Local authorities across the country, including London boroughs, are seriously struggling to balance the books and face a bleak financial outlook for the foreseeable future. Following the Local Government Finance Settlement, London boroughs forecast a funding gap of over £400 million in 2024-25. This 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.
Across England, 19 councils are now receiving ‘exceptional financial support’ from the government – up from the typical 5 to 9 councils since the pandemic began. This is a massive increase and indicates that issues with local government finance are no longer due to one-off issues—the problems are structural. Without this stop-gap measure, these 19 authorities would likely have issued Section 114 notices, effectively declaring themselves bankrupt.
Local authorities are also unable to plan for the medium or long-term as there have now been six one-year settlements in a row and funding for critical services, like adult and children’s social care, continue to be propped up with one-off grants announced late in the budget cycle. London Councils is urging the government to bring much-needed reform and stability to local government funding.
Financial challenges facing boroughs
- London boroughs’ Core Spending Power (CSP) will rise by approximately 5.5% in real terms following the 2024-25 Local Government Finance Settlement. However, this will still leave boroughs’ overall resources 15% lower in real terms compared to 2010-11.
- Demand for services has also risen significantly over this period. Since 2010, London’s population has grown by 800,000 residents, meaning CSP per person in London has decreased by approximately 30% in real terms.
- As mentioned above, London Councils estimates a £400 million budget gap for London local authorities in 2024-25. All but two of London’s 33 local authorities forecast to overspend on their original budget plans for 2023-24, with the collective shortfall totalling more than £600 million.
- This year’s settlement also relies too heavily on council tax. Almost 40% of the boost to CSP projected for London boroughs relies on council tax going up by the maximum permitted amount – an extremely difficult decision while so many Londoners continue to struggle with the cost of living.
- The 2024 Spring Budget was also an opportunity for the government to address the acute budgetary challenges facing local authorities but fell well-short of remedying the relentless squeeze on borough finances. While the outlook for borough finances remains challenging, London Councils welcomed the extension of the Household Support Fund at existing levels. The fund was due to end this month and its continuation was a top priority for London Councils, due to ongoing cost-of-living pressures. However, the decision to extend the fund for only six months will reduce support for vulnerable Londoners just as winter approaches.
Issues with the recent Local Government Finance Settlement
- There is an unjustifiable issue with the distribution formula for the Social Care Grant (SCG). The SCG funds both adult and children’s social care, however it is distributed solely based on the adult social care relative needs formula. We estimate London boroughs will lose out by over £200 million in 2024-25 if compared with a formula that uses adult and children’s social care need in equal measure. The government must update the formula for the SCG so it 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. Boroughs are collectively spending £90 million each month on temporary accommodation. We were particularly concerned by the Budget’s lack of action on homelessness. The government should end the unfair cap on housing benefit subsidy rates for temporary accommodation to relieve the pressure on boroughs’ resources.
- The Services Grant saw a significant and unexpected 82% cut this year, following a 43% cut last year. Funding decreased from £822 million in 2022-23 to £87 million in 2024-25. The Services Grant is one of the few flexible resources available to local authorities, so this sustained reduction will severely impact boroughs’ ability to counteract pressures associated with homelessness, temporary accommodation and general cost inflation. We call for this cut to be reversed in future settlements.
- 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. These funding sources are separate to the overall settlement but the sector desperately needs long-term solutions on both.
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 also 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 identifies opportunities for improvement to the benefit of all levels of government and constituents.
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
