A new report from IFS researchers shows that while the funding provided to councils has long failed to reflect their individual spending needs, the proposed reforms to the system would create big ‘winners’ and ‘losers’, with some councils mainly in the North of England gaining substantially while others are facing significant cuts.
Inner London, particularly its western parts, is set to be by far the biggest loser from the reforms.
Even with the funding floors, Camden, Hammersmith & Fulham, Kensington & Chelsea, Wandsworth and Westminster can expect their overall funding to be 11–12% lower in real terms in 2028–29 than this year, even if they increased their council tax by the maximum allowed (5%) each year.
Outside London, councils in the East Midlands are set to see the biggest real-terms increases in overall funding over the next three years (15% in real terms, on average), followed by Yorkshire & the Humber (12%). Those in the South East (7%) are set to see the smallest real-terms increases, on average.
Despite expectations that deprived areas were set to gain from the reforms, increases in funding for councils covering the most deprived 30% of areas are set to be similar over the next three years, on average, to those in the middle 40% of areas.
This reflects the fact that while deprived areas would typically benefit from a reformed system that properly accounts for differences in revenue-raising capacity, they fare less well from updates to the spending needs assessments. It is also worth noting that increases in grant funding this year were highly targeted at councils serving deprived areas.
Kate Ogden, a Senior Research Economist at IFS and an author of the report, said:
‘England has lacked a rational system of local government funding for at least 12 years – and arguably more like 20. It is therefore welcome that the nettle of funding reform is being grasped, and some councils will benefit substantially under the new system. But the changes will sting for those councils that are assessed to currently receive too high a share of the overall funding pot, and so which lose out from moves to align funding with assessed spending needs.
‘The government should consider giving highly affected councils which currently have low council tax rates greater flexibility to bring their council tax bills up to more typical levels to offset funding losses. More generally, reform of council funding allocations is just one part of the financial sustainability puzzle. Efforts to reduce demands on, and the cost of providing, local services through reform and the use of new technology will also be vital.’
David Phillips, an Associate Director at IFS and another author of the report, said:
‘The scale of changes in funding some councils are set to face over the next three years reflects just how arbitrary funding allocations have become in the absence of a proper funding system. To avoid such large changes in another decade or two’s time, these reforms cannot be a one-off: the new funding system must be updated on a periodic basis so that it continues to reflect local circumstances and remains aligned with government objectives. These objectives may change – not least when governments change – so it is good that the proposed funding system has a degree of flexibility so that it can be adapted by future governments.’
