London boroughs are responsible for a vast range of local services that are essential to the capital’s success as a city.
From social care and waste collection to housing and road maintenance, boroughs play a pivotal role in supporting their communities, enabling economic growth, and tackling London’s key challenges.
However, boroughs face immediate unsustainable financial pressures. After years of underfunding from central government, boroughs are struggling to balance the books while maintaining vital services.
The difficulties experienced by councils across the country show the need for urgent reform of the entire local government finance system. With better funding tools, boroughs would be able to invest in the services that make such an important contribution to Londoners’ lives and the capital’s future prospects.
Boroughs are chronically underfunded
London local government has suffered from chronic underfunding for far too long. London boroughs’ overall resources remain 15% lower in real terms compared to 2010. Over the same time period, the population has grown and boroughs now serve 800,000 more residents – broadly equivalent to a city the size of Leeds.
The gap between funding and need is further demonstrated by research from the Institute for Fiscal Studies, which found an estimated 17% gap between funding need and the actual levels of local government funding across the whole of London – by far the highest of any region in England. This structural underfunding means a number of boroughs are now getting close to the financial cliff edge of Section 114 notices through no fault of their own.
Over the last decade, London boroughs have also been asked to deliver new burdens and responsibilities without the requisite funding. We estimate this has added £1.1 billion to London boroughs’ cost pressures – for example in Council Tax Support schemes (£300 milllion), underfunding for implementing the fair cost of care (£70 million), and the shortfall in the costs of concessionary fares (£160 million).
A crisis on many fronts: Key service pressures
The pressures boroughs faced this year have been such that all but two London boroughs are forecasting an overspend in 2023-24 totalling more than £600 million. Managing these in-year overspends is increasingly difficult as any low hanging fruit or general efficiencies have long been implemented. Staff numbers have reduced by a third (80,000 personnel) since 2010, and most authorities have delivered significant transformational programmes. The average London borough plans to use a quarter of its reserves to balance budgets over the next four years, which can only be done once—this situation is not sustainable.
The largest pressures remain in adult social care, where demand has grown following the pandemic and wider pressures on the NHS. Costs have also increased because of persistent high inflation and the impact on the care market from the fair cost of care reforms, which means nearly all boroughs expect to overspend in this area by a total of £200 million this year.
Children’s social care demand is also higher than before the pandemic because of the impact of lockdown, child welfare and mental health, but it is the growing complexity of needs and a lack of sufficient capacity in the London market which is driving costs higher. For example, despite the number of looked-after-children falling since 2010 in London, expenditure has increased by nearly 25%. With these pressures, boroughs are forecasting a £150 million overspend this year.
London is at the epicentre the homelessness crisis with an estimated 170,000 households living in temporary accommodation (TA), meaning one child in every classroom is homeless, while the number of families living in B&Bs for longer than six weeks is up by 781%. The number of people owed a homelessness duty is up 15% and monthly spending is up 16% in the past year, leading to boroughs forecasting a £150 million overspend on TA this year across London.
Pressures on boroughs’ Housing Revenue Accounts are also becoming unsustainable due to constraints on rental income combined with the mounting demand to tackle damp and mould, fire safety and retrofit costs. We estimate the 7% cap on social rents in 2023-24 will cost boroughs £600m over five years. Despite the headline commitment to a CPI+1% rent increase over recent years and the localist principle undermining HRA self-financing in 2012, government has imposed a rent position on social housing providers for five of the past seven years.
Three quarters of boroughs are estimated to be carrying Dedicated School Grant deficits, totalling almost £300 million in 2023-24. This is expected to increase to nearly £400 million by 2025-26 and is despite the Department for Education’s Safety Valve and Delivering Better Value programmes.
All of the above pressures mean that despite the 6.4% increase in Core Spending Power for 2024-25 and new funding announced on 24 January 2024, we still anticipate London local government has a funding shortfall of more than £400 million next year.
Funding reform
Beyond next year, London Councils believes the entire system of local government funding needs to be reformed to ensure the ongoing sustainability of local services.
Neither council tax nor business rates are fit for purpose. Social care continues to be propped up by a growing number of annual grants; the business rates retention scheme has not been reviewed since 2013; and, most importantly, core funding formulae are a decade old and no longer reflect need. The 2024-25 settlement was the sixth annual funding settlement in a row, which inhibits strategic planning and investment in prevention.
A reformed local government funding system - reflective of up-to-date measures of need, with medium term (largely un-ringfenced) funding allocations, and a fair incentive to grow business rates - would be a first step to enabling London boroughs to provide early preventative support that not only makes a huge difference to people's lives but, crucially, saves the wider public purse.
More fundamentally, London boroughs operate in a highly centralised funding system compared with international peers. London Councils has long called for greater financial self-sufficiency for the sector. Devolving decision-making and spending powers closer to communities is the only way to deal with the huge challenges London is facing.
We welcome the devolution trailblazers in Greater Manchester and the West Midlands and believe London and other areas should benefit from 100% business rates retention for 10 years be able to have single “departmental style” multi-year settlements.
Cities, and urban areas more broadly, are well placed to take advantage of smaller specific taxes that will directly support local economic growth. Three such examples are a tourism levy, the Apprenticeship Levy and Vehicle Excise Duty which we believe, if devolved to London government, would deliver additional economic benefit for the wider country as well as London.
In the long term, we believe all councils should have access to a broader range of freedoms, flexibilities, and revenue raising powers, rather than being exposed to the flaws of any one, centrally determined, tax. Towns, cities and local councils that are more responsible for their own destiny and more accountable for their own success, would design better taxes and provide better services.
We believe all councils should have full control over (suitably reformed) business rates and council tax, and would also support the assignment of a proportion of national taxes, such as income tax and VAT.
There is no shortage of recommendations on how to improve the broken local government finance system, and London Councils has four broad priorities for government going forward:
- Deliver stability and certainty with medium-term (at least 3 year) funding settlements for London boroughs. There have now been six single-year funding settlements in a row. Local authorities need certainty over how they will be resourced. Medium-term funding certainty leads to more strategic and efficient use of resources. Local authorities can create the environment for greater economic growth, but they need the stability to be able to make the required long-term investments and assure private investors of its commitments.
- Fund local government properly at a higher, sufficient amount. As stated above, London boroughs’ overall resources remain 15% lower in real terms than in 2010 and face a funding gap of more than £400 million in 2024-25. As demonstrated by several local authorities’ warnings of future Section 114 notices, local government will be unable to provide critical services to constituents if sufficient funding is not made immediately available.
- Reform the distribution of funding to better reflect local need. The funding gaps identified by the previously mentioned IFS analysis show how current funding distribution models are not matching resources to needs. Delivering the “fair funding” review of relative needs and resources should be a top priority.
- Increase funding flexibilities and freedoms. In the short term: revenue grants should be un-ringfenced by default (with ringfencing only in exceptional circumstances); the business rates retention scheme should be reset, reviewed and reformed to better incentivise growth (including all areas offered the same 100% business rates retention deals as the trailblazer areas); and London and other areas should be given single departmental-style settlements to spend public money in a more joined up and coherent way across an area. In the long term, we continue to call for full devolution of business rates and council tax to local authorities and to explore the assignment of a proportion of national taxes, such as income tax and VAT, so that local government funding is more balanced and less reliant on any one funding source.
Paul Honeyben, Strategy Director: Local Government Finance & Improvement