IFS: Major reforms to English council funding will create big winners and losers over the next three years

A UK government consultation on its proposed reforms to the English local government finance system will close next Friday (15 August).

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 gaining substantially and others facing significant cuts.

Funded by the Economic and Social Research Council and the Health Foundation, the report looks at how different types of councils could fare under the proposed reforms, and how tweaking the proposals would affect their impacts. It finds that:

• The key benefit of the proposed reforms is that they would better align funding with updated official assessments of councils' spending needs. If council tax rates were set to the national average, 85% of councils would receive a share of overall funding that is within 2% of their share of assessed spending needs by 2028–29. That compares with fewer than one-in-five if the funding system was not reformed.
• But because England has lacked an effective system for allocating funding to councils for nearly 20 years, the proposals involve big changes in funding for some councils. If the reforms were introduced in full immediately, one-in-ten councils would see a fall in their overall funding (including from council tax) of 14% or more, while another one-in-ten would see an increase of 10% or more.
• To make it easier for councils to adjust, the government proposes to phase the reforms in over three years, and provide ‘funding floors' for those councils due to see cash-terms reductions in funding.Between 2025–26 and 2028–29, the average council is set to see an 8% real-terms increase in funding. However, around one-in-four councils would see real-terms falls in overall funding under the government's proposals, with around 30 on the lowest funding floors seeing real-terms cuts of 11–12%. Conversely, another one-in-four councils would see real-terms increases of 12% or more.

The new analysis shows that winners and losers from the reforms will be concentrated in different parts of the country and among different types of councils:

• 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.
• In contrast, outer London will fare much better, on average. Indeed, several outer London boroughs (such as Enfield, Havering and Hillingdon) are set to be among the biggest winners from the reforms, and could see their overall funding increase by around 20% in real terms over the next three years, if they increase council tax by 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.
• In contrast, rural areas, which feared losing from the reforms, may fare better than expected. In particular, the average change in funding for the least densely populated 10% of council areas is set to be in line with the national average over the next three years. This reflects the proposed inclusion of a ‘remoteness adjustment' in the spending needs assessments which boosts assumed spending needs for those areas far from a large town. Without this adjustment, it is likely the most rural areas would fare substantially less well from the reforms.

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.

ENDS