WIREDGOV

Councils face a funding gap of more than £2 billion next year (2025/26) as the Local Government Association warns against any “disastrous” further cuts in the Autumn Budget.

In its submission to the Treasury ahead of the October 30 fiscal event, the LGA says the Government needs to take immediate steps to stabilise council finances and protect vital local services.

The LGA said there is a growing risk of systemic financial failure with 18 councils reliant on being given Exceptional Financial Support by the Government in February to balance their books in 2024/25.

LGA analysis shows that due to inflation and wage pressures alongside cost and demand pressures, English councils face a £2.3 billion funding gap in 2025/26, rising to £3.9 billion in 2026/27. This is a £6.2 billion shortfall across the two years. 

Key cost pressure drivers include: 

• Soaring costs in children's social care due to rising complexity and placement expenses while home-to-school transport costs for children with SEND have surged due to a 62.7 per cent rise in Education, Health and Care Plans from 2018/19 to 2023/24. 
• Rising costs and demand in adult social care have driven a £3.7 billion (18.1 per cent) increase in budgeted spend from 2019/20 to 2024/25 while homelessness service costs have surged by £604 million (77.4 per cent) since 2019/20, driven by asylum, resettlement issues, and housing shortages and record spend on temporary accommodation.  
• Growing pressure on councils’ Dedicated Schools Grant budgets due to increased demand for services for children with special educational needs and disabilities. The ‘deficit’ on the provision of these services is forecast to reach £5 billion by 2025/26.  
• The National Living Wage (NLW) has increased by nearly 10 per cent in both 2023/24 and 2024/25 and could face a further substantial increase in 2025/26. Councils are clear that supporting those on the lowest pay is not only fair but improves the motivation, loyalty, productivity, and retention of hard-working council staff, these increases - alongside other wage rises - lead to added pressure on budgets. 
• Local government recruitment and retention issues are being exacerbated by pay gaps between local government and other sectors, leaving more than nine in 10 councils struggling to fill essential roles. 

Councils are increasingly having to draw on their financial reserves to manage these cost pressures and balance their budgets. Councils’ un-ringfenced reserves fell by £1.7 billion in 2022/23 and £1.1 billion in 2023/24. Some 42 per cent of councils drew on their reserves in both years. The LGA is clear that the use of reserves is not a sustainable solution to current budget pressures – reserves can only be spent once. 

While the Government has warned that the Autumn Budget will be “painful” with departments being tasked with finding savings, the LGA said any further local government funding cuts would tip many more councils towards financial ruin and leave them unable to deliver key local services.

New LGA analysis shows that service spending in 2022/23 was 42.1 per cent lower than it would have been had service spend moved in line with cost and demand pressures since 2010/11. This means that councils have made £24.5 billion in service cuts and efficiencies over this period. There is simply no more capacity for further cuts to council budgets.

Council tax-raising powers have also been too heavily relied on by government in recent years to boost local government core-spending power. While council tax is an important funding stream, the significant financial pressures facing local services cannot be met by council tax income alone.  

Instead, the Government must provide adequate funding to sustain the vital services that our communities rely on every day. The LGA is clear that there needs to be immediate action to support the sector in the short-term. In particular, the Government should give councils: 

• A significant and sustained increase in overall funding that reflects current and future demands for services. 
• Multi-year and timely finance settlements. 
• General rather than ring-fenced grant funding, reduce the fragmentation of government funding and end the use of competitive bidding to allocate grant funding. 

The LGA submission also looks ahead to the Spending Review, next Spring, setting out the benefits of investing in preventative services rather than a reactive, demand-led model to service spending. The LGA also wants government to convene a cross-party review of, and debate on, options to improve the local government funding system.  

LGA Chair Cllr Louise Gittins said: 

“Councils are the key to delivering the Government’s priorities, but the risk of financial failure across local government is potentially becoming systemic. Councils already face a funding black hole of more than £2 billion next year. 

“Having already delivered £24.5 billion in cuts and efficiencies, any further cuts on top of this would be disastrous.  

“The Government needs to take action to provide councils with financial stability and certainty in order to unlock their full potential. 

“Immediate financial support and long-term funding reform and certainty – alongside a focus on preventative spending - are essential to protect services and enable councils to fully contribute to the Government's agenda, from social care to housing, economic growth and tackling climate change.”

Notes to editors

1. You can read the LGA’s Budget and Spending Review submission here.