Local government finances: Impact on communities

On 21 March 2024 the House of Lords is due to consider the following motion:

Lord Shipley (Liberal Democrat) to move that this House takes note of current local government finances and the impact on local communities.

1. Local government structure and responsibilities

Local councils are responsible for many services including social care, education, housing, planning, licensing and pest control. Responsibilities vary by the structure of the local government. In most areas in England, local government responsibilities are split between two tiers: an upper tier of a county council, and a lower tier of a district council.^[1] Each county contains multiple districts. In other areas, a single authority takes on the responsibilities of both tiers. These include the London boroughs, metropolitan districts and unitary authorities.

Among other things, county councils are responsible for:^[2]

• education
• transport
• planning
• fire and public safety
• social care
• libraries
• waste management
• trading standards

District, borough and city councils responsibilities include:

• rubbish collection
• recycling
• council tax collections
• housing
• planning applications

The National Audit Office (NAO) explains that some services are mandatory, while others are discretionary. Mandatory services are subject to different levels of central control:

Services are mandatory where Parliament has created legal duties for local authorities. These include social care services to adults and children, waste collection, planning and housing services.

Some mandatory services are subject to a great deal of central influence, most obviously social care services. Legislation or statutory guidance describes duties in detail, and inspectorates monitor service quality. Local authorities have a broad discretion over the delivery of other mandatory services, however, such as libraries.

Local authorities have the power to deliver discretionary services in line with their local priorities, but are not obliged to provide them. Wholly discretionary services include sport and recreation, economic development, business support and additional provision that supports mandatory services.^[3]

2. Sources of finance

Local government finance is complex, with multiple sources of funding. The information below is an overview of the main elements of local government revenue funding and is not intended to be exhaustive. Suggestions for further reading are provided at the end of the section.

This briefing focuses on revenue finance; however, local authorities also receive capital finance from a variety of sources. For information on capital finance, see the House of Commons Library briefing ‘Local government in England: Capital finance’ (4 January 2023).

2.1 Council tax

Each local authority sets a council tax and can retain all of the funding raised from this tax to support its budget.^[4] Council tax is charged on domestic properties, which are grouped into valuation bands based on domestic property values from April 1991. These bands determine the level of tax charged. Some properties are eligible for discounts or exempt from council tax. People on lower incomes can apply for council tax support to reduce their council tax bill.

Local authorities are legally required to set council tax to produce a balanced budget that funds their costs each year, allowing for other income.^[5] Local authorities are not permitted to operate deficits.

Each year the government publishes referendum thresholds (as part of the ‘referendum principles’) for council tax.^[6] If local authorities want to increase council tax levels above these thresholds, they are required by the Localism Act 2011 to hold a referendum. The referendum threshold for 2024/25 for most councils is 3%. It was also 3% in 2023/24.^[7]

Local authorities with responsibility for social care are also entitled to a ‘social care precept’.^[8] This means they can increase council tax by an additional amount on top of the general referendum threshold. This is set at 2% for 2024/25, the same as for 2023/24.

Local authorities raised 30% more council tax in 2021/22 than in 2009/10.^[9] The proportion of councils’ core spending power coming from council tax also rose between 2009/10 and 2021/22: council tax accounted for approximately 40% of councils’ core spending power in 2009/10 and was 60% in 2021/22. The House of Commons Scrutiny Unit forecasts it will form 56% of core spending power in 2024/25.^[10]

Read more:

• House of Commons Library, ‘Council tax: FAQs’, 25 September 2023
• House of Commons Library, ‘Council tax: Local referendums’, 4 January 2023

2.2 Business rates

Non-domestic rating, also known as business rates, is a tax that applies to all non-domestic properties

unless they are specifically exempt.^[11] Business rates are charged on properties such as shops, offices, factories and holiday rentals. Exemptions include empty properties and businesses in financial difficulty.^[12] Business rates are intended to “broadly” reflect the rental value of a property.^[13] This is termed a property’s rateable value and is set by the Valuation Office Agency. This value is multiplied by the tax rate, which is set by central government. Any relevant reliefs are then deducted to calculate the final charge.

Currently local government collectively retains half of the income from business rates. However, each council does not keep exactly 50% of the business rates it collects; some of it is redistributed to even out differences between how much each council is able to collect.^[14] Councils pay the remaining 50% of business rates to central government, which uses the income to fund grants to local authorities.^[15] Since 2017, some councils have taken part in pilots to retain a greater share of their business rates.

Read more:

• House of Lords Library, ‘Non-domestic Rating Bill’, 26 May 2023
• House of Commons Library, ‘Business rates’, 9 November 2021

2.3 Central government grants

The ‘revenue support grant’ is a central government grant given to local authorities that can be used to finance expenditure on any service.^[16] The amount of revenue support grant to be provided to authorities is determined by a formula and forms part of the local government finance settlement, along with locally retained business rates.

The government also provides grants that that are ring-fenced for particular services. These form part of the councils’ general fund because they are to be spent on council-run services. This is in contrast to funding for schools, sixth form colleges, the police and housing benefit, which local authorities pass on directly to those services. Ring-fenced government grants include the:

• public health grant, which is for use on public health functions^[17]
• better care fund and improved better care fund, which provide funding for local government and integrated care boards to work together to join up health, social care and housing services^[18]
• social care grant, which provides additional funding for social care^[19]
• new homes bonus, a grant paid to local councils to reflect and incentivise housing growth in their areas^[20]

In 2020/21 and 2021/22 the government also provided local authorities with grants to cope with the effects of the Covid-19 pandemic.^[21]

Government grants reduced by 40% in real terms between 2009/10 and 2019/20, from £46.5bn to £28bn in 2023/24 prices. This downward trend was reversed in 2020/21 and 2021/22 because central government made more grant funding available to local government in response to the pressures of the pandemic. Accounting for these extra grants, the fall in grant income was 21% in real terms between 2009/10 and 2021/22. The fall across this period was 31% if grants relating to Covid-19 are not included.

2.4 Other sources of income

Local authorities can charge for certain services, such as leisure centres and parking.^[22] These fees can only offset the cost of these services. Councils can also generate income from sales, for example of property, and other charges, such as for certain types of waste removal.^[23] Local authorities increased the money raised from sales, fees and charges by £1.6bn between 2010/11 and 2019/20.

In 2019/20 service users directly funded almost half the cost of planning and development services (through, for example planning fees) up from 25% in 2010/11. Direct funding for highways and transport services (through, for example, fees for supervising works) increased 31% between 2010/11 and 2019/20.

Some local authorities also receive income from investments in commercial property.

Read more:

• House of Commons Library, ‘Local government: Commercial property investments’, 14 November 2022
• National Audit Office, ‘Local authority investment in commercial property’, 13 February 2020, HC 45 of session 2019–20

2.5 Read more

• House of Commons Library, ‘Local government finances’, 6 June 2023
• House of Commons Library, ‘Local authority data: Finances’, 16 February 2022

3. Trends in spending power

The government measures the income made available for local authorities through ‘spending power’, published as part of the annual local government finance settlement. This indicator captures the main streams of government funding to local authorities, in addition to council tax.^[24] It does not include various other forms of local income, such as sales, fees and charges, or commercial income.

According to the NAO, total spending power for local authorities fell by 26% between 2010/11 and 2020/21.^[25] Spending power funded by the government fell in real terms by more than 50% on a like-for-like basis between 2010/11 and 2020/21. It fell every year in that time period up to 2019/20, then increased slightly in 2019/20 and 2020/21. In contrast, after an initial fall between 2010/11 and 2016/17, spending power from council tax rose by 15% between 2010/11 and 2020/21.

The House of Commons Library has analysed spending power statistics between 2015/16 and 2023/24. Similarly, it reported a real-terms decrease until 2019/20, before a partial recovery.^[26] However, looking at the situation for 2024/25, it says that core spending power remains around 11% below its 2010/11 level in real terms.^[27]

There is wide variation between authorities; though total core spending power across England rose by 7% in real terms between 2015/16 and 2023/24, fewer than half of authorities (42.5%) saw any real terms increase over this period.

The House of Commons Library also reported a relationship between deprivation and spending power, with local authorities with higher deprivation tending to have greater spending power.^[28] This relationship is weak, however, and there is considerable variation in spending power between authorities with similar levels of deprivation. There is a much stronger relationship between government funding and deprivation, with the most deprived areas receiving the most funding.^[29] The Commons Library stated that the relationship is weaker for spending power than government funding because more affluent areas are able to raise more in council tax.

4. Spending on services and the impact of reductions

The amount local authorities spent on all services combined fell 10.4% between 2010/11 and 2019/20.^[30]

Councils have responded to funding pressures by redirecting funding towards statutory services, particularly social care, and away from non-statutory ones. Spending on all services excluding social care (including non-schools education, highways and transport, cultural and related services and planning and development) decreased between 2010/11 and 2019/20. Spending on these services was at its lowest since 2010 in 2018/19 before increasing slightly in 2019/20. Spending was 25% lower in real terms in 2019/20 than in 2010/11.^[31]

In local authorities with social care responsibilities, their spending on social care rose from 52% to 80% of their spending power.

Services that saw spending reductions between 2010/11 and 2019/20 include:^[32]

• cultural and related services (–36.8%)
• planning and development services (–35.7%)
• non-schools education (–31.6%)
• housing services (general fund revenue account only) (–25.7%)
• highways and transport services (–23.6%)
• central services (–16.4%)
• environmental and regulatory services (–10.5%)

There is some evidence that in the years immediately after the initial reductions in funding, efficiencies were made without commensurate declines in services. The Institute for Government’s submission to a 2019 House of Commons Housing, Communities and Local Government Committee report said that in some cases satisfaction and service levels had been maintained for some periods between 2010 and 2019 in spite of spending cuts:^[33]

• Residents’ satisfaction with waste collection, libraries, and road maintenance declined only slightly between September 2012 and October 2018 despite large spending cuts.
• The number of social care users who said they were satisfied remained at approximately 90% between 2009/10 and 2019.
• Professionally qualified food standards and hygiene staff were undertaking more inspections and audits per person in 2019 than in 2010.

However, the Institute for Government has also pointed to indicators that quality of services declined in this period:^[34]

• The miles covered by bus routes fell 14% between 2009/10 and 2019/20, with deprived areas more likely to see reductions in routes.
• A third of England’s libraries closed between 2009/10 and 2019/20 with more closures in the most deprived areas.
• The timeliness of reviews for children on child protection plans declined. 91% of children on child protection plans had their reviews carried out within the required timescales in 2017/18, compared to 97% in 2009/10.

The Local Government Association (LGA) has also highlighted effects of reductions in funding. Writing about this in January 2024, it said:^[35]

• Spending is increasingly concentrated on fewer people, because councils have protected services such as social care (adult and children’s) where there are clearly defined statutory responsibilities and regulatory oversight.
• There are growing concerns over the quality and scale of service provision, with the share of respondents that are satisfied with council service provision having fallen for every service except waste collection between 2016/17 and 2023/24.
• Councils are struggling to recruit and retain staff because they have been unable to increase salaries of key professions.
• There has been a reduction in spending on preventative services and a greater focus on reactive, demand-led provision as councils have focused their spend on meeting their statutory obligations.

Many councils have said they plan to reduce services further in the future. Two thirds of respondents to a survey for the LGA, which was conducted after the publication of the final local government finance settlement for 2024/25 (see section 7), said they would have to make cuts to local neighbourhood services such as waste collection, road repairs, libraries, and leisure services in 2024/25 because of lack of funding.^[36] The survey found that many councils said they would need to make cuts to the following services:

• sport and leisure (55 percent of respondents)
• libraries (48 percent of respondents)
• parks and green spaces (48 percent of respondents)
• museums, galleries, and theatres (34 percent of respondents)

The LGA said that while further savings could be made through shared services and new technology, “2024/25 is the sixth one-year settlement in a row for councils which continues to hamper financial planning and their financial sustainability”. It argued that as well as providing additional funding to protect services the government must provide councils with greater funding certainty. This could be achieved through multi-year settlements and “more clarity on financial reform” so councils could “plan effectively, balance competing pressures across different service areas and maximise the impact of their spending”.

5. Pressures on finances as a result of increasing costs and demands

Local governments are subject to many increases in costs higher than the rate of general inflation, as well as increasing demand for services.^[37] In a letter to Chancellor Jeremy Hunt ahead of the March 2024 budget, the LGA said that councils were facing significant shortfalls because of cost and demand pressures:

Our analysis shows that by 2024/25 cost and demand pressures will have added £15bn (28.6%) to the cost of delivering council services since 2021/22. Despite increased funding in both 2023/24 and 2024/25 we estimated in October 2023 that the sector was facing a funding gap of £2.4bn in 2023/24 and £1.6bn in 2024/25. We have not revised this analysis following the OBR’s [Office for Budget Responsibility] new projections at the 2023 autumn statement. However, if we were to do so we would anticipate a greater funding gap in 2024/25 as inflation and wages are forecast to be higher in 2024/25 than in our October model. The funding gaps produced by our analysis relate solely to the funding needed to maintain services at their current levels. The implication here is that councils do not have enough funding simply to stand still.^[38]

The LGA highlighted particular pressures, including:

• the cost of the increased national living wage on providing adult social care
• rising costs in children’s social care because of increases in placement costs
• escalating costs of home-to-school transport for children with special educational needs and disabilities, driven by ongoing growth in the number of children with education, health and care plans
• increasing costs and demand in adult social care
• increasing costs of homelessness services as a result of multiple contributory cost and demand drivers, including asylum and resettlement issues and an insufficient supply of affordable housing

It said that real terms funding reductions since 2010/11 meant councils could not keep up with these pressures, in spite of increases in funding in recent years. It argued that drawing on reserves was not a sustainable solution to avoiding service cuts, as “they can only be spent once”.

A House of Commons Levelling Up, Housing and Communities (LUHC) Committee’s February 2024 report, entitled ‘Financial distress in local authorities’, also cited social care, homelessness and meeting demand for services for people with special educational needs and disabilities as particular sources of financial pressure on local government.^[39]

The committee found that significant spending on children’s social care has been driven by high agency costs, high placement costs and high demand.^[40] In addition to more children requiring care, the Competition and Markets Authority found that prices were higher than they should be because the market for the children’s residential home sector was not working well. There was wide recognition, including by the government, that resources being diverted away from prevention in order to cope with immediate need contributed to rising costs overall. In February 2023 the government announced a new strategy to reform children’s social care, including an extra £200mn over the following two years.^[41]

Demographic changes and people living with multiple health conditions for longer has increased the demand for adult social care.^[42] Pressures in the cost of adult social care are primarily from “wage inflation and recruitment gaps necessitating the use of expensive agency staff”. The government has provided increased funding for social care in recent years and has published a white paper on long-term reform of adult social care, entitled ‘People at the heart of care’ (December 2021).

There has also been a significant increase in demand for services for children with special educational needs and disabilities (SEND) since the Children and Families Act 2014 instituted new requirements for schools and others to provide additional support.^[43] In addition, more diagnoses, advances in medicine and advances in care have led to increased costs. Many of the associated costs are financed by the Department for Education through the local authority; however, the LUHC committee found that “the amount of funding provided by the Department for Education has not kept pace with this increase in demand and costs”.^[44] In addition, there are knock-on costs for local authorities, such as providing transport.

The Institute for Fiscal Studies (IFS) states that in addition to the costs outlined above, there is often a lag in contracts being updated which can result in higher costs for local authorities:

[…] inflation can affect councils with a lag, as contracts with suppliers (eg for social care or cleaning services) are often updated each year based on inflation at some point in the prior year. For 2023–24, that may mean autumn 2022, when inflation reached its peak: over 11% for CPI inflation, which is far higher than forecast inflation for 2023–24 itself.^[45]

6. Section 114 notices: Local authorities in financial distress

Under the Local Government Finance Act 1988 a local authority’s most senior finance officer must issue a section 114 notice, in the form of a report, if they believe that the authority has taken, or is about to take, a course of action that would be unlawful.^[46] This includes being unable to meet its spending commitments from its available sources of funding. Once a council has issued a section 114 notice it cannot incur any new expenditure until an amended budget is passed. In order to balance the budget, this would require spending cuts, asset sales, or increased taxation, fees, or charges. The secretary of state can also, in some circumstances, intervene in the running of the local authority. This can include appointing commissioners to undertake specific functions of a local authority in place of that authority’s elected representatives.

Fourteen councils have issued section 114 notices since the Local Government Finance Act 1988 became law.^[47] Hillingdon and Hackney councils were the first and second to do so, in 2000. After Hillingdon and Hackney there were no section 114 notices until 2018, when Northamptonshire issued two. Since 2018, eight different councils have issued at least one section 114 notice; a total of 12 were issued in this period. The Institute for Government states that “with the exception of Nottingham (for its first section 114 notice) and Northumberland—whose section 114 notices related to illegally incurred expenses—all have been because an authority has not been able to balance its books”.

The reasons some local authorities have been unable to balance their budgets are multi-faceted and vary between councils. Both the Institute for Government and the House of Commons LUHC committee argue that management and governance issues played a role, but that this took place in the context of reductions in funding and increased demand. In addition, the Institute for Government points to measures some councils took in order to deal with funding pressures:

In response to these financial pressures, local authorities looked to other sources of income. Some opted to borrow large sums to invest in assets that generate income, such as commercial property. Rising interest rates have made it more difficult for local authorities to service their debt, contributing to lower financial resilience.

Finally, the Public Accounts Committee has reported an “unacceptably high backlog in local government audit”. While improved audit almost certainly would not have prevented most authorities from issuing section 114 notices, it could have shed light on risks in some councils’ finances.^[48]

In December 2023, the LGA reported that one in five council leaders and chief executives surveyed said it was very or fairly likely that their chief finance officer would need to issue a section 114 notice in 2023/24 or 2024/25 due to a lack of funding for key services.^[49] The House of Commons LUHC committee said there was evidence for “a likely further increase in local authorities issuing section 114 notices”.^[50]

Read more:

• House of Commons Library, ‘Local authority financial resilience’, 7 February 2024
• House of Commons Library, ‘What happens if a council goes bankrupt?’, 13 September 2023

7. 2024/25 local government funding settlement

7.1 Settlement measures

The local government finance settlement is the annual determination of funding to local government from central government.^[51] It sets out how much councils will receive in the revenue support grant and redistributed business rates. It also allocates other grants and provides an estimate of spending power (see section 2.3).

The government published a provisional local government finance settlement for 2024/25 in December 2023.^[52] It then consulted on the December 2023 figures, publishing the final settlement on 5 February 2024.^[53]

Secretary of State for Levelling Up, Housing and Communities Michael Gove set out the final settlement in a written statement to the House of Commons.^[54] In his statement, Mr Gove emphasised that the settlement included increased funding for social care. In addition to an additional £500mn for social care that had been added to the provisional figures in response to the consultation, he said the settlement contained “£1.5bn in additional grant compared to 2023/24”, allocated through the social care grant and various funds. He said that, where possible, councils should use this additional funding to “invest in areas that help place children’s social care services on a sustainable financial footing”.

On council tax, Mr Gove said the government was “committed to continuing to protect local taxpayers from excessive council tax increases” and would continue to require referendums for increases of core council tax at 3% and at 2% for the adult social care precept. He said certain councils “that have taken decisions to get themselves in the most severe financial failure” would be permitted to raise council tax by a maximum of 10% without a referendum.

Other measures in the settlement included a guarantee that all councils would receive at least 4% more spending power, an increase in the rural services delivery grant and an increase on the provisional figure of the services grant.

In addition to the measures contained in the settlement, Mr Gove said the government would provide £3mn to support councils experiencing the biggest increases to their internal drainage board levies. He said councils would also benefit from increased growth in business rates income, and that £100mn of this would be returned to the sector on a one-off basis. He also said the government had launched a consultation on capital flexibilities and borrowing “to explore options for allowing councils greater financial flexibilities to make savings and better manage their own budgets overall”.

The secretary of state noted that “while local authority reserves are falling, they remain significantly higher than prior to the pandemic” and said that the government would “continue to encourage local authorities to consider, where possible, the use of their reserves to maintain services in the face of these pressures”. Finally, Mr Gove said the government would ask local authorities to “develop and share productivity plans”. These would set out “how local authorities will improve service performance and reduce wasteful expenditure, for example on consultants or discredited equality, diversity and inclusion programmes”.

7.2 Comment and reaction

In December 2023 the IFS published an analysis of the provisional settlement figures.^[55] It concluded that inflation had significantly decreased the real terms increases in funding councils would have expected based on policy announcements in December 2022:

[…] economy-wide inflation has been much higher than was expected even last December, and has almost entirely offset the extra funding provided this financial year. We estimate core spending power in 2023–24 will have been just under 5% higher in real terms than in 2021–22, compared with the 9% expected at last year’s settlement.

Next year, we now expect core spending power to increase by 4.7% in real terms, and to be around 10% higher in real terms than in 2021–22. This is more than was provided for at the [2021] spending review, but will be around 4% lower in real terms than councils might have expected based on last year’s policy statement.

The IFS argued that “the real pain looks set to be from 2025–26 onwards”. It said that if the government sticks to its future spending totals “the next spending review period could be a much tougher one for local government than the current period”. It estimated that councils would likely see a real terms cut in grant funding of at least 1.7% per year. It argued this would leave councils again needing to raise significant amounts from council tax, which might prove challenging in the context of slowing inflation and wage growth.

The LGA responded to the final settlement in February 2024 with 10 ‘key messages’.^[56] Among other things, it argued that the settlement funding was not sufficient to meet cost and demand pressures and many councils would need to make cuts to services as well as raise council tax. It called for more certainty over future funding, allowing authorities to plan more in advance. Concerning reserves, it said these were required to respond to emergencies and should not be spent to respond to long-term financial pressures.

7.3 House of Commons debate

On 7 February 2024 the House of Commons debated the government motion to approve the 2024/25 finance settlement.^[57] Opening the debate, Minister at the Department for Levelling Up, Communities and Local Government Lee Rowley said that available funding for local government in England would rise by 7.5% in cash terms for 2024/25.^[58] He said there were “infinite worthy demands, but finite resources” and the government needed to strike a balance between the two. He said the government sought to “support local government in the face of increasing demands for services and the rising inflation and costs that are the legacy of the war in Ukraine and instability in the Middle East”. Mr Rowley also highlighted that the government had made £15bn available in “complementary levelling-up projects” that would “help grow local economies, create local jobs, improve local transport, provide local skills training and support local businesses”.^[59]

On council tax, Mr Rowley said each council should consider the balance between increasing the tax and drawing on reserves to fund services. He said that “a number of councils have reserves well in excess of 100% of their core spending power” and that “half of all local authorities have seen their unallocated reserves grow since the 2019/20 financial year”.^[60]

Mr Rowley said the government had listened to calls for the system of local government finance to be reformed. He said the government was committed to reforming and modernising the local government finance settlement and system in the next parliament.^[61]

Responding to Mr Rowley’s argument on councils’ reserves, Labour’s Clive Betts, chair of the House of Commons Levelling Up, Housing and Communities Committee, said that as a result of previous cuts there was a “funding gap of £4bn”. He said that because of this many councils were not “rushing to spend their reserves all at once” because “they can see those reserves running out in two or three years’ time”.^[62] He highlighted that in the last six years “eight councils have issued section 114 notices, effectively declaring bankruptcy, whereas in the previous 18 years none did so”.

Responding on behalf of the Labour Party, the shadow minister at the Department for Levelling Up, Housing, Communities and Local Government, Liz Twist, said the government had been applying “sticking plaster policies” to local government finance.^[63] Ms Twist said local government was “crying out” for certainty and stability but the government had not provided this. She argued that “councils of all political stripes are left shelling out millions and communities and service users are paying the price”; for example, she highlighted councils spending large amounts for temporary accommodation.

Liz Twist said the government had “abandoned any interest” in cooperation with councils and had “torn down the protections that were meant to prevent a crisis like this”. She argued the government had taken away financial oversight of local council spending, “done away with the Audit Commission” and “pushed councils to borrow more and more”. She also said the government had “left councils without a functioning early warning system, meaning that they cannot even sound the alarm when they are struggling”.

Ms Twist said a Labour government would:

[…] instead prioritise stability and greater certainty, unlocking multi-year funding settlements to give local taxpayers better value for money, fixing our broken audit system to restore genuine oversight and partnership with local government, and prioritising certainty and stability over this government’s narrow and short-term fixes to problems of their own making.^[64]

The motion to agree the finance settlement was agreed without a division.

8. Read more

• House of Commons Library, ‘Funding for adult social care in England’, 21 February 2024
• House of Commons Library, ‘Local government finance settlement 2024/25’, 5 February 2024.
• House of Commons Committee on Public Accounts, ‘Local government finance system: Overview and challenges’, 2 February 2022 HC 646 of session 2021–22
• House of Commons Library, ‘Children’s social care services in England’, 12 March 2021

Cover image by Tim from Pixabay