The Lead Untangles: Has the government kept its promise of a radical overhaul to council funding?

Council funding is being reallocated to make sure deprived areas receive the cash they need, but the new three-year deal for local government has received a mixed response

Dec 18, 2025

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After getting into power, Labour promised to undo a decade of austerity that left councils on the brink of financial ruin, to “fix the foundations” and put councils “on the road to recovery”.

After months of speculation, consultation and vague announcements, the government finally published the details of what the next three years will look like for councils, in what it described as “a radical overhaul of how local government is funded”.

But with local authorities up and down the country struggling to cope with rising demand for social care, temporary accommodation and services for kids with special educational needs, is this funding announcement the news that the sector has been desperately waiting for? The Lead dug into the details to find out.

What will change for councils?

The first major change in the provisional local government financial settlement is that it will last three years instead of one, which has been widely welcomed in the sector because it gives councils the greater certainty to plan further ahead.

Other reforms include streamlining the complex grant system and continuing the £600m recovery grant for areas hit hardest by previous underfunding.

The second big reform is a reallocation of funding for councils based on up-to-date measures of deprivation so that services in areas with the greatest need get much-need funding boosts. This update to the funding formula has been called for for years but understandably has proved controversial because it creates winners and losers.

It appears that outer London boroughs and urban areas around the country will see the biggest boosts to funding, with Enfield (58 per cent), Newham (53 per cent), Bradford (47 per cent) and Manchester (47 per cent) all featuring among the top 10. But areas with less deprivation and greater ability to raise money from council tax, which tend to be in rural areas, will see their spending power fall over the next three years.

While the spending power in some areas will grow considerably, it’s important to point out that these increases are calculated on rising council tax too, not just extra funding from the government.

For example, Croydon, a borough that has been in financial crisis for years and long argued it gets a raw deal from the previous funding allocation, will see its core spending power increase by 27.5 per cent from £463m to £590m over three years, but about £60m of that extra amount will come from council tax, while £67m comes from government grants.

But what about overall levels of funding? Councils’ core spending power will increase by 15 per cent over the next three years, which is nearly an extra £11.1bn in the system. This is a substantial increase, but it’s actually a smaller year-on-year rise than the previous three years. And it’s only a 7 per cent increase over the three-year period once you factor in inflation and population growth.

The extra money for councils comes after announcements in the last few weeks of a new £3.5bn National Plan to End Homelessness, and that the Department of Education will take over responsibility for paying for SEND services from 2028.

What is missing from the announcement?

There have been recent calls for a more fundamental overhaul of how local government is funded, including in a report this summer by the MPs on the Housing, Communities and Local Government (HCLG) committee.

The big stumbling block is council tax, which is outdated and unfair because it’s based on 1991 house prices so has very little bearing on the income of residents. Although the government recently announced new powers for councils to introduce a tourist tax, council tax remains one of the few ways councils can raise money locally.

Currently council tax hikes are capped at 5 per cent unless the government grants special permission, which it has done this year for six councils, five of which are in wealthy parts of London.

The HCLG committee report called on the government to “begin the process of overhauling or replacing council tax”, allow councils to set their own council taxes until a new system comes into force, and in the long term devolve tax-setting powers to local authorities completely.

Successive governments have tinkered around the edges with council tax premiums on empty homes and the new mansion tax, but reforming council tax in a meaningful way or even replacing it altogether is seen as a political minefield.

What has been the response?

It’s fair to say the reception across the sector has been mixed. The Local Government Association welcomed the multi-year settlement and streamlined funding system, but said an increase in overall funding was still needed to ensure the financial sustainability of councils.

LGA chair Louse Gittens said: “We remain concerned by the number of councils having to use unsustainable emergency bailouts which are a clear warning sign about the financial pressures facing local government. Unless sustainable solutions are found to the severe financial challenges facing local government, we anticipate more councils may need Exceptional Financial Support (EFS) in the future.”

Claire Holland, the chair of London Councils, welcomed the decision to change the proposed funding formula to account for housing costs in deprivation, which has meant that the capital has done better out of the reforms than first expected.

“This is a far more accurate approach to measuring deprivation and its impact on levels of need, not just in London but across the country,” she said.

This late change to the formula has prompted the Special Interest Group of Municipal Authorities, which represents urban councils outside the capital, to describe the fact that London’s suburbs were the “biggest winners” as “especially disappointing”.

Meanwhile the County Councils Network said: “It is abundantly clear that recent changes to the original government proposals have disproportionately benefitted London and metropolitan boroughs at the expense of all county and rural areas.”

Some in the sector have also criticised the government for the lack of clarity about what will happen to SEND deficits that councils have been allowed to accumulate until 2028, making it hard for councils to plan ahead.

What next?

Senior finance officers at town halls up and down the country will be reviewing their funding allocations ahead of setting their annual budgets for 2026/27 by early March. A consultation on the provisional settlement will be run until mid-January, and the final settlement will be published a few weeks after that.

The day before the provisional settlement was published, it was reported that up to 100 councils could apply for exceptional financial support (EFS) in the new year – a sharp rise on the 30 councils that received it this year. EFS, which gives authorities temporary permission to balance their budgets by selling off assets or borrowing, has come under increased criticism from council leaders an unhelpful sticking plaster that needs to be reviewed.

The total number of councils that will need this lifeline, which is usually announced in February, will be the clearest indication of whether Labour’s first multiyear financial settlement has truly “fixed the foundations” of local government and put councils “on the road to recovery”. ■

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