“Perverse” funding changes threaten North East councils

Councils in some of the North East’s most deprived areas are at risk of being worse off under a government review intended to make the distribution of government funding to local authorities fairer, the councils have warned.

All seven councils in the region (Tees Valley excluded) and the North East Mayor have written to the Ministry of Housing, Communities and Local Government (MHCLG) complaining that the outcome of the review is “a perverse outcome and is surely not what the government intended.”

Three of the region’s most deprived councils, South Tyneside, Gateshead and Sunderland, appear to be at greatest risk, though others too could be losers from the latest, second version of the government’s fair funding review (FFR 2.0). 

FFR 2.0 was introduced by the Labour government because, it said, the outdated way in which local authorities were funded meant the link between funding and the need for services had broken down. Some places had been left behind, which was unfair.

FFR 2.0 looked at two aspects of local authority funding. One was the needs of different councils based on factors such as the size and characteristics of the population, including deprivation, and geographic features like rurality. The needs analysis then fed into the government’s calculation of each council’s core spending power, made up of grants, council tax and retained business rates.

Letter to the Ministry

In their 15 August letter to Jim McMahon (Local Government Minister at the time, but who left the government at the recent reshuffle) the seven North East councils (the so-called LA7) wrote that “ We strongly welcome the government’s stated intentions and ambitions through the FFR 2.0 to fix the broken funding system of local government that has left local authorities across the country in crisis.”

But they go on to say: “While we completely agree with the intentions of government through the review and the consistent policy statements by ministers, we do not believe that the proposed system as designed will deliver this. In fact, it has the real risk of creating the exact opposite, a system that will have a detrimental impact on the very authorities that it set out to support and contradicting the aim to redress the significant imbalances in the current system…

The big losers

“South Tyneside, Gateshead and Sunderland councils are examples of three authorities that have suffered some of the deepest cuts during austerity, face significant pressures given the nature of their populations, have some of the most deprived areas in the country yet, under the new system, will lose out considerably.”

They say that independent modelling by credible (unidentified) third party organisations indicates that the average national increase in overall spending power (including council tax income) across all local authorities between 2025/26 and 2026/27 is estimated at 6.0% but for the North East authorities the increase will only be 3.7%. As a result, all seven will receive less than the average change in resources.

The change in the needs assessment, which feeds into spending power (the greater the need the greater, potentially, the government grant), shows that between this year and next, of 120 upper tier English councils (London boroughs are excluded), South Tyneside suffered the third greatest fall in need – down by 11.2%, placing it at 118 in a table ranked from greatest increase to greatest reduction. Gateshead fares only a little better – placed at 117 with a fall of 10.5% in need – and Sunderland slightly better again at 112 with minus 6.3%.

The other councils in the North East Mayoral Combined Authority area assessed as having reduced need, according to the analysis, are North Tyneside and Northumberland. There are modest increase in assessed need in Newcastle and Durham.

Of the Tees Valley councils, Redcar & Cleveland fares worst, placed at 87 in the table, then come Darlington, Stockton and Hartlepool. Only Middlesbrough in the whole region comes in the top half of the table, at sixth, with a 14.3% increase in need.

Nationally, the council that tops the table is West Northamptonshire, where needs are assessed to have risen by 18.1%, while at the bottom comes Cumberland, where needs are calculated to have fallen by 12%.

The MHCLG warned that reporting of the impact of FFR 2.0 on council tax is speculation.

Source: North East Mayoral Combined Authority and LA7 councils.

The MHCLG blog

In a blog dated 7 August, MHCLG said: “The current, outdated way in which local authorities are funded means the link between funding and need for services has broken down. Some places have been left behind with communities facing declining neighbourhood services – this is not fair.

“The previous government themselves understood this in their ‘Fair Funding Review’ but they did not deliver, launching the Fair Funding Review in 2016, but did not take proposals forward.  We are taking a different approach and making good on this long-overdue promise through the FFR 2.0. 

“Subject to the results [of consultation] we will update the funding system to more accurately account for deprivation, including pockets of disadvantage, and to account for the differing ability of councils to raise income locally, which results from the number and values of homes within a council area. 

“We recognise that change of this scale requires careful management. That is why we are inviting views on a package of transitional arrangements available over the multi-year [government] Spending Review period, including providing a funding floor. And any council with concerns about their ability to set or maintain a balanced budget can approach government directly.

“Reporting of the impact on council tax is speculation. It is for local authorities to decide at what level they set their council tax within the referendum thresholds. The Spending Review confirmed the government intends to maintain the referendum threshold at 3%, with 2% for the adult social care precept.”

Durham County Council’s cabinet will discuss a report on its Medium-Term Financial Plan on 17 September, as reported by North East Bylines, and it includes a section on FFR 2.0. In line with the table in the regional letter to MHCLG, where Durham fares best of the seven NECA councils with an increase in needs assessment of 0.6%, it says that Durham is likely to benefit from the proposed redistribution of funding allocations but also warns that funding changes are indicative at this stage and open to interpretation. None of the other regional council cabinets is known to have discussed the outcome of FFR 2.0 so far.

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