The provisional Local Government
Finance Settlement for 2025–26 implies core spending power next
year will increase by 3.8% in real-terms after forecast
economy-wide inflation. Accounting for new revenues councils will
receive from the producers' use of packaging (‘extended producer
responsibilities' levies) takes the average increase in funding
to 5.5% in real-terms.
There will be much larger increases in
funding for councils serving more deprived and more urban areas
than for those serving more affluent and more rural parts of
England. Core spending power is set to increase by 6.4% in
real-terms for the tenth of councils with the highest levels of
deprivation, compared to 2.6% for the tenth with the lowest
levels of deprivation. This continues a trend seen over the last
5 years. But more deprived parts of England saw much bigger cuts
to council funding in the 2010s and the increases seen since then
have only partially undone this: funding next year will still be
23% lower per resident than in 2010–11 in the most deprived
areas, compared to 11% lower in the least deprived
areas.
Most (132) English shire district
councils will see no cash-terms increase in their core spending
power even if they increase council tax by the maximum allowed
without a referendum. This represents a real-terms cut. However,
they are expected to be the biggest beneficiaries, proportionally
speaking, of new revenues from producers' use of packaging –
receiving on average the equivalent of 7.8% of core spending
power. Accounting for this takes the average real-terms increase
in funding for shire districts to around 6% in
real-terms.
Much more radical changes are planned
for future years, as the government starts rolling out an updated
and reformed system of local government funding from 2026–27
onwards. This is vital: the
current allocations for different councils are so out of date as
to be essentially arbitrary. However, the government will need to
be clear about the desired end goal and ensure appropriate
transitional arrangements are in place to ease in what will
potentially be a big and painful redistribution of funding around
England.
Kate Ogden, a Senior Research Economist at the Institute
for Fiscal Studies and an author of the comment
said:
“Today's announcement of funding for
English councils next year is a clear statement of intent by the
government to channel funding to more deprived, typically more
urban parts of the country. Core spending power is set to
increase 2.4 times as fast in real-terms in the most deprived
tenth of areas as in the least deprived tenth, with a wider
measure of funding including new revenues from levies on
producers' use of packaging up 1.8 times more in the most
deprived areas than in the least.
Most shire districts are set to see
little if any increase in core spending power next year. The
saving grace for them is that, relatively speaking, they are the
biggest recipients of the new revenue stream from producers' use
of packaging – with it amounting to an equivalent of an extra 8%
in core funding. This funding is only guaranteed for one year
though and the amount raised by the levy in future will be lower
the more successful it is in getting producers to cut back on the
amount of packaging they use. Spending pressures mean district
and other councils may feel the need to use this revenue to fund
core service provision. But they may have to start weaning
themselves off it in the not-too-distant
future.”
David Phillips, head of devolved and local government
finance at the Institute for Fiscal Studies and an author of the
comment said:
“The government has been clear that
next year's funding changes are a stepping stone to more
fundamental reforms from 2026–27 onwards. Central to these will
be updated assessments of different councils' relative spending
needs and revenue-raising capacities, and a new system to account
for these when allocating grant funding between councils – all of
which are sorely needed. A consultation published alongside the
2025–26 settlement sets out a broadly sensible direction of
travel, and asks the right sorts of questions to elicit views
from councils and stakeholders on the design of a new
system.
However, the technical details of
reform will matter, and there will be some big losers as well as
big winners from reform, with patterns likely somewhat similar to
those seen next year. And, at least as important as how a pie is
sliced, is how big it is overall. For councils, like the wider
public sector, this will not be known until after the Spending
Review expected in June 2025. At that point, the government
should aim to ensure what it is asking of local government is
consistent with the funding being made available. If it does not,
its plans for financial reform, devolution and structural
reorganisation are unlikely to fulfil their
potential.”
Read the full briefing
here.
