The provisional finance settlement will shape the future of local services
An increase in core spending power and additional resources from new initiatives contained in December’s provisional local government finance settlement for 2025/26 are recognition of the mounting pressures facing local authorities.
However, significant challenges remain, and councils in England continue to grapple with difficult decisions to balance their books while ensuring they can deliver essential services.
As local authorities prepare for the final settlement and this year’s Spending Review, critical issues around equity, sustainability, and the broader funding model remain.
Core spending power
The provisional settlement includes an increase in core spending power of 6 per cent – a positive step in helping councils address cost and demand pressures.
Particularly noteworthy is the introduction of £1.1 billion from the new Extended Producer Responsibility (EPR) scheme for packaging, which is additional to core spending power for 2025/26.
By shifting the cost of managing packaging waste to producers, the scheme aligns financial support with environmental goals. This approach, which ensures councils receive additional funding outside the settlement, has long been called for by the LGA.
However, the methodology behind EPR allocations must be transparent, with sufficient funds to cover actual costs rather than estimates. Councils need assurance that the funding will grow in line with demand.
Another positive is the £515 million that has been allocated to compensate councils for increased employer National Insurance contributions.
While this funding is gladly received, it is insufficient to cover the total impact on local government.
The £515 million allocated falls short of the £637 million the LGA estimates councils are expected to incur directly; and indirect costs, through commissioned providers, could add another estimated £1.13 billion.
Smaller care providers and charities are particularly vulnerable, potentially jeopardising delivery of vital services.
Variations across councils
The impact of the settlement varies widely across different councils, depending on their specific circumstances – including their size, demographics, and economic conditions.
For some councils, the introduction of the new ‘recovery grant’ and the continuation of grants such as the New Homes Bonus (NHB) offer valuable support. Shire district authorities, for instance, rely heavily on the NHB and have welcomed confirmation of another year’s funding.
However, the Government’s decision to repurpose grants and use new allocation methods for certain funding streams has raised concerns.
Rolling grants into the settlement promotes simplicity, but it must be executed transparently to ensure councils are not inadvertently disadvantaged.
Similarly, the cancellation of negative revenue support grant is a step in the right direction, but broader issues surrounding the settlement funding assessment remain.
The methodology, unchanged from previous years, should be reviewed. The Government issued a consultation document on local government funding reform in December, to which the LGA will be responding, and councils have called for sufficient funding to ensure no authority has a loss of income during the transition to any new system.
Public health funding is another area of concern. The absence of an announcement on the public health grant for 2025/26 leaves councils uncertain about their ability to plan effectively for health and prevention services, which are critical to reducing long-term pressures on care services.
Social care
Social care remains one of the most pressing challenges for local government.
While additional funding for adult and children’s social care has been announced, it does not address the £3.4 billion cost pressures projected for 2025/26.
This ongoing shortfall threatens not only the sustainability of care services, but also the Government’s broader agenda, such as breaking down barriers to opportunity and implementing its 10-Year Health Plan.
The social care funding shortfall is exacerbated by rising employer National Insurance contributions (see above) and increases to the National Living Wage.
While councils will receive some compensation, it falls short of covering the full financial impact.
Care providers, already under strain, may well seek higher fees from councils, adding further pressure to local budgets.
The sector’s reliance on small providers and charities amplifies concerns about the potential for service disruptions.
The £250 million Children’s Social Care Prevention Grant, earmarked for initiatives such as Family Help, is a positive addition. However, concerns have been raised about its distribution via a new children’s needs-based formula and its focus on new burdens introduced by the Children’s Wellbeing and Schools Bill.
Ensuring that these new duties are fully funded is critical to maintaining the viability of children’s services.
Finance reform
The forthcoming final settlement and this year’s Spending Review present opportunities to address the systemic issues underlying local government finance.
The LGA has long called for a significant and sustained increase in overall funding, paired with reforms to create a more equitable and sustainable funding model.
Council tax, as currently structured, is inadequate for addressing national-level pressures such as adult social care.
The 5 per cent cap on council tax places additional burdens on households while failing to reflect local needs.
Moreover, reliance on council tax as a primary funding source disproportionately affects areas with lower property values and higher socioeconomic challenges.
The LGA has proposed abolishing referendum limits, alongside the conclusion of the needs and resources review, allowing councils and communities to determine appropriate tax rates based on local priorities.
Equally important is the Government’s commitment to multi-year settlements, which offer councils greater financial certainty and planning capacity.
However, this commitment must be accompanied by comprehensive reforms, including:
- a needs and resources review, updating outdated formulas and ensuring funding reflects current service demands. This is covered in the Government’s consultation referred to above.
- prevention-focused investments, prioritising preventative services to reduce short-term and reactive spending in the future.
- business rates reform – while it is positive that some councils will receive compensation because of the decision to freeze the small business rates multiplier, it has also removed buoyancy from the system, and reduced medium-term council income.
As the final settlement approaches, the LGA is calling on the Government to take bold steps to create a sustainable, equitable funding model.
Collaboration with local authorities will be essential to ensuring that funding reflects both current demands and future challenges.
This is essential not only for councils, but also for Government to achieve its wider ambitions of delivering on its priorities, as well as its devolution agenda.
By prioritising transparency, equity and prevention, the Government can support councils in delivering the services that communities rely on every day.
The Spending Review must go beyond immediate fixes, setting the stage for a long-term vision of local government finance that supports thriving, resilient communities across the country.