Consultation on Local Authority Funding Reform: objectives and principles

The LGA, along with Solace and CIPFA, on 13 December 2024, published a report on Reforming the local government funding system in England. It contains suggestions for both improvements to the current system and for longer term reform. In that report, we say that councils need a significant and sustained increase in overall funding to stem the emerging risk of system-wide financial failure and to ensure that councils can meet growing demand for the vital services needed by their communities. But additional funding alone will not address the multiple issues with the funding system. There is growing evidence that the local government revenue funding system itself desperately needs reform, and a new urgency needs to be added to the search for new funding streams for local government.

When considering revenue sources for councils; these should, when taken together, reflect a number of principles: sufficiency, buoyancy, fairness, efficiency, predictability, transparency and that they should provide incentives. They should also work with whichever structure emerges from the English Devolution White Paper. However, changes to local government structures are highly unlikely by themselves to address the deficit in ongoing revenue funding needed to sustain local services.

The current consultation picks up many of the themes in the report including updating the system for allocating funding, resetting the business rates retention system, giving certainty over funding streams such as the New Homes Bonus, as well as sales, fees and charges reform. Our answer to question 2 of the consultation suggests longer term reforms.

Question 1: Do you agree with the Government’s objective to allocate grant and retained business rates income in a way which accounts for differences between local authorities in demand for services, the cost of delivering them and ability to raise Council Tax locally?

The funding system is out of date, opaque, and overly complex. We have long called for the Government to commit to reviewing both the formulae and the underlying data used for the assessment of relative needs and resources and therefore we welcome this review.

Transitional mechanisms should provide sufficient funding to ensure that no council experiences a loss of income as a result of changes and updates to the way needs and resources are assessed.

Question 2: In addition to the areas included in this consultation, are there elements of the local government finance system that are not fit for purpose and require improvement and reform? If so, please provide information on what reforms are required and why.

There are a number of areas where the funding of local government could be improved, in addition to updating the formula that underpin elements of the local government finance settlement. For example, in the shorter term these include flexibilities around council tax and business rates (sales, fees and charges are covered in response to a later question). Our recommended reforms are set out in our joint report with SOLACE and Cipfa, Reforming the local government funding system in England.

The LGA also believes that wider reform is needed which is why we have called for a cross party review of, and debate on, options to improve the local government finance system, including a review of council tax alongside other funding sources. The review also needs to consider an assessment of whether business rates retention represents a viable future funding model.

Given the financial situation councils face, a new urgency needs to be added to the search for new funding streams for local government. As with any new income sources there will need to be some equalisation and therefore redistribution between authorities. Taken together new funding streams should conform to the principles for revenue sources we set out in the introduction.  The Government should consider:

• Assigning each local area a proportion of nationally collected taxes, such as income tax, stamp duty, vehicle excise duty or inheritance tax. It would be for local politicians in partnership with local providers to decide on priorities and the allocation of funding.
• Consider alternative sources of income for local government including an e-commerce levy with the funding retained by local government.

It is vital that any discussion on council funding focuses not just on how best to fund councils’ current activities, but also considers whether there are other areas of existing public spending that would be best devolved to councils.

There is no mention of public health within the consultation. Local government’s role in improving healthy life expectancy is hugely important, because in addition to the benefits it brings to people, it has positive impacts on other parts of the public sector. As a consequence, we look forward to seeing the public health grant announced at the same time as the Local Government Finance Settlement and as part of a multi-year settlement.

Some member councils are particularly concerned about the pressures of rising Internal Drainage Board levies, which in some cases accounts for up to 60 per cent of their council tax. We would ask the Government to find a solution to this, working together with affected authorities.

There are also other areas that would benefit from reform. These include SEND, Housing Revenue Accounts, and capital financing. We repeat our call for all high needs deficits to be written off and for long-term reform to the SEND system, as set out in the LGA/CCN-commissioned research, to improve outcomes for all children with special needs and to help with the financially sustainability of councils.

On the Housing Revenue Account, the fice year rent settlement as announced in the 2024 Spending Review is a step in the right direction in providing certainty for councils on rental income, but to really strengthen and provide stability to Housing Revenue Accounts, a minimum 10-year rent settlement is needed, alongside restoration of lost revenue due to the rent cap and a review of the self-financing settlement of 2012. This would better support long-term business planning to ensure councils can deliver high quality homes and associated support for their tenants.

On capital, over 80 per cent of recent capital programmes have been funded by Government grants and prudential borrowing, in broadly equal measure. The continuation of the Prudential Framework is crucial to the delivery of council capital programmes. The overall framework for capital finance should continue to allow local authorities wide freedoms to borrow and invest, without the need to seek prior approval from Government. The capital finance system could be improved by making the flexible use of capital receipts arrangements permanent and by amending PWLB lending terms so that existing loans can be novated between borrowers. The current Exceptional Financial Support arrangements, which allow capitalisation of revenue costs, should be reviewed to ascertain whether they are achieving the objective of supporting councils in returning to financial sustainability. Consideration should be given to whether there is a need to review how capital financing will work in the context of devolution. 

The LGA has responded separately to the consultation on audit reform, and we will be responding to the discussion paper on Transforming Business Rates.

Question 3: Do you agree that the suggested principles should inform our approach to updating local authority funding allocations?

We broadly agree with the principles in the consultation paper, although as we noted in our February 2019 response to the 'Review of local authorities’ relative needs and
resources', the previous Government’s 2018 consultation, simplicity is welcome, but not at a disproportionate cost to accuracy or fairness

Question 4: Do you agree with our proposal to use the best available evidence and most up-to-date data in the assessment of need, including using the most recent census data?

The funding system is out of date, opaque, and overly complex. We have long called for the Government to commit to reviewing both the formulae and the underlying data used for the assessment of relative needs and resources and therefore we welcome this review. This also need to consider the base year used in any assessment of need.

In our responses to the previous Government’s consultations, from March 2018 and February 2019 we supported the use of population projections in order to reflect changing population size and structure in areas when assessing the relative needs of local authorities. This is still our position. 

In the interests of transparency, the Government should provide evidence on cost drivers tested and the expenditure data used, including, on a case-by-case basis, reference years, clarification of whether total spending or spending per head is being measured, and whether spending is deflated for area cost differences. It should also show how statistical techniques such as regression/correlation analysis or multi-level modelling are used and the results, in either the forthcoming detailed consultation on formula changes or in an accompanying technical appendix.

Question 5: Do you agree with our proposal to simplify the assessment by reducing the number of Relative Needs Formulae? If you disagree, please explain why and which service areas you are concerned about.

As stated above we consider that simplicity is welcome but not a disproportionate cost to accuracy. In terms of a general formula, or what was previously known as the foundation formula, there is a case for deprivation to remain as a factor, with the development of a clear evidence base for the weighting of this cost driver.

We agree that adult social care, children’s services, fire and rescue and highway maintenance should have bespoke formulas as proposed in the consultation. On the latter, we note that the previous Government’s 2017 consultation, which the current consultation refers to, said that traffic volume, particularly that of heavy goods vehicles, has a significant impact.

There is a case for a bespoke formula for temporary accommodation given the increasing costs of homelessness services with multiple contributory cost and demand drivers. Councils’ budgeted net spend on homelessness services increased by £604 million (77.4 per cent) in real terms from 2019/20 to 2024/25.

Some member councils would also press the case for bespoke formula for services such as concessionary travel, free home to school transport services, and flood defence and coastal protection. On flood defence they would point to the costs of preventing floods. There has also been a real-terms increase in budgeted spend by councils on home to school transport for children with SEND of 64.3 per cent from 2018/19 to 2023/24. We would repeat our suggestion that the Government should be guided by the evidence and should engage with councils most affected by the cost pressures on these services as part of arriving at its decision.

Question 6: For the children, young people and family services formula, do you agree that the variables set out are the right ones to consider in an assessment of relative need? If you recommend the addition or removal of variables, please provide supporting evidence and recommend a suitable dataset.

In our 2019 response we welcomed an evidence-based approach, the use of multi-level modelling and lower area level data. It would appear that the approach builds on this work but it is not completely clear this is the case. As we have said in our response to question 4, it is important that the analysis and selection and weighting of factors are published, including how it draws on work previously commissioned by MHCLG and DfE, and the 2025/26 Children’s Social Care Prevention Grant formula.

Question 7: Do you agree that the Government should consider updating the data in the fire and rescue services Relative Needs Formula?

We support a collaborative approach between authorities with fire responsibilities and the Government in developing a new fire relative needs formula.

Question 8: Do you agree we should assess differences in cost using an Area Cost Adjustment based on the structure of 2024 ACA? If not, please provide evidence for alternative approaches.

We agree with the use of Area Cost Adjustments to account for cost differences in both urban and rural areas. It would appear that the 2024 ACA builds on previous work. In our 2019 response, we supported an evidence-based approach and said that the principle of considering journey times as an area cost factor reflecting sparsity and density in the revised assessment was sound. We welcome the publication of the explanatory note for the 2024 Children’s Services Area Cost Adjustment and consider that the Government should publish similar notes for the other service ACAs. The Government should also publish the model used, not just the final values, so that councils can see how the ACA is constructed and calculated for their area.

Question 9: Do you agree that (other than locally retained business rates) we should only adjust for Council Tax when assessing local resources? If you do not agree, please include details of what other sources of income you think should be included (if any), and how the Government should adjust for them.

In our 2019 reply we said that council tax only, and not sales and fees and charges, should be taken into account when assessing local resources. We repeat this.

The consultation asks for views on whether the Government should in principle adjust for the new Extended Producer Responsibility (pEPR) income source, how to do so, and to what extent although there is no specific question.  We have welcomed that in 2025/26 funding local authorities will receive from the pEPR will be treated as ‘additional’ income and separate to the local government finance settlement. We have also said that, in the longer-term, councils need to receive the full actual costs for delivering local waste and recycling services rather than estimates. Based on our modelling work, the £1.1 billion which is the estimate of the payment in 2025/26, may be lower than what local authorities need to deliver the packaging waste services.  Incorporating this income into the resources baseline may be challenging, at least initially, as it is difficult to predict producer behaviour.

Question 10: Do you agree that we should measure Council Tax income by making uniform assumptions on the Level of Council Tax charged by local authorities and factors which determine their ability to raise Council Tax?

We support the use of assumed rather than actual council tax levels, in order to ensure that local authorities are not rewarded or penalised as a result of historic political decisions.

The Government should take account of non-discretionary council tax discounts and exemptions, including that due to the pensioner element of council tax support. However, it should not take account of discretionary discounts and exemptions or premiums in line with the principle that financial costs and benefits of local decisions should be retained in full by councils.

We do not believe that actual council tax collection rates should be taken into account as this could inadvertently penalise councils with higher collection rates. However, we previously noted that there is a very strong correlation between 2017/18 collection rates and the average score of the 2015 index of multiple deprivation. As a result, we believe that the ability to collect council tax could be adjusted for using a formula approach instead of looking at actual council tax collection rates.

Question 11: To what extent should we adjust for Council Tax when determining local authority allocations (i.e. what assumption should we make on Council Tax Level)?

Different authorities will have different views on the weighting given to assumed council tax income within the formula.

In our view the Government’s methodology should not presuppose increases in council tax income in calculations of the resources adjustment or of the baseline for the transition mechanism, regardless of whether those assumed increases arise from expected taxbase growth, or from expected increases in council tax levels.

Question 12: Do you agree Transitional Arrangements should account for a Business Rates Reset? If not, please explain why.

The LGA notes that the Government has announced that a full reset will occur in 2026/27. We note that business rates retention means balancing needs with incentives and that any reset should be consistent with the Government’s growth agenda. We consider that the Government should introduce a transitional mechanism as part of any reset to ensure that local authority services that residents rely on are not put at risk.

Pools, which enable growth to be shared among wider areas, should continue.

We welcome the Government’s approach to technical work on the 2026 reset and will respond to the technical consultation when it is published. It is important that minutes of the Implementation Working Group are in the public domain and that the Government fully update their 2018 work on retention gains.

Question 13: Do you agree or disagree we should enable and encourage local authorities to support housebuilding in their areas through the Local Government Finance Settlement? Please provide any explanation or supporting evidence for your view.

In our response to the previous Government’s 2021 consultation on the New Homes Bonus (NHB) we said that we believe that it should be separately funded and not drawn from a top slice of Revenue Support Grant (RSG) or other grants. Drawing the NHB from a top slice of RSG means that those councils who are unable to deliver homes above the baseline threshold lose out on core funding distributed on the basis of need. 

The NHB makes up a significant part of some councils’ budgets, particularly but not confined to shire districts, and that any changes to the methodology for the NHB should come with transitional funding to ensure that local authority services that residents rely on are not put at risk.  Any top-sliced funding for NHB should be returned to local government.

A key strength of the NHB as it has operated up to now is that it is simple to understand and easy to evidence. The core principle of any scheme should incentivise the increase of housing supply to match local need. We would be supportive of an affordable housing premium and the potential for incentivising energy efficient homes.

Question 14: What measures should we use to support local authorities to move to their updated funding allocations? (Blend in updated allocations over several years / Other transitional arrangements)

It is difficult to see how a transition mechanism could include both a reasonable time limit and meaningful protection for the councils that are most significantly affected, without additional Government resources. We do not have a specific view on the mechanism to be used. 

Question 15: Do you agree we should keep funding allocations up-to-date dynamically by using the most up-to-date data possible? If so, how?

We understand there is a balance to be struck between using up to date data and predictability.  However, councils’ ability to deliver the high quality, value for money services needed by their residents is dependent on both the sufficiency and the certainty of their funding.  They need multi-year and timely finance settlements to allow councils to plan ahead and make meaningful financial decisions that improve value for money and financial sustainability. Consideration should be given to what new data sources have become available for use since the system was last updated in 2013/14.

Question 16: What are the most excessively burdensome activities or requirements for councils, which if changed, could significantly free up local government capacity? 

Local government should be funded through general rather than ring-fenced grant funding, with a reduction in the fragmentation of Government funding and there should be an end to the use of competitive bidding to allocate grant funding. LGA research estimated that the average cost to councils in pursuing each competitive grant was in the region of £30,000 costing each local authority roughly £2.25 million a year bidding for various pots of money across Whitehall.

Question 17: Do you agree with our proposals to reduce the number of grants and New Burdens payments issued to local government?

Yes, we would support the consolidation of separate new burdens grants into single quarterly payments, as long as the new burdens assessments themselves are kept up to date and reflect spending pressures fully, with post-implementation scrutiny being carried out in line with the New Burdens Doctrine. We call on the Government to publish a programme of recent burdens to be subject to this process. This should include an assessment of the resources for implementation of the 2014 Children and Families Act, including Special Educational Needs and Disabilities.

Question 18: Do you agree or disagree that the Government should provide local authorities with greater control over Sales, Fees and Charges? Please provide supporting evidence, considering specific fees where greater control would be of most benefit, and expected impacts on charge-payers.

We call for the full localisation of sales, fees and charges, including road user charges and workplace parking levies.

Councils should have flexibility to set planning fees at a local level so that they can cover their full costs relating to planning, in order to help to future-proof the sector, and ensure planning departments can continue to support the delivery of much-needed new homes, including affordable homes and infrastructure.

Question 19: Do you have any views on the potential impacts of the proposals in this consultation on persons who share a protected characteristic?

We invite the Government to consider the response of member councils to this question. 

Mike Heiser 

Senior Adviser (Local Government Finance)

Email: [email protected]