Written statement on Local Government Finance Settlement - Dec 18

Introduction 

Minister for Local Government (Jim McMahon): Our fiscal inheritance means there will be tough choices to get us back on the path to recovery. Fixing the foundations of local government will be a long process following the 14 years of decline and instability overseen by the previous government. But our programme of reorganisation and reform will lead to more efficient structures; will mean funding is sent to where it is needed the most; investment focusses on crisis prevention rather than an expensive crisis response; and councils once again have the certainty and flexibility they need to focus on their priorities. Together, we will fix the foundations for everyone.

We are under no illusion about the scale of this task. The demand for, and cost of, services has increased significantly. The persistent failure of the previous government to do the right thing, underlined by their decision to drop the long overdue Fair Funding Review, compounded by spiralling inflation and a failure to grow our economy, has left councils of all stripes in crisis. Our fiscal inheritance means that there is no easy route to solving this.

This 2025-26 Local Government Finance Settlement and our programme of reform for the future mark the first steps towards stabilising and rebuilding the financial sustainability of local government. We will take a more efficient approach to government grant funding, including a one-off Recovery Grant to get councils back on their feet. And, in 2026-27, when we move to the first multi-year Settlement for local government in a decade, we will ensure grant funding goes to where it is needed the most, delivering better services by investing in prevention, and improving value for taxpayers' money. Our consultation on local authority funding reform(opens in a new tab) sets us on this path to recovery.

More secure finances must go hand-in-hand with higher standards and stronger financial decision-making, both of which are impeded by the broken local audit system we have inherited in England. Today, we launched a strategy to streamline and simplify the local audit system(opens in a new tab) through the establishment of a new and proportionate Local Audit Office – combining the functions of the existing system – and ensuring the core underpinnings are fit for purpose. We will embed transparency, restore our public financial early warning system, and ensure that every council is equipped to deliver the best value for council taxpayers and business ratepayers. We will strengthen the local government standards system to support councils to deliver the high standards that they strive for. We welcome views on proposals to better support local government to uphold the highest standards of conduct and sanction misconduct whenever and wherever it occurs as part of our standards consultation(opens in a new tab). These steps are a crucial part of our plans for a stronger local government as set out in the English Devolution White Paper this week.

Together, these reforms will begin to stabilise local government finances and ensure that all councils are fit, legal and decent, so they can better deliver for their residents. We will build on the significant steps we are already taking, laying the groundwork for children's social care reform and increasing funding for homelessness and SEND services next year. We are giving councils more say over how they run local bus services, guaranteeing the future of vital reforms to our waste and recycling system, filling potholes, and bringing planning fees up to cost recovery. The hard work has already begun, and today we set out our detailed funding proposals for 2025-26 and our plan for the years ahead.

Provisional local government finance settlement 2025-26

The Autumn Budget announced over £4 billion in additional funding for local government services, of which £1.3 billion would go through 2025-26 Local Government Finance Settlement. We recognise the challenges local authorities are facing as demand increases for critical services. Today we are announcing over £700 million of additional grant, which increases the total additional grant funding which will be made available to local councils in England through the Settlement to over £2 billion. The over £700 million increase in funding announced today includes a £200 million increase to the Social Care Grant, taking the grant's total increase from 2024-25 to £880 million. It also includes £515 million of further funding will be made available at the final Settlement to support councils with the increase in employer National Insurance Contributions.

The provisional Settlement for 2025-26 therefore makes available £69 billion for local government, which is a 6% cash terms increase and a 3.5% real terms increase in councils' Core Spending Power on 2024-25. The final Settlement will increase further, to incorporate the £515 million of funding announced for National Insurance Contributions.

Grant decisions for 2025-26

The proposals we announced on 28 November – a new £600 million Recovery Grant, a new Children's Social Care Prevention Grant, additional funding for social care, and repurposing the existing Rural Services Delivery Grant and the Services Grant – lay the foundations for fundamental reform by allocating new funding through improved formulas in 2025-26 and investing in priority services.

Social care

We will make available up to £3.7 billion extra funding for social care authorities through the Settlement next year. In total, local government will receive over £10 billion in grant funding for social care, including: £1.05 billion in the Market Sustainability and Improvement Fund, £2.6 billion via the Local Authority Better Care Grant, and £5.9 billion via the Social Care Grant.

We can also today confirm the new Children's Social Care Prevention Grant will be uplifted at the final Settlement to £263 million. Taken together with the new Children and Families Grant, the government is doubling Settlement investment in preventative services within children's social care, to over half a billion in 2025-26, laying the groundwork for fundamental reform of children's social care next year.

National Insurance Contributions (NICs)

In recognition of the decision to increase employer NICs, we can today confirm that the government will provide £515 million to English local councils, including mayoral combined authorities and fire and rescue authorities, allocated based on an assessment of each council's share of relevant net service expenditure. We have published a methodology note today to explain how this funding will be distributed across local authorities. Individual allocations will be published at the final Settlement early next year.

Council tax 

It is for local authorities to decide at what level they set their council tax. However, the government is committed to keeping taxes on working people as low as possible. This Settlement maintains the previous government's policy, as set out in the March 2024 Office for Budget Responsibility forecast, of setting a 5% council tax referendum principle, made up of a 3% core principle and the 2% principle for the adult social care precept. Voters will have the final say over excessive increases above this threshold.

The government is committed to improving the presentation and transparency of council tax bills and will therefore require local authorities to adjust the presentation of the adult social care precept on council tax bills from 2025-26. This will simplify bills and provide clarity on council tax levels set by the local authorities. The government will publish a consultation in 2025 to consider other options to improve transparency of council tax billing and support taxpayers manage their household finances with a default option to pay over 12 months as with most other household bills.

Requests for exceptional financial support

The government has a framework to support councils in financial difficulty. This will be a collaborative and supportive process, and we have already confirmed we will not replicate previous conditions which made borrowing more expensive. Similar to the approach taken by the previous government, we will consider requests for bespoke referendum principles from councils seeking exceptional financial support. But this government will put taxpayers and the impact on working people at the forefront of our decisions. Any requests from councils will be considered on a case-by-case basis and the government expects any additional increases to only be agreed in exceptional circumstances, not as a punishment where councils have failed. We will look carefully at councils' specific circumstances, for example, their existing levels of council tax relative to the average and the strength of plans to protect vulnerable people. MHCLG continues to offer any council a discussion, in confidence, about its ability to manage its budget.

Levy account

Every authority in England will receive a share of the accumulated surplus currently held in the business rates levy account. We can confirm that £100 million will be returned to the sector on a one-off basis, distributed in line with relevant legislation. Individual allocations of this funding will be published at the final Settlement early next year.

Fixing the foundations: consultation on local authority funding reform

From 2026-27, the government will fundamentally improve the way we fund councils based on a new assessment of need and resources. These reforms will build on the framework set out in the previous government's abandoned review of Relative Needs and Resources (originally Fair Funding Review).

We will reset the Business Rates Retention System as was intended when the previous government established the system. We will move gradually towards an updated system and will invite views on possible transitional arrangements to determine how local authorities reach their new funding allocations. Some local authorities work collaboratively with Mayoral Combined Authorities in their area to ensure that extra business rates income is directed to local growth priorities across the wider region. In recognition of this, and as part of the government's reform of funding for local government, we will consider how the Business Rates Retention System could better and more consistently support Strategic Authorities to drive growth. The government will also reduce the number of funding pots to give councils more flexibility to focus on priority outcomes agreed with government.

Today's consultation is on objectives and principles. The consultation will give councils, sector organisations and the public the opportunity to contribute to the government's proposals. We will consider all representations to develop our understanding of the drivers of need, including the impact of rurality. This reform is about spending taxpayers' money as efficiently as possible, but it is also about the impact it will have on real people's lives and local authorities' ability to deliver for their citizens.

Conclusion 

The consultation on the provisional Local Government Finance Settlement 2025-26(opens in a new tab) will be open for four weeks, closing on 15 January 2025. The consultation on local authority funding reform will be open for eight weeks, closing 12 February 2025. We welcome views from the sector and beyond on each of these consultations.

This Written Ministerial Statement covers England only.