London boroughs face £400 million funding shortfall
London boroughs are seriously struggling to balance the books and face a bleak financial outlook for the foreseeable future. The final Local Government Finance Settlement (LGFS) for 2024-25 was published today (Monday) and will be debated in the House of Commons on Wednesday.
The current level of funding in the settlement remains insufficient, with London boroughs forecasting a gap of over £400 million in 2024-25. The shortfall will leave boroughs needing to consider cutting services in order to balance their budgets, with worrying implications for London’s communities and economic growth. London Councils is asking London MPs to highlight boroughs’ concerns and urge the government to bring much-needed reform and stability to local government funding.
The financial challenges facing boroughs
- The finance settlement – including the funding announced in January – bring an approximate 5.5% real-terms increase in London boroughs’ Core Spending Power (CSP). However, this will still leave boroughs’ overall resources 15% lower in real terms compared to 2010, despite a significant rise in demand for services.
- Since 2010, London’s population has grown by 800,000 residents, meaning CSP per person in London has also decreased by approximately 30% in real terms.
- London Councils anticipates that boroughs face a collective funding shortfall of at least £400m in 2024-25 and an extremely challenging outlook.
- The government’s plans for increasing council funding rely too heavily on council tax. The boost to councils’ CSP does not come entirely from new government funding. Almost 40% of the CSP uplift projected for London boroughs relies on council tax going up by the maximum permitted amount – an extremely difficult decision for boroughs while so many Londoners continue to struggle with the cost of living.
- Boroughs are currently under enormous and unsustainable financial pressure. All but two of London’s 33 local authorities forecast to overspend on their original budget plans for this year (2023-24), with the collective shortfall totalling more than £600m.
Opportunities to improve the final settlement
- There is an unjustifiable issue with the distribution formula for the Social Care Grant (SCG). The SCG is supposed to fund both adult and children’s social care, with a Written Ministerial Statement in January focussing heavily on pressures in the latter. However, it is distributed solely based on adult social care needs. We estimate London boroughs will lose out by over £200m in 2024-25, compared with a formula that used adult and children’s social care need in equal measure. It is vital that the formula reflects children’s social care needs.
- London is the epicentre of the homelessness crisis. London Councils estimates that one in 50 Londoners are currently homeless and living in temporary accommodation. Increasing temporary accommodation pressures mean boroughs forecast a 50% overspend this year on average, totalling £150m. The additional homelessness funding announced in the Autumn Statement must be allocated and distributed as soon as possible and should recognise that London has 60% of the national gross spend on temporary accommodation.
- This year’s LGFS saw a significant and unexpected 82% cut to the Services Grant, following a 43% cut last year. Funding decreased from £822m in 2022-23 to £87m in 2024-25. This cut must be reversed. The Services Grant is one of the few flexible resources available to local authorities, so this sustained reduction in the overall grant will severely impact boroughs’ ability to counteract pressures associated with homelessness, temporary accommodation and general cost inflation.
- Allocations for the Public Health Grant were only published on Monday, which has contributed to the uncertainty local authorities face when setting their budgets.
- Schools funding (via the Dedicated School Grant) – where London boroughs have accumulated deficits of £300 million - and borough Housing Revenue Accounts (facing a £900 million shortfall over the next 20 years) are also under enormous financial pressure. While these funding sources are separate to the LGFS, the sector desperately needs long-term solutions on both.
- London Councils also strongly urges the government to continue the Household Support Fund (HSF) for at least another year at current levels or work with the sector now to secure transitional funding. London boroughs are spending £137m on HSF-related activity this year. Ending the fund next month as currently planned would create critical service gaps for vulnerable residents. The HSF enables boroughs to partner with local voluntary and community organisations to provide support to low-income households, helping them afford their energy bills, fund emergency food support, and provide free school meals among other crucial services.
Fundamental reforms are critically needed
- The above issues highlight two major problems with the current local government finance system: a lack of transparency and ongoing uncertainty. Local authorities are in the unnecessary and detrimental position of being unable to plan or budget beyond the immediate term. There is a serious lack of transparency regarding funding decisions, allocations and rolled-in grants.
- The government should embrace the findings and recommendations in the House of Commons Levelling Up, Housing and Communities Committee’s recent report on financial distress in local authorities. The committee provides an excellent overview of the sector’s overall financial position and identifies opportunities for improvement, to the benefit of all levels of government and constituents.
- Finally, London Councils believes local government funding must be fundamentally reformed as soon as possible to be:
- More sufficient – at an appropriate level to address current pressures, demands and responsibilities
- Distributed more fairly – to better reflect local need
- More certain – with 3-4 year settlements to use public funds more effectively
- Less reliant on council tax and central government – by increasing funding flexibilities and freedoms.
