2nd Report - The Funding and Sustainability of Local Government Finance

The Government is undergoing the most significant local government reorganisation in decades. Substantial change, if not driven by a clear vision of what local government should be for and should be achieving, risks embedding undesirable elements of the current system into local government for the foreseeable future. (Conclusion, Paragraph 15)

The Government must assess the role of local government and, by the end of 2025, publish its vision for local government’s role in the state, including whether they see its role changing as a result of reorganisation and devolution to Strategic Combined Authorities. This vision should be submitted to consultation. Decisions around local government made by central government, including reorganisation and any changes to services and funding, should be informed by this view of local government’s role. (Recommendation, Paragraph 16)

The statutory and non-statutory responsibilities of local government have not been reviewed holistically for many years, contributing to the fragmented system of requirements that local authorities are required to deliver. What is needed to satisfy statutory requirements is too often unclear, which causes confusion and leads to inconsistency between service provision at different local authorities. (Conclusion, Paragraph 22)

The Government must undertake a review of which local government services should, and which should not, be statutory requirements. This review must begin by the end of calendar year 2025 and go to consultation by June 2026. If changes are needed to legislation to bring statutory requirements in line with the review, these must be made before the end of this Parliament. (Recommendation, Paragraph 23) Services under strain

Decisions made by departments other than the Ministry can have a significant impact on services delivered through local government, and it is local authorities and residents that must bear the brunt of the impact. 73 For example, those affected by welfare cuts such as the freezing of Local Housing Allowance may no longer be able to afford council tax and may even present as homeless, drastically increasing the level of support that local authorities must provide. (Conclusion, Paragraph 37)

The Ministry is in regular contact with other departments and government bodies about the needs of local government, but it lacks the levers that it needs to control decisions across central government. In our view, merely discussing the issues with other departments is not enough. To properly reform and stabilise these vital services, clear lines of accountability between relevant departments are needed, with the responsibilities for overall delivery and for funding being held together in a single department (even if delivery in practice is managed by several). (Conclusion, Paragraph 38)

We support the calls by the National Audit Office and Public Accounts Committee that the Government must provide cross-government reform to ensure that the entire system of local government is sustainable. The Ministry must collaborate with other departments on this and there must be clear lines of accountability. We also recommend that, for each mandatory service delivered by local government, a single Minister should have both the responsibility for delivering that service and the authority to coordinate work across all relevant departments. The power and responsibility for decision-making should be held by the same person so that effective action can be taken across departmental boundaries. (Recommendation, Paragraph 39)

The Government has committed over £1.5 billion from the Transformation Fund to reform adult social care, children’s social care, SEND, and homelessness services so that they are focused on prevention. Reforms to these services are urgently needed, but the Government must provide further clarity about what these service reforms will involve, how they will be implemented, and how the Government will measure whether the reforms have been successful. Delivering the reforms will require the Government to act proactively for many years to come. (Recommendation, Paragraph 41)

We support the Government’s current stated intention to focus more on prevention to reduce the demand for more expensive acute services in the long term. These preventative services have been weakened by a decade of underfunding in local government. However, bolstering preventative services must not come at the expense of acute services, such as temporary accommodation provision, lacking the funding they need today. (Conclusion, Paragraph 48) 74

Rebuilding and strengthening damaged preventative services will require temporary increases in central government funding before the demand for acute services starts to drop. (Conclusion, Paragraph 49)

The Ministry must prioritise funding and support for local preventative services to fix the foundations, reduce the demand for acute services, and bring down costs in the longer term. (Recommendation, Paragraph 50)

Successive Governments have relied too much on ringfencing of funding to control the activities of local government. Through ringfencing, the Government has required local authorities to spend their money in specified ways, which may not be the most efficient use of that money in the local context. Local authorities would be able to make more use of their local knowledge and make better decisions within their local context if the Government used an outcomes-based system: rather than requiring local authorities to spend specific amounts of money in certain ways, requiring local authorities to achieve certain outcomes within their overall budget. (Conclusion, Paragraph 61)

We are encouraged by the recent launch of the Local Government Outcomes Framework and the beginning of a transition towards an outcomes-based system of accountability for local government, and we look forward to further detail, as it emerges during the call for evidence, about how the Ministry will use the Framework to assess local authorities’ performance against the proposed metrics and support them to deliver the Framework’s priority outcomes. (Conclusion, Paragraph 62)

After the conclusion of the Framework’s live call for evidence and before the start of the 2026/27 financial year, the Ministry must implement the agreed outcomes-based system, by which local authorities will be held accountable for achieving the agreed outcomes within their overall budgets and not for meeting spending targets for individual services. (Recommendation, Paragraph 63)

The Ministry must end ringfencing by removing the standard spending requirements that are placed on the funding available to local authorities, whether the funding was provided by Government or collected locally. Spending requirements, such as ringfencing, should only be used in response to financial mismanagement. (Recommendation, Paragraph 64)

We welcome the Government’s desire to move away from the competitive bidding process as outlined in the Plan for Neighbourhoods, but further clarity is needed around what alternative funding programmes will replace competitive bidding. (Conclusion, Paragraph 65) 75

The Ministry must outline how it plans to allocate funding to local authorities in future investment programmes and move away from competitive bidding between councils. Any allocation must use a transparent process, based on clear criteria, and be focused on achieving desired outcomes. (Recommendation, Paragraph 66)

As part of the Ministry’s reduction of the use of funding pots and competitive bidding, it must consider and reduce the number of funding pots managed across multiple government departments, not just those managed by the Ministry. (Recommendation, Paragraph 67)

Unfunded mandates (responsibilities for local authorities without adequate funding or compensation) contribute to the lack of sustainability in the local government sector. (Conclusion, Paragraph 74)

The New Burdens doctrine, which requires government departments to ensure any new responsibilities for local authorities are fully costed and funded, is a vitally important part of government financing but is not robust enough to prevent unfunded mandates. (Conclusion, Paragraph 75)

The New Burdens doctrine must be reviewed, updated, and put on a stronger statutory footing. It must focus not only on new responsibilities, but on any increase in the costs of mandatory services delivered by local authorities. For any such increase in cost, there must be a proportionate increase in central government funding. (Recommendation, Paragraph 76)

The increase in the rate of employer National Insurance Contributions has placed a significant financial burden on local authorities that has not been sufficiently covered by new funding. It is an unfunded mandate of the Government’s making. (Conclusion, Paragraph 81)

The Government must fully compensate councils for the additional costs arising from the increase to employer National Insurance Contributions. (Recommendation, Paragraph 82)

The Ministry and HM Treasury must work together to align accountability over decisions that affect local government, including around national taxation. Authority over tax decisions that affect local government and responsibility for the financial sustainability of local government should be held together, perhaps by a single Minister who can work across departments at the Ministry and HM Treasury. (Recommendation, Paragraph 83) 76 The big pressures

We support and echo the conclusions of the recent report Adult Social Care Reform by the Health and Social Care committee. As they have said in the summary of their report, successive Governments have not fully considered the human and financial costs of inaction on social care reform, including costs falling on local authorities and their residents. The cost of doing nothing is now unsustainable, and reform is urgently needed. (Conclusion, Paragraph 91)

While we support the new independent commission into adult social care led by Baroness Casey, we are concerned that the proposed timescale means that urgent reforms to social care services will not be implemented soon enough to overcome the severity of the crisis in adult social care. If no action is taken by the time the commission concludes in 2028, it may be too late to stabilise the system. (Conclusion, Paragraph 93)

The timescale for the commission into adult social care should be brought forward, and it must present actionable reforms to the sector as part of its interim findings in 2026. The Government must not wait for the commission to publish its final report, and treat its interim findings with due urgency. The Government must ensure that adult social care is fully funded by the end of this Parliament. (Recommendation, Paragraph 93)

The Department for Health and Social Care must ensure that the ongoing reforms and cuts to Integrated Care Systems and Integrated Care Boards are aligned both with wider reorganisation of local government and with necessary reforms to the adult social care sector. (Recommendation, Paragraph 99)

The statutory override that allows local authorities to keep deficits of the Dedicated Schools Grant (DSG) off their books is an unsustainable measure that hides the true cost burden on local authorities. The recent extension of the override until 2028 is a necessary step to protect local authorities from the harmful consequences that would have ensued if it had ended in March 2026. As long as the override is in place, local authorities’ accounts will diverge further from reality, and it must not be extended further beyond

The Government’s upcoming reforms to the Special Educational Needs and Disabilities (SEND) system must be bold enough to eliminate local authorities’ deficits on the DSG going forwards before March 2028, while ensuring SEND children receive the support they need. The Ministry must commit not to extend the statutory override further beyond 2028. The 77 Ministry must also develop an approach to address historical cumulative DSG deficits, and to support local authorities handle them when the statutory override ends in 2028. (Recommendation, Paragraph 111)

Home-to-school transport is a particular area of concern for the affordability of local government services. We support the Government’s proposed update to the assessment of local authority’s needs relating to home-to-school transport, but while this more fairly distributes money between local authorities, it does not make the service as a whole more affordable. Reforms to the service itself will also be necessary. (Conclusion, Paragraph 114)

As part of its ongoing service reform for the SEND sector, the Ministry must consider options for reforming or improving the efficiency of home-to-school transport services. Potential options include wider use of sharing transport, and capital investment to enable councils to use efficient ways to meet their statutory requirements. (Recommendation, Paragraph 115)

It is a source of national shame that cases of homelessness, particularly among families and children, are at record levels and continue to rise. This is placing considerable strain on the finances of local authorities. We repeat the findings of our report of earlier this year, England’s Homeless Children: The crisis in temporary accommodation. (Conclusion, Paragraph 120)

As we recommended in our previous report, England’s Homeless Children, the Government should reconsider its decision to freeze Local Housing Allowance rates and should extend its support for local authorities to acquire new housing stock through the Local Authority Housing Fund. (Recommendation, Paragraph 121)

We support the return to multi-year funding settlements, but the local government funding reforms announced to date will not solve the underlying problems in the system by themselves. (Conclusion, Paragraph 127)

We acknowledge the trade-offs that the Government is making in updating the local government funding formula, and we support the Government’s decision to focus funding towards areas with higher need, which will help correct an existing imbalance in the system. We are pleased to see that factors considered in the Fair Funding Review take account of the different pressures faced by urban and rural authorities. (Conclusion, Paragraph 132)

The Government’s new funding formula must consider the effect of disparities between wards and sub-wards within single local authorities, which can be hidden when only considering the data at the level of whole local authorities. Measures of deprivation used in the new funding formula must account for local housing costs. (Recommendation, Paragraph 133) 78

Council tax is a regressive and unfair tax. We note the Government’s decision to prioritise other areas of local government funding for reform, but any local government reform that does not address council tax will be undermined by the current system. Council tax reform should be a higher priority on the Government’s agenda. (Conclusion, Paragraph 154)

Using property values from 1991, or proxy 1991 values where actual values are not available, is inappropriate and becoming increasingly inappropriate as time goes on. (Conclusion, Paragraph 155)

The Government’s arguments that council tax has high collection rates and leads to stable income levels are not sufficient reasons to avoid reforming council tax. (Conclusion, Paragraph 156)

Council tax is one of the main interactions with local government that residents will have. Giving councils more power over, and therefore more responsibility for, setting council tax will improve democratic engagement by residents. (Conclusion, Paragraph 157)

The Government should begin the process of overhauling or replacing council tax. This should look at options for a significant reform of local government funding, which could include replacing council tax. Whatever form of taxation is eventually adopted, the Government must clearly set out the tax’s purpose, its economic impact, and its fairness. (Recommendation, Paragraph 158)

A significant and considered reform of council tax will take several years to take effect. Until it does, the Government should devolve power and responsibility for setting council tax to councils. This should include the power for individual councils to revalue properties in their area, define property bands, and set the rates for those bands. Individual councils should also be given the power to apply or remove discounts and premiums (such as the single person discount), and to determine the criteria for how they are applied. Councils using these powers will have a responsibility to justify their use to their electorates, who will hold them accountable at the ballot box. The Government should retain the power to override locally set council tax rates only in exceptional cases of councils showing financial mismanagement or a lack of social responsibility to residents. (Recommendation, Paragraph 159)

We acknowledge the Government’s current plans to reform business rates and the Business Rates Retention system, including the business rates reset and the addition of new multipliers. However, we remain concerned that the business rates system can harm growth, disincentivise investment, and entrench deprivation at local authority level. (Conclusion, Paragraph 168) 79

The business rates system, or any alternative tax system for business property, must be designed to incentivise councils to encourage growth in their areas. We are concerned that any full, cliff-edge reset of business rates will reduce this incentive by withdrawing the benefits of growth. (Conclusion, Paragraph 169)

The Government must devolve more powers to local authorities to set multipliers, discounts and premiums relating to business rates. (Recommendation, Paragraph 170)

Pending a fuller reform of the business rates system, business rates resets must avoid cliff-edges for local authorities by means of a phased reset, by which growth is reset to a fixed prior period, say seven years before the date of the reset. This would eliminate hard resets, allow authorities to benefit from accumulated growth for a known length of time, encourage investment, and reduce funding uncertainty. (Recommendation, Paragraph 171)

The Government must be more courageous with its long-term plans for the funding of local government. While stabilisation is important in the short term, both the Ministry and HM Treasury need to start considering how to get the sector back to full strength, which will need to include serious consideration of long-term, radical reforms, and further devolution of fiscal powers and autonomy. As well as reforming local taxes that are currently in place, HM Treasury must devolve tax-setting powers to local authorities, allowing them to set their own forms of local taxes such as tourist levies. (Recommendation, Paragraph 182) Councils in financial distress

The process of issuing and responding to a section 114 notice is not a productive solution to financial unsustainability caused by long-term underfunding and increasing responsibilities. The need to avoid a section 114 notice can itself lead to poor financial management. (Conclusion, Paragraph 191)

The Government must amend the section 114 process so that an inability to set a balanced budget in a single year because of financial pressure does not cause long-term additional financial pressure. This could be done by extending the requirements to a rolling two-year basis (that is, allowing councils to recoup losses in the following year), by incorporating the year- end accounts into the criteria (that is, ensuring councils are actually making a loss instead of merely expecting to), or by easing the use of some reserves to fill funding gaps. (Recommendation, Paragraph 192) 80

Exceptional Financial Support (EFS) by means of capitalisation direction is a stopgap measure that avoids section 114 notices and allows councils to produce short-term balanced budgets, but can weaken councils’ finances and capital investment in the long term. Capitalisation directions have been over-used for many years, and Exceptional Financial Support is now neither exceptional nor supportive. We approve of the Government’s goal to end the use of EFS by the end of the upcoming multi-year funding settlement. (Conclusion, Paragraph 199)

The Government should aim to end the use of capitalisation directions as a standard part of EFS. Alternative measures to support local authorities must improve local government sustainability not only in the short term, but in the long term as well. EFS should remain a short-term measure, after which the Government must use an alternative approach for a long-term solution. (Recommendation, Paragraph 200)

The process by which the Government chooses which councils will receive EFS, and what it will look like, is not transparent. (Conclusion, Paragraph 204)

When the Ministry announces new cases of EFS, it must publish alongside its announcement sufficient supporting information to demonstrate how it determined that EFS was necessary, how much it would provide, and what form it would take. This published information should be the same information that the Ministry used to make its decision. (Recommendation, Paragraph 205)

The Government must mandate a minimum level of financial training for all councillors and statutory officers, so that all councillors are at least able to understand their council’s financial accounts and use them to compare their actual performance with the initial budget, to hold their officers to account when necessary, and to be suitably equipped to take decisions in the best interests of the taxpayer. (Recommendation, Paragraph 208) Local audit and early warnings

We support the Government’s moves to clear the local audit backlog and get the local audit system functioning, including the creation of the Local Audit Office and amendments to the Code of Accounting Practice, noting that these are in line with recommendations made by the predecessor Committee in its report on Financial Reporting and Audit in Local Authorities. However, without reforms to the audit requirements, significant resources are still spent to comply with requirements that were written for the private sector and that do not apply to public sector bodies like local authorities. (Conclusion, Paragraph 215) 81

The Ministry must review the purpose and requirements of local audit to ensure that they are proportionate and deliver maximum value for the public and users of the accounts. There must be clarity about the purpose of local audit, and no effort, time or money should be spent on local audit activities that do not support this purpose. (Recommendation, Paragraph 216)

The Ministry must act on other recommendations from the predecessor Committee’s report on Financial Reporting and Audit in Local Authorities that have not yet been addressed. Specifically, the Ministry should work with the organisation that prepares the Audit Code (currently the National Audit Office, transferring to the Local Audit Office when it is set up) to ensure that local auditors’ opinions over value for money include an actual assessment of value for money achieved (not merely whether appropriate arrangements exist), to assess the benefits of decoupling value for money work from financial audit work, and to encourage local auditors to make more proactive use of existing powers to raise early warnings. (Recommendation, Paragraph 217) 82