Local
Government
Finance
Overview
The County Councils Network's manifesto proposals for local government finance outline that the incoming government must use the next Spending Review to set out a four-year sustainable funding settlement for councils, one capable of meeting the growing demand-led pressures. Alongside this, it should progress reforms to the system of local government finance, including engaging the sector on a review of relative needs and resources, while reforming business rates, council tax and other funding streams.
Our priorities
Financial Sustainability
The funding of local councils is more firmly in the public consciousness than at any point in recent history. However, while a recent bout of Section 114 notices may have bought the issue to wider public attention, the root causes of the challenges have been over a decade in the making.
Between 2010 and 2020, councils are estimated to have lost 40% of core government funding on average, at a time when demand for core services has risen inexorably. While austerity may have ended in recent years, the structural deficits it caused have been deepened by the pandemic and cost-of-living crisis. Moreover, for much of the past decade, councils have received only short-term one-year settlements, disrupting effective financial planning at time when long-term strategic decisions have never been more important.
There is no doubt that Whitehall has begun to recognise these pressures and welcome additional funding for social care has been forthcoming. But, with inflation embedding permanently higher costs and demand for services continuing to rise, this extra funding has only prevented the most severe cuts to local services and provided breathing space to prevent insolvency.
Last year, County Councils Network member councils delivered an unprecedented £1bn in savings and service reductions to balance the books. However, over the next two years, they still face a funding shortfall of at least £2bn.
Therefore, although local authorities who have declared effective bankruptcy have all had specific local challenges, even well-managed authorities of all shapes, sizes and political control are reaching breaking point.
On entering office, the incoming government will inherit this extremely precarious situation whilst preparing to conduct its first Spending Review. This will be against a fiscal backdrop of forecasted spending growth of just 1% for non-protected departments: which, if implemented, would equate to a further real-terms funding squeeze for local government.
The proposals below set out that an incoming government must use the Spending Review to provide sustainable, long-term funding for councils. With 68% of the average County Councils Network member budget already consumed by care services alone, failing to provide the significant uplift in funding required would mean there will be no alternative to an honest discussion with government on what services councils can be expected to deliver above the statutory minimum.
Funding Reform
The structure of the local government finance settlement is no longer fit for purpose. The underlying formulas used to determine council funding levels have not been updated for over a decade, while the introduction of business rates retention and New Homes Bonus have unbalanced the local government funding system.
These structural deficiencies adversely impact all types of councils. However, counties face a number of unique challenges which amplify these issues. Our ageing demographics and large rural geographies create additional costs in service delivery, while issues of rural poverty, deprivation and poor social mobility are overlooked and under recognised in funding settlements. As a result of outdated funding formulae, counties have been historically the lowest funded councils, receiving £410 core funding per head this financial year, compared to an England average of £571. This historic underfunding, and an over reliance on council tax rises to fund services, also means the average Band D council tax rate in counties is 15% higher than the national average.
County councils have also benefited least from the introduction of business rates retention and New Homes Bonus due to the disproportionate tier share for district councils, with many councils left worse off. The County Councils Network has raised concerns over whether business rates are a fair way to fund demand-led services, with little correlation between income, expenditure, and service need. Consultations on the future of these funding streams were undertaken by the previous government. Most importantly, considerable positive progress was made under previous administrations on introducing a ‘fair funding review’. The County Councils Network broadly supported the direction of travel of these reforms, but ultimately no changes have been introduced.
Reform to the distribution of funding is necessary and inevitable. But it will be complex and difficult to achieve at a time when there are limited resources. Any incoming government will need to balance the need to reform, whilst ensuring it does not further undermine the financial stability of councils.
The County Councils Network proposals set out that an incoming government should seek to undertake a review of relative needs and resources, building on proposals put forward in the previous government's 2019 consultation. Alongside this, the government should seek to reform both business rates and New Homes Bonus, ensuring at a minimum that business rates growth is reset, while county authorities receive a more appropriate share of income.
our proposals
Local Government Finance
The County Councils Network’s Manifesto for Counties is built on an agenda for reform. Detailed proposals contained within each policy section demonstrate how the sector can work with an incoming government to implement practical reforms to drive down costs and improve outcomes, particularly in adult social care, children’s services, SEND and home to school transport. But to achieve this, council finances must be both sustainable, and reformed, through the implementation of our proposals for local government finance.
.svg){kind=icon}
- Ahead of undertaking a full Spending Review, the incoming government should set out its approach to the local government funding settlement for 2025/26 as early as possible. This must, at the very least, retain all existing funding streams, whilst providing an emergency injection of resources to meet increased spending needs.
- Commit at the Spending Review to a minimum four-year settlement for local government. An evidence-based assessment of council funding needs should be undertaken to provide long-term sustainable resources, taking into the account the forthcoming findings of the Independent Review of Local Government Spending Need and Funding currently being conducted by PwC for the County Councils Network.
- In line with the Manifesto for Counties proposals for Adult Services and Health, urgent clarity is needed on the implementation and funding of adult social care charging reforms, postponed until October 2025. If the government intends to implement these reforms during the Parliament, it must undertake a revised impact assessment and commit at the Spending Review to fully fund the reforms through a separate dedicated funding settlement.
- In line with the Manifesto for Counties proposals for Children’s Services and Education, the incoming government must provide immediate clarity on how it plans to manage councils' high-needs deficits in 2026 when the statutory override is scheduled to end. Alongside this, it must put in place a comprehensive reform and deficit reduction strategy to make the special educational needs and disabilities system more sustainable.
- In line with the Manifesto for Counties proposals for devolution and local growth, the government should remove competitive bidding processes, seeking wherever possible to streamline and consolidate both revenue and capital grants into single, long-term and flexible funding streams, distributed based on need.
- The government should seek to remove the referendum principle on council tax rate setting, recognising the role of democratically elected councils in setting their budgets locally.
- A consultation should be undertaken on providing councils with greater freedoms and flexibilities over council tax locally, including areas such as the single person discount and ability to propose additional council tax bands.
- An incoming government should consult the sector on the future of business rate retention as part of wider fiscal devolution proposals and reforms to business rates. This must recognise concerns over the sustainability and suitability of the tax in the face of pressure from business groups to reduce the tax, given the nature of high-street and online retailing; the correlation between business rates income, growth expenditure, and service need; and the tier share between county and district councils.
- Ahead of any fundamental reform to business rates retention, the government should seek to reset business rate growth in its second year in office, distributing retained growth according to need.
- New Homes Bonus should either be reformed or abolished. If abolished the funding should be redistributed based on need, with any reform focused on reviewing the role of incentives so they better reward upper-tier councils' vital role in providing infrastructure that enables sustainable housing development.
- The new government should provide certainty in the short-term, ensuring in the first year of office there are no changes to the approach in the distribution of grants, allowing time for a full consultation on any proposals for reform.
- Following confirmation of the local government settlement 2024/25, the government should begin an extensive engagement exercise with the sector to review relative needs and resources. This should build on the work previously developed as part of the fair funding review and the proposals contained in the 2019 consultation, specifically proposals for the foundation formula, area cost adjustments and independent work undertaken to develop service specific funding formulae.
- As part of any review of relative needs and resources, the government should ensure that when approaching resources (i.e. council tax), a notional rather than actual council tax rate must be used, with only a partial council tax equalisation. This would recognise that councils with high council tax bases have seen their reliance on this funding stream grow due to central government policy decisions and historically lower funding.
- In line with the Manifesto for Counties proposals for Adult Services and Health, the new government should seek to consult on, and implement, an updated Adult Social Care Relative Needs Formula, building on and updating independent proposals put forward by the Personal Social Services Research Unit at the University of Kent.
- Sector-led improvement has proved to be an effective mechanism for supporting councils. An incoming government should continue to focus on this as the primary mechanism for improving services and ensuring effective governance.
- An incoming government should provide a clear statement of policy to the sector on its future plans for the Office for Local Government (OFLOG). County Council Network members continue to have concerns over the remit and purpose of OFLOG, and in particular the severe limitations of the data comparison tool which is open to misinterpretation on council performance.
- If the government intends to retain OFLOG, it should seek to make it independent of the department. A review should be undertaken of its purpose and remit, with a view to focusing activity on supporting improvement and the sharing of best practice; achieving greater alignment between sector-led improvement activity and the work of regulators such as CQC and Ofsted; and avoiding the recreation of an inspection body similar to the Audit Commission.
- The new government should remove the recent requirement for councils to submit annual productivity plans. Councils already have pre-existing medium term financial strategies focused on this which are scrutinised locally, without the need to submit separate burdensome and time-consuming plans to Whitehall.
Our Evidence Base
CCN Budget Analysis: Autumn 2023
This report was the outcome of a survey of 41 county and unitary councils in autumn 2023, which found that those councils were facing historically high overspends leading into the 2024/25 financial year and beyond.
Key findings:
- In 2023/24 county authorities were set to overspend their budgets by a combined £639m - £16m per council - due to inflationary costs and rising demand.
- Children’s services accounted for almost half (45%) of this figure, with adult social care accounting for 25% and education, highways and home to school transport accounting for 22%.
- In 2023/24 the funding gap facing county authorities grew to £1.6bn, with a further shortfall of £1.1bn in 2024/25 and £1.3bn in 2025/26, meaning a total funding shortfall of £4bn between 2023-2026. Over the course of this period, planned savings and service reductions would only eradicate half of this deficit.
Workplace of the Future: Future of Local Government
This research by CCN and PwC explored the workforce challenges facing local government, putting forward a range of recommendations. It featured a survey of over 6,000 local government employees on their experience.
Key findings:
- Since 2012, councils in England’s 37 county and rural areas have witnessed the largest workforce decline amongst local authority types, with 32.5% (215,000) fewer employees.
- The survey reveals that one in four (26%) of respondents plan on working in local government for less than four years, with only half (46%) believing they would work in local government for over 10 years.
- Pay was the biggest factor for the retention of employees, but 18-34 year olds ranked career pathways as the second highest, whereas over 35s ranked flexible working as the second highest and secondment opportunities third highest.
Coming soon
Independent Review of Local Government Spending Need
Ahead of the next Spending Review, this forthcoming report with PwC will provide a detailed analysis of the funding outlook for councils over the period of the next parliament.
Areas of focus:
- Analyse the financial pressures experienced by councils during the height of the inflationary spike in 2022 and 2023.
- Projecting forward council spending need up to 2029/30.
- Outlining the funding required for councils to provide core statutory services over the coming period.
