The chancellor has promised councils a 3.2% real terms increase in core spending power for the next financial year in today’s Budget, and reforms to the distribution of local government funding in the following years.
The budget allocates an additional £1.3bn of new grant funding for local authority services for 2025-26, including at least £600bn for social care.
This amount, “together with council tax flexibilities and locally-retained business rates”, is expected to lead to an increase in core spending power of 3.2%.
This is broadly in line with increases in recent years. Stuart Hoddinott, a senior researcher at the Institute for Government, posted on Twitter that the expected increase was “pretty much exactly in line with the average annual increase of 3.1% per year since 2019-20”.
The details of the funding arrangements will be confirmed in the local government finance settlement, expected later this year.
The Budget does not specify any changes to the current arrangements for council tax – which allows councils to increase this by 3% a year without a referendum, plus a further 2% for those with responsibility for social care.
While the Budget also announced future changes to the business rates system, it says the government says it will “work to ensure that, as far as practicably possible, local government income is unaffected by business rates tax policy changes” and that councils are “compensated for administration costs”.
Reforms to funding distribution promised
The Budget also promises wider future changes to local government finance. The government says it “recognises the pressures that local authorities are facing and will have a framework in place to support those in most difficulty”.
Ministers are also “committed to pursuing a comprehensive set of reforms to return the sector to a sustainable position”, the budget document says.
This will include “reform of the approach to allocating funding” through the finance settlement.
The plans will begin with a “targeted approach to allocating additional funding in 2025-26”, followed by a “broader redistribution of funding through a multi-year settlement from 2026-27”.
Further details of these plans will be set out in an “upcoming local government finance policy statement”.
The Ministry for Communities, Housing & Local Government’s local government budget for 2025-26 will increase to £14.3bn – equivalent to annual real terms growth of 10.4%.
Alongside the regular grant funding, this increase also includes about £1.1bn of new funding in 2025-26 for the implementation of the extended producer responsibility scheme from January 2025, “to improve recycling outcomes”.
The Budget also provides a £1bn increase to funding to support the special educational needs and disabilities (Send) system (as part of a £2.3bn increase to the core schools budget), and £233m to address homelessness.
