Council funding to be overhauled to deliver better outcomes

Long overdue reforms to council funding to ensure it offers better value for money have been outlined today (28th November) alongside more money for councils to help fix the foundations of local government.

The government will launch a consultation next month on its long-term proposals to fundamentally improve the way the sector is funded, moving away from an outdated and inefficient approach – which has seen some councils increasing their level of reserves and others struggling to deliver services and balance budgets – and shifting to a fairer system which matches funding with need.

This major reform, which will be subject to extensive consultation with local leaders, will ensure public money is spent more efficiently on improving services local people rely on through a fairer system which builds on the lessons learned through the previous government's review of Relative Needs and Resources, better known as the ‘Fair Funding Review', which highlighted the problem of how councils are funded and the need for change but was delayed and never implemented.

It will be launched alongside a consultation on the Provisional Local Government Finance Settlement for 2025-26, which includes a new £600 million Recovery Grant for areas most in need, an increase to the Social Care Grant by £680 million, a new £250 million Children's Social Care Prevention Grant and the repurposing of grants to offer better value for money for the taxpayer and deliver better outcomes for local people, including the most vulnerable.

Overall, local government is expected to receive a real-terms increase in Core Spending Power of around 3.2% and no council will see a reduction in this after taking account of any increase in council tax levels. On average, places with a significant rural population will receive an increase of around 5% in their Core Spending Power, and will be better off this year compared with 2024-2025.  

Deputy Prime Minister Angela Rayner said:

For too long councils have been let down by an outdated and inefficient funding system which has led to public services creaking and taxpayers' money not being spent efficiently.

Whilst there's no magic wand to fix what we've inherited, we're taking the necessary steps to fix the foundations of local government by creating a fairer system and ensuring every penny is spent on the services so many people rely on every day.

The £680m increase for the Social Care Grant will help local authorities address social care pressures, whilst the new £250m Children's Social Care Prevention Grant will help ensure children stay with their families or in safe loving homes where possible as part of a planned overhaul of the system next year. Legislation will be brought forward to crack down on the profiteering of vulnerable children and ensure local government can deliver safe, loving homes for children in care.

The Budget also set out more than £4 billion of investment in local government – of which £1.3 billion will come through the Settlement – to build new homes, invest in Special Educational Needs and Disabilities and improve homelessness services, and tackle potholes. 

On funding reform, further consultations are planned before the final proposals will be developed, published and again consulted on ahead of the provisional settlement for 2026-2027 – ensuring the views of local leaders are reflected, in another demonstration of the government's push to reset relationships with councils.  

Implementation of these reforms will take place alongside multi-year funding settlements, the first in 10 years come 2026-2027, allowing local authorities the certainty to plan and invest for the long-term. The number of funding pots will also be reduced to allow councils to have more flexibility to judge local priorities, to meet the needs of local people, and to decide how best to deliver on national priorities.   

The Provisional Local Government Finance Settlement for 2025-2026 will further maintain the previous government's referendum threshold for council tax at 3% with 2% for the adult social care precept, balancing the need between protecting local taxpayers who are still feeling the impact of the cost of living and funding local public services.   

The government also confirmed it will: provide support to the public sector, including local government, to meet the increased costs of directly employed staff arising from changes to employer National Insurance Contribution (NICs); plans to merge grants and simplify funding; and a commitment to overhauling the local audit system and to hold talks with local government over reorganisation if appropriate.

Several grants including the Rural Services Delivery Grant and the Services Grant will be repurposed. The government will ensure the impact of rurality on the cost of service delivery and demand is reflected in the public consultation next year. Places with a significant rural population will still on average receive around a 5% increase in their Core Spending Power, which is a real terms increase. No council will see a reduction.

Councils will also receive over £1 billion in total through the Extended Producer Responsibility for Packing scheme (pEPR) which will cover the existing costs they incur for managing household packaging waste, provide additional funding for new legal duties, and support much needed investment in the waste and recycling industry. Provisional payment figures will be shared with councils by the end of November.