Executive summary ifs.org.uk 

English councils saw big cuts to their funding during the 2010s, with spending on some services down between 40% and 70% over the decade. And although like virtually all public services, funding for local government was increased during the 2019–24 parliament, councils’ finances are still under significant pressure. This reflects increases in demands and costs for key services that have often far outpaced economy-wide inflation, and has led to a growing number of councils requiring exceptional financial support.

Despite this, the main parties’ manifestos were virtually silent on their plans for council funding post-election. This means there is significant uncertainty about exactly what to expect over the next five years. This report therefore looks at a number of scenarios for councils’ funding – and what these might mean for service delivery and financial sustainability given the spending pressures councils face. It finds that, given the current fiscal environment and overall spending plans implicit in the main parties’ manifestos, cuts to some council services are highly likely unless spending pressures abate – even with big increases in council tax, and particularly in poorer parts of the country. There is also a real risk of significantly more councils being pushed to financial breaking point, joining the likes of Birmingham, Thurrock and Woking. 

How might central government funding change?

The next government will have to decide how much grant funding will be provided to local government. None of the main parties has made commitments on this, unlike in 2019. 

Existing indicative spending envelopes for 2025–26 onwards imply that ‘unprotected’ spending – which in the 2010s included grant funding for councils – could see cuts averaging 2% to 3½% in real terms per year, if the next government wanted to fully fund the NHS workforce plan and meet existing childcare, defence and overseas aid commitments. However, this may not provide a good guide for how grant funding for councils will change in the next parliament. 

First, overall UK government spending totals are likely to be revised more significantly than suggested in party manifestos, when detailed plans are set at a post-election Spending Review; the trend since 2015 has been for budgets to be revised upwards. Second, the extent to which councils will share in any pain imposed is uncertain; in principle, they could fare better or worse than the average unprotected area. The public finance situation and major parties’ overall tax and spending plans mean that grant funding is likely to be more constrained in the coming parliament than over the last few years though.

Will reliance on council tax increase?

There is also uncertainty about the outlook for council tax, the biggest single source of funding for English councils. 

Councils have increased their council tax by an average of 4.4% per year since 2019. But this has barely been enough to keep up with inflation, leaving council tax at the same real-terms level as in 2019–20 and just 2% higher in real terms than in 2010–11. In future, 5% increases (the overall maximum allowed without a referendum over the last two years) would mean a 3% per year real-terms increase in bills over the next parliament, the fastest rate since the 2001–05 parliament (when they averaged 6% a year). 

Whether 5% increases in council tax are a good guide for the future is unclear though. On the one hand, both central and local government may feel uncomfortable with such above-inflation increases. On the other hand, an incoming government could decide to remove council tax referendum limits as part of devolution plans. Experience from Wales suggests that this could see bigger increases in council tax, especially by those councils that have traditionally set low tax rates.

Scenarios for funding changes

Uncertainty about both grant funding and council tax increases means that it is not possible to predict the funding councils will receive in the next parliament with confidence. However, it is possible to look at a range of more optimistic and more pessimistic scenarios using different assumptions about how both grant funding and council tax revenues may change over the next five years. This is done in Table A, which includes three scenarios for grant funding (flat in real terms; 2.7% real-terms cuts per year; 7.0% real-terms cuts per year), reflecting uncertainty about the priority placed on council funding by the next government, as well as two scenarios for council tax increases (5% and 3% per year). 

The table shows that, in any of these scenarios, overall funding will increase by less than the average over the 2019–24 parliament (2.9% per year in real terms). These scenarios also show that across the local government sector as a whole, the increases that are made to council tax will likely matter more for trends in overall funding than changes in grant funding. This reflects the much larger contribution that council tax makes to overall funding (57% in 2024–25) than grant funding (15%) (with retained business rates making up the remainder). 

Table A. Scenarios for English council funding

Real-terms change in grant funding each year	Increase in council tax bills each year	Average annual change in overall funding, 2024–25 to 2028–29
		Cash terms	Real terms
Freeze	5% (3%+2%)	4.2%	2.5%
Freeze	3% (2%+1%)	3.1%	1.3%
2.7% cut	5% (3%+2%)	3.9%	2.1%
2.7% cut	3% (2%+1%)	2.7%	1.0%
7% cut	5% (3%+2%)	3.3%	1.6%
7% cut	3% (2%+1%)	2.1%	0.4%

_{Source: Table 2 in the main text. The first figure in parentheses relates to the increase in council tax for general services, and the second the additional increase for social care services.} 

Potential impacts of these scenarios

Councils in more deprived areas can raise relatively less in council tax than those in more affluent areas and in turn rely more on grant funding. This means that unless grant funding were redistributed towards deprived areas, councils in such areas may fare financially worse. For example, with cuts to grants of 7% a year and 5% council tax increases, councils in the most deprived tenth of areas in England would see overall funding increases averaging 0.6% a year, compared with 2.6% a year for councils covering the least deprived tenth of areas.

In order to offset this pattern, the government would need to redistribute grant funding from less deprived to more deprived areas. For example, under the scenario just described, councils in the most deprived tenth of areas would need to see their grant funding increase slightly in cash terms over the next four years, while those in the least deprived areas would need to see cuts averaging two-thirds, to equalise the cut in overall funding in 2028–29. 

The impact of any future funding scenario on councils’ service provision and financial sustainability will depend crucially on the cost and demand pressures councils face. Recent Local Government Association analysis suggests that if recent demand and cost pressures continued, real-terms increases of 4.5% a year would be needed to maintain services – far outpacing the funding increases in even our optimistic scenario. Even with a significant slowdown in cost and demand growth, councils in more deprived areas could struggle under even our most optimistic funding scenario, given that they can raise less from council tax than those in richer areas. If grants are cut significantly and/or council tax increases are closer to 3%, councils across the country would need to cut back service provision and could potentially face severe financial stress, even if cost and demand pressures ease.