IFS: Ad hoc bolt-ons are undermining government’s aims on local government funding reform, but support for historic SEND deficits eases pressure on councils' finances

FS researchers respond to changes the government made yesterday in the final local government settlement for English councils, and the announcement of a compensation scheme for councils' SEND deficits. 

Responding to the final local government finance settlement for England, IFS Senior Research Economist Kate Ogden said: 

“Yesterday, the government published the final local government finance settlement, confirming funding allocations for each council for the next three years. The government has made larger-than-usual changes since the provisional settlement it published in December. 

Some of these are welcome improvements. Along with others, we had highlighted that the government's assumption about how gains from business rate pools are shared between councils was likely to be systematically overestimating current revenues for some councils – in turn setting their funding floors too high. At the same time, other councils would lose out. The government now plans to make a more reasonable assumption on how these gains are shared that, while not perfect, will get closer to the right answer. 

However, the government has also introduced a new ‘adjustment support grant' which will ensure no council receives less funding in 2026-27 than their indicative allocation from December. It would have been unprecedented to make such large cuts to some councils between the provisional and final settlements, even to address an error. But there are undoubtedly better ways government could have spent £116 million in the coming financial year than a temporary windfall gain for some councils. 

The government has also doubled-down at the final settlement on providing even more funding to those areas which were in receipt of the so-called ‘recovery grant' in 2025-26. This was initially awarded to around half of councils as a one-off grant in an effort to redistribute funding towards the more deprived areas that had seen the largest cuts in funding in the 2010s – as a precursor to more fundamental reform in 2026-27. Importantly, the allocations of the recovery grant are based on factors – deprivation and council tax bases – which are anyway set to be accounted for under the government's reformed system, and in a more up-to-date and sophisticated way.  

In the provisional settlement, the government already said it would keep the recovery grant for the next three years, instead of rolling the funding in and redistributing it in line with new assessments of spending needs. It is now proposing an additional ‘recovery grant uplift' which will be paid to a subset of councils in receipt of the recovery grant who would otherwise see an increase in core spending power of less than 17% – and which will be based on an extremely complicated system of caps and adjustments. The new grant will be worth £175 million in 2028-29, taking the total amount being provided to recovery grant councils on top of their spending needs assessments to £875 million in that year. This does not look like a principled decision but a way for the government to achieve particular distributional aims through a further ad hoc bolt-on to the new system – and a response to lobbying from particular councils. 

There are two key problems with this. The first is that it takes the government further away from (rather than closer to) allocating funding in a way that aligns with its own assessments of relative needs. If the government thinks the needs assessments it has produced do not properly reflect the needs of more deprived places, it should say so – and update them accordingly. 

The second is that these tweaks add even further complexity to a system that is complicated enough already – and which the government's reforms were meant to simplify. Indeed, this government set out seven principles that would guide the reform, which included simplicity, transparency and accountability. Each extra bolt-on to the system takes us further away from these principles.  

Given how much time and energy has been poured into designing a reformed system for funding local government, it is a shame that the government has already seen fit to meddle with the outcome – before the new system has even started to operate.” 

Commenting on support for addressing historic SEND deficits, IFS Research Fellow Luke Sibieta said: 

“Spending on special educational needs and disabilities (SEND) has grown rapidly in recent years, and by more than growth in funding. This has led many councils to build up large in-year deficits. The government estimates the total accumulated deficits will be about £5 billion by March 2026. An accounting fudge known as the ‘statutory override' has given some protection to council balance sheets. This is currently due to end in March 2028.  

In yesterday's settlement, the government announced that it will cover 90% of historic SEND deficits built up by March 2026. These historic deficits have already been recognised in the overall UK deficit and national debt. By shifting most of the responsibility for covering these historic deficits from local to central government, this will reduce the risks these deficits pose to councils' solvency.  

What we don't know is how the government will address the further challenges to come in the next few years. Without reforms to the system, councils are currently on course to build up another £9bn of SEND related debt over the next two years (2026-27 and 2027-28). The provision of a 90% bailout may now reduce the incentives faced by councils to contain costs, in anticipation that the government may feel compelled to step in again. The government also still faces an in-year funding gap of £6 billion in 2028-29, when it has committed to taking full responsibility for spending. 

In early efforts to reform the system, the councils will be required to submit 'local reform plans' in order to access the historic support package. There is a lot of uncertainty about these plans will mean. The real test will come when the government publishes its long-awaited white paper and SEND reform plan.”