Commenting on the launch of the government’s consultation on how funding is distributed among local authorities [1], London Councils emphasised that money provided to boroughs must reflect the high levels of need and significant deprivation in the capital, as well as the rising cost of delivering local services.
Earlier this month, Cllr Claire Holland, Chair of London Councils, warned that the reforms would be “make or break” for borough budgets.
The cross-party group has welcomed the focus on deprivation but emphasised the importance of using deprivation measures which properly account for housing costs.
London has the highest rate of poverty in the country once housing costs are factored in [2] and failing to use accurate measures of deprivation which reflect housing costs would risk penalising deprived communities in the capital and other major cities.
The proposal to introduce a new formula for homelessness pressures is seen as a positive step, given the £330m overspend boroughs incurred providing temporary accommodation in 2024/25.
London boroughs are grappling with a £500m budget shortfall this year, following more than a decade of structural underfunding, skyrocketing demand for services, and rising costs.
Almost a quarter of boroughs in the capital (seven) now rely on emergency borrowing measures through the government’s Exceptional Financial Support programme [3] - the highest proportion of any region in the country.
More boroughs are likely to face the risk of effective bankruptcy if funding reforms fail to deliver sufficient resources.
Cllr Grace Williams, Deputy Chair of London Councils, said:
“In the face of severe budget pressures, these funding reforms will be pivotal in determining boroughs’ financial future.
“It has been twelve years since the government formulae that determine so much of our funding were last updated. Change is long overdue – current funding certainly does not reflect the costs of sustaining London’s local services – but if we don’t get this right, we risk more boroughs being pushed towards effective bankruptcy.
“We welcome the chance to shape the government’s plans. It’s vital that the resources we receive match the high levels of need, deprivation and cost of delivering services in the capital.”
London Councils is now reviewing the proposals in more detail to understand their implications for boroughs. The group will share further analysis in the coming weeks and formally respond to the consultation in due course.
ENDS
Notes to editors:
[1] The government announced last year that it will reform its approach to new funding allocations for local authorities, with the aim of changes being implemented in 2026-27.
This will include updating funding formulae that allocate core funding to local authorities and resetting the business rates retention scheme – neither of which have been changed since 2013 – reducing the number of grants to local authorities and delivering a multi-year settlement over the next three years (from 2026-27 to 2028-29)
A government consultation on aims and principles closed in February 2025:
https://www.gov.uk/government/consultations/local-authority-funding-reform-objectives-and-principles
This new consultation covers detailed proposals for reform. It opened on 20 June and closes on 15 August.
[2] London has the highest rate of households in poverty once housing costs are properly reflected. More than a quarter (26%) of London households are in poverty as defined by DWP as having “relative low income” below the 60% median average income, based on the three years ending 2023-24.
[3] Seven London boroughs now require Exceptional Financial Support (EFS) from the government to balance their budgets for 2025-26, the highest rate of any region in the country. London accounts for almost a third (£418m) of the national EFS total of £1.3bn. This means seven London boroughs could be borrowing more than £1 million each day just to cover their day-to-day running costs.
EFS is an emergency measure that effectively forces councils into further borrowing or selling assets rather than addressing structural funding issues.