Local
Government
Finance
Overview
County Council Network manifesto proposals for local government finance this parliament outline that the new government must use the upcoming Spending Review and Budget to set out a four-year sustainable funding settlement for councils, one capable of meeting the growing demand-led pressures facing councils. Crucially, it must put in place a priority set of reforms to reduce costs and improve outcomes within the next 18 months. Alongside this, in the medium-term, 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
Our Priorities
Our Vision
It is undoubtedly the case that the funding of 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.
It is in this context the new government begins its first Spending Review and prepares to set out the Budget in October. The government has inherited a very precarious position when it comes to local government funding, and with the Treasury suggesting there is a larger than expected funding black hole in the public finances, it is clear money will be tight. To overcome this, the government has declared that it will be a missions-led administration and has made a commitment to empowered and sustainable local authorities. Alongside this, the government have set out that the Spending Review will take a reform-driven and mission-led approach to public services.
Our proposals in our Manifesto for Counties aligns with these missions and aims of the Spending Review, while recognising and clearly outlining the severity of the financial challenges facing councils. Our vision for local government finance this parliament is built on three core principle of: Stability through financial certainty in the short term; Investment to meet the severe financial pressures in the short-term and underlying gap in the medium term; Reform to reduce costs and improve outcomes, providing long-term sustainability and the foundations for growth through greater devolution to councils.
Financial Pressures
It is welcome that the new government have committed to sustainable local authorities, supported by longer-term financial settlements. However, these will only be sufficient if accompanied by a substantial injection of new resources.
The recent findings of our financial outlook for councils with PwC and Pixel shows that the pressures facing local government in England will not ease up over the coming period - indeed they will only intensify. Based on the current trajectory of spending, analysis conducted by PwC shows that total spending need on council services in England could increase by £26.3bn by the end of the parliament, compared to 2022/23 - a 46.7% increase.
As a result of these rising costs and demands, local authorities in England face a cumulative £54.2bn funding shortfall over the next five-years. County and CCN unitary authorities represent 36% of the total, with a £20.3bn funding gap. While our analysis showed that yearly rises in council tax of 3% could reduce this national cumulative deficit to £38bn over the next five years, the County Councils Network have been clear that the government cannot rely on council tax alone to meet the gap, and local authorities would still be left to find billions each year in undeliverable service reductions to balance their budgets.
Even with yearly council tax increases, the network has set out that councils would have no choice but to continue to divert even more funding to fund high-demand care services. With 68% of the average County Councils Network member budget already consumed by care services alone, under current projections, this leave local authorities providing little more than care services in just a matter of years.
However, with many councils already providing close to statutory minimum levels in many service areas, this will still not be enough – threatening their ability to remain solvent unless their statutory obligations change. A recent County Councils Network survey revealed some 16 could be at risk of declaring bankruptcy by 2026/27, with a further six the year after, if government does not provide extra funding and councils statutory responsibilities remain the same.
As our proposals below set out, this unpalatable trade-off between reducing statutory duties or insolvency must be avoided through the government providing a substantive injection of new resources as part of long-term settlement for councils. Failure to do so would mean there will be no alternative to an honest discussion with residents on what statutory duties councils can reasonably be expected to deliver moving forward.
Service Reform
The County Councils Network recognise that the government are operating within a tight fiscal envelope, and while additional funding is urgently required, it must go hand-in-hand with reform.
Further organisational and service transformation through the adoption of new technologies and digitalisation, alongside a renewed focus on productivity, can help councils bare down on future costs. However, after a decade of cost-cutting, a narrow focus on efficiency savings will not resolve the underlying financial challenges facing councils. Moreover, reducing non-statutory services further is neither desirable nor will it close the scale of the funding gap facing councils.
Reform, therefore, must go deeper and faster. This must fundamentally tackle the drivers of surging demand, while seeking to address market failures that are creating unsustainable costs for councils in delivering adult social care, children’s services and home to school transport. By 2030, cost increases in these three services alone account for 83% of the total increase in spending need in England. For County Councils Network member councils this is even higher, at 89%.
Within our recent financial outlook report, PwC produced an alternative spending need forecast, which assumes some policy intervention and national reforms to resolve the surging costs and demands in adult social care, children’s services and home to school transport. If reforms were enacted, this could reduce the trajectory of spending need from 2027/28 onwards in these services, resulting in the national cumulative gap falling further after council tax rises to £24.2bn over the five-year period.
However, this reduction won’t occur unless the government introduce and drive through reforms to address spiralling costs in children’s services, adult social care, and in special educational needs. It is also urgent to have an impact on councils’ spending: with the government needing to outline and deliver reforms within in the next 18 months.
Our Manifesto for Counties sets out the bold and necessary reforms across adult social care, children’s services, SEND and home to school that are required: ones that the network believe could help make the ‘Reform’ forecast contained in our financial outlook a reality, reducing the trajectory of spending need from 2027/28 onwards and with it the anticipated funding shortfall.
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 were 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. The government will need to balance the need to reform, whilst ensuring it does not further undermine the financial stability of councils. That’s why our Spending Review submission outlined the need to 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 engagement and consultation on any proposals for reform.
However, over the medium-term, our proposals below set out that the new 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 the new government to implement practical reforms this parliament 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.
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- Ahead of undertaking a full Spending Review, the new 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 three-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 findings of the Independent Review of Local Government Spending Need conducted by PwC for the County Councils Network.
- In line with the Manifesto for Counties proposals for Children’s Services and SEND, 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.
- The 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 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.
- The 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 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 priorities
Funding Outlook
The Outlook for Council Finances
this Parliament
With preparations now underway for the Budget and Spending Review, the County Councils Network new report published in early October 2024 seeks to provide government with a detailed outlook for council finances this parliament.
Building on previous analysis conducted in 2019, part one of the report presents updated spending need forecasts for local government in England by PricewaterhouseCoopers LLP (PwC). This analysis was conducted across seven specific areas of council expenditure, alongside other services, incorporating a detailed and robust forecasting methodology to estimate the funding requirements of the sector.
Part two of the report set out funding projections by Pixel Financial Management. This incorporates funding both within councils Core Spending Power, and elements outside of it, projecting forward anticipated funding based on maintaining all current funding for the sector and the potential growth in locally retained resources.
CCN and Pixel Financial Management have bought together the spending need and funding projections to forecast the financial outlook for councils for the period 2025/26 to 2029/30.
Click left to explore the findings.
Baseline Forecast
Our baseline forecast for councils demonstrates the financial outlook before local decisions take place on council tax increases and national policy decisions on funding levels.
- Based on the continuation of cost pressures and current trajectory of spending, analysis conducted by PwC shows that total spending need on council services in England could increase by £26.3bn by the end of the parliament, compared to 2022/23 - a 46.7% increase.
- CCN authorities could face an £11bn increase in spending need over the same period, representing growth of 49.8%. By 2030, CCN authorities account for 40% of all spending need.
- The baseline financial outlook shows that next year local authorities in England have an annual funding gap of £4.9bn, rising to £17.3bn by 2029/30.
- For CCN authorities, the gap in the next financial year is £1.6bn, growing annually to reach £6.7bn over the same period. As a result of continuing surging pressures in adults, children’s and home to school transport, CCN authorities share of the funding gap grows from from 33% in 2025/26 to 39% in 2029/30.
- Cumulatively the forecast shows that all local authorities combined have a £54bn funding shortfall over the five year period. CCN authorities represent 36% of the total, with a £20.3bn funding gap.
Council Tax & Business Rates forecast
Our Council tax increase forecast shows the impact of a 3% rise annually before government sets out any changes to referendum principles and the continuation of the social care precept.
- The financial outlook including a 3% council tax rise annually of shows local authorities in England have an annual funding gap of £3.9bn in 2025/26, rising to £11.6bn by 2029/30. Cumulatively the forecast shows that by all councils increasing council tax by 3% annually throughout the forecast period, the total combined shortfall reduces by less a third (30%) to £37.6bn over the five year period.
- For CCN authorities, the gap in the next financial year is £1.1bn growing annually to reach £4bn over the same period. With council tax overwhelmingly the most important source of income for CCN member councils collectively, this reduces their cumulative gap by 40% to to £12.3bn.
By incorporating estimates on retained rates above baseline in our all retained business rates forecast, the analysis assumes these resources are used to fund day-to-day expenditure, which for upper-tier councils will naturally result in very limited ability to invest in growth enabling services.
- The financial outlook assuming councils use all retained business rates above baseline to fund core services shows local authorities in England have a combined funding gap of £2.4bn in 2025/26, rising to £9.5bn by 2029/30.
- Cumulatively the forecast shows the total combined shortfall reduces by a further 16% compared to the baseline forecast. The cumulative gap is £28.7bn over the five year period if councils were expected to use all retained business rates above baseline to fund core services.
Reform forecast
Within our Reform forecast, we assume reforms are enacted to reduce the trajectory of spending need from 2027/28 onwards in adult social care, children’s service and SEND home to school transport. If reforms were enacted, and spending trends returned to levels experienced before 2020, the necessity to use retained business rates above baseline to fund expenditure in these services would be reduced. Therefore we exclude retained rates above baseline from this forecast for upper-tier councils.
- The alternative forecasts, which assumes policy interventions are made to reform service provision to address recent high costs and demands that have been causing recent pressures, suggests total spending need could be £5.9bn lower by 2030. Policy intervention could have the largest impact on CCN member councils, with spending need £2.6bn lower by the end of the forecast period.
- The financial outlook based on reforms being enacted shows local authorities in England have an annual funding gap of £3.6bn in 2025/26, rising to £5bn in 2026/27 but broadly remaining stable up to 2029/30. The cumulative gap is £24.2bn over the five year period if reforms were enacted, councils increased council tax by 3% per annum over entire forecast period and districts still used retained rates to offset their funding gap.
- For CCN authorities, the gap in the next financial year is £1.1m growing to £1.7bn in 2026/27. CCN councils would benefit most from national reforms that help reduce spending need over time: resulting in the funding gap stabilising at between £1.6-£1.5bn for the remainder of the forecast.
