More money for councils, starting next year and targeted at deprived areas, and a reform of the local government funding system have been announced by the government. There will be a new £600mn Recovery Grant for areas most in need, a £680mn increase in the Social Care Grant and a new £250mn Children’s Social Care Prevention Grant.
The money will be included in the local government finance settlement for 2025-26, details of which would be revealed by the Ministry of Housing, Communities and Local Government (MHCLG) in December.
Grants will be re-purposed to offer better value for money for the taxpayer and deliver better outcomes for local people, including the most vulnerable, said the government.
At the same time the government will launch a consultation on its long-term proposals to fundamentally improve the way the sector is funded, moving away, according to the Ministry, from an outdated and inefficient approach – which had seen some councils increasing their level of reserves and others struggling to deliver services and balance budgets – and shifting to a fairer system which matches funding with need.
The reforms to council funding would ensure it offered better value for money and were described by the MHCLG as long overdue; the increase in funding for councils would help “fix the foundations” of local government.
“We are…committed to fixing the basics to enable local government to focus on its priorities – delivering for residents and providing high quality, vital frontline services that people rely on every day, “said the MHCLG.
“We will begin this process at the 2025-26 [financial] settlement…targeting money towards areas with greater need and demand for services (we have used deprivation as a proxy for this), and less ability to raise income locally. It will start to correct the inefficiency of the current system to put councils on a more stable footing.”
The government announcement comes within a week of the long-term problems of local government, including the need for more funding, being highlighted by North East Bylines.
Real terms increase
The Ministry said: “Overall, local government is expected to receive a real-terms increase in core spending power of around 3.2% and no council will see a reduction in this after taking account of any increase in council tax levels. On average, places with a significant rural population will receive an increase of around 5% in their core spending power and will be better off this year compared with 2024-2025.”
In addition, the Budget set out more than £4bn of investment in local government, and £1.3bn of this will come through the 2025-26 settlement – to build new homes, invest in special educational needs and disabilities, improve homelessness services and tackle potholes.
Deputy Prime Minister Angela Rayner said: “For too long councils have been let down by an outdated and inefficient funding system which has led to public services creaking and taxpayers’ money not being spent efficiently…[W]e’re taking the necessary steps to fix the foundations of local government by creating a fairer system and ensuring every penny is spent on the services so many people rely on every day.”
The MHCLG added: “The £680mn increase for the Social Care Grant will help local authorities address social care pressures, whilst the new £250mn Children’s Social Care Prevention Grant will help ensure children stay with their families or in safe loving homes where possible as part of a planned overhaul of the system next year. Legislation will be brought forward to crack down on the profiteering of vulnerable children and ensure local government can deliver safe, loving homes for children in care…
“On funding reform, further consultations are planned before the final proposals [are] developed, published and again consulted on ahead of the provisional settlement for 2026-2027 – ensuring the views of local leaders are reflected, in another demonstration of the government’s push to reset relationships with councils.
“Implementation of these reforms will take place alongside multi-year funding settlements, the first in 10 years come 2026-2027, allowing local authorities the certainty to plan and invest for the long-term. The number of funding pots will also be reduced to allow councils to have more flexibility to judge local priorities, to meet the needs of local people, and to decide how best to deliver on national priorities. “
National Insurance
The government also confirmed it will: provide support to the public sector, including local government, to meet the increased costs of directly employed staff arising from changes to employer National Insurance Contribution (NICs); plans to merge grants and simplify funding; and a commitment to overhauling the local audit system and to hold talks with local government over reorganisation if appropriate.
Several grants including the Rural Services Delivery Grant and the Services Grant will be repurposed, said the MHCLG. The government would ensure the impact of rurality on the cost of service delivery and demand was reflected in the public consultation next year. Places with a significant rural population would still on average receive around a 5% increase in their core spending power, which was a real terms increase. No council would see a reduction.
Councils would also receive over £1bn in total through the Extended Producer Responsibility for Packing scheme which would cover the existing costs they incur for managing household packaging waste, provide additional funding for new legal duties, and support much needed investment in the waste and recycling industry. Provisional payment figures would be shared with councils by the end of November.
Reaction
Institute for Fiscal Studies
IFS associate director and head of devolved and local government finance David Phillips said: “Today’s announcement on council funding is a clear statement of intent from the new government.
“If all English councils increase their council tax by the maximum allowed (on average, just under 5%), their overall core funding would increase by 5.6%, or 3.2% in real-terms after accounting for forecast economy-wide inflation. And add on new income from the producers of packaging, and the increase will be closer to 5% in real-terms.
“But funding increases will be very much targeted at deprived, typically urban, councils. Grants targeted at rural councils are to be abolished to part-fund a new deprivation-based grant. The government is at pains to point out that councils serving rural areas will still see a boost to their overall funding, but this will be substantially smaller than in more deprived areas.
“The government has described these changes as a stepping stone to more fundamental reforms from 2026-27 onwards. Its commitment to reform the council funding system with updated assessments of spending needs and local revenue-raising capacity is welcome – and long overdue. Existing funding allocations are based on a range of ad-hoc decisions and data from back as far as the 1990s. The current system is simply not fit for purpose and the government is right to reform it.
“The changes made for the coming year suggest these longer-term changes will also have an emphasis on redistributing funding to more deprived areas to offset cuts they bore the brunt of during the 2010s. Whether that is fair will be in the eye of the beholder. The status quo could not continue indefinitely though, and a forthcoming consultation will allow councils and other stakeholders across England their say on what a reformed funding system should prioritise.”
Special Interest Group of Municipal Authorities
Councillor Sir Stephen Houghton, chair of the Special Interest Group of Municipal Authorities, representing 48 urban councils in northern, midland and south-coast regions and Labour leader of Barnsley Borough Council, said:
“The [government] policy statement is an important first step in resetting the relationship between funding and need. It is very welcome that the government have targeted new funding on a deprivation-basis, recognising the disproportionate nature of the cuts and demand-increases that the most deprived areas have seen over the last decade. The “Recovery Grant” will be welcomed by our members and is a promising signal that the government intend to make the system fairer and more sustainable. The new Children’s Social Care Prevention Grant is a positive step, recognising the significant pressures for children’s services and the importance of preventative work.
We look forward to seeing more detail in the settlement and engaging with the department as they bring forward more significant reforms to the local government finance system in time for the multi-year settlement in 2026/27. It is very promising that the policy statement commits to the long-overdue “reset” of the business rates system. This will make the system fairer by further repairing the relationship between need and funding levels.”
County Councils Network
Councillor Tim Oliver, chair of the County Councils Network and Conservative leader of Surrey County Council, said:
“[O]n first glance the way government intends to distribute resources will be concerning for many county and unitary councils.
“Considering that increases in the minimum wage and National Insurance contributions will more than wipe out extra funds for social care, it is possible most CCN member councils – and many more across the country – will receive nothing from the ‘Recovery Grant’ which will be heavily targeted and weighted exclusively by deprivation. We are also very disappointed that the government have chosen to repurpose some grants and redistribute this funding elsewhere, which will adversely impact rural councils.
“As we have argued over the last few weeks, whilst deprivation is a key indicator of a council’s need, it is not the only indictor nor the most important measure of financial distress. The reality is that it is demand and market failure across adult and children’s social care and special educational needs services that are pushing councils to the brink. With our previous analysis showing county authorities have a larger funding gap than metropolitan boroughs next year, our councils deserve an appropriate share of the Recovery Grant.
“The way these funds next year are to be distributed do not adequately account for many under-pressure councils’ actual and future demands and costs and with the government also committing to a fair funding review, we would be very concerned if this is the direction of travel moving forward. The government must ensure that this review is a genuinely fair funding review and based on a robust and independent evidence-base.”
*This report is based on a press release from the MCHLG and Angela Rayner, Deputy Prime Minister. For more information see here.
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