for local government – although just how much so is not yet clear.
The particular challenge facing more deprived areas if councils are reliant on council tax for more of their funding is a reminder that England lacks a proper system for assessing the spending needs and revenue-raising capacities of different councils and for distributing funding accordingly (Ogden et al., 2022). Putting in place such a system, and in particular redistributing funding in line with any updated needs assessments, would be both more important and practically and politically more difficult to implement if funding is limited. This makes reviewing arrangements and putting in place a modernised local government finance system a tricky task for the next government – and the issues and options for the design of such a system, as well as for funding local services more generally, are issues we will examine in a post-election report. Such a review could also consider whether the funding available to councils overall is sufficient for them to deliver the range and quality of services expected. Ensuring appropriate funding levels both nationally and to different councils is a key element of any plan for ‘levelling up’ and reducing geographic inequalities.
Given the evident pressures councils face in funding their existing responsibilities, the next government should also ensure plans are in place for funding any additional responsibilities councils will face. This is particularly true for adult social care services, where unlike general local government funding, the Conservative, Labour and Liberal Democrat manifestos did make commitments of varying degrees of ambition and specificity (see: Adam et al., 2024; Boileau et al., 2024; and Emmerson et al., 2024). However, neither the Conservatives nor Labour identified any specific funding to pay for their ‘cap-and-floor’ and ‘National Care Service’ proposals, respectively, and because the Liberal Democrats assumed funding was already in place for a cap-and-floor system, they have not identified sufficient funding to fully cover the costs of their proposals for free personal care and wage increases. Paying for any of these plans would require some combination of tax rises, higher borrowing or cuts to other areas of public spending. The limited tax-raising powers available to councils, who cannot borrow to cover day-to-day spending, mean that if central government did not fully cover the costs of social care reform, councils would need to cut back other spending. This could be on other services, or by further increasing the stringency of care needs tests used to determine who is ill or disabled enough to require support. That could see existing low-income/asset recipients of care lose access to care to pay for an expanded offering for middle- and higher-income/asset individuals who would be newly eligible for support.
Thus, while we have heard little about local government funding in the run-up to the election, the next government will not be able to avoid the issue.