London boroughs welcome steps to reform council funding, as ‘severe strain’ continues

Responding to the local government finance policy statement, London Councils has welcomed the steps being taken to reform the “fundamentally broken” funding system.

The cross-party group is particularly pleased with the government’s focus on supporting services focused on prevention, with £250m of additional investment coming to children’s social care.

The policy statement also promises funding will give more recognition to the impact of deprivation on local service pressures. London Councils welcomes this move and would want to see any deprivation measures taking housing costs fully into account. One in four Londoners live in poverty after housing costs [1].

Boroughs are pleased the policy statement has come earlier than in previous years, as this will help with their budget setting for 2025-26.

However, borough finances continue to face severe strain. London Councils highlights that, despite an estimated 5.4% increase in their Core Spending Power, boroughs will still face a significant shortfall next year and some will require exceptional financial support to balance their budgets. Housing and homelessness costs are skyrocketing, with London Councils having warned that the cost of temporary accommodation threatens to bankrupt boroughs.

Cllr Claire Holland, Chair of London Councils, said: “We welcome the steps being taken to fix the fundamentally broken local government funding system and the additional investment in areas such as children’s social care.

“We have long called for simpler, fairer, and more predictable funding – and this policy statement takes us in the right direction. The extreme deprivation we sadly see in the capital is a significant factor in the pressures facing Londoners’ local services, and current funding arrangements do not adequately address this. It’s vital that housing costs are taken into account as part of the government’s new focus on targeting deprivation.

“After fourteen years of structural underfunding, fast-rising demand for services, and spiralling costs, we have been left in an extremely precarious position. London boroughs are in a grim financial situation and will still face a significant funding shortfall next year.

“We need to see borough finances put on a more stable footing so that we can continue to deliver services, put prevention at the heart of our work, and help drive inclusive growth in

our communities. We look forward to working with the government on this crucial agenda in the run up to next year’s spending review and beyond.”

Earlier in the year, London Councils estimated that boroughs in the capital would face a £700m funding gap in 2025-26. Further analysis shows that boroughs forecast to overspend on their original budget plans by more than £700m in 2024-25 due to extreme service pressures and escalating costs.

Homelessness represents the largest single driver of London boroughs’ overspending, accounting for £270m of the forecast overspend this year. Adult and children’s social care together account for more than £300m.

Although the funding measures confirmed in the policy statement will help reduce the anticipated £700m funding gap for 2025-26, the continuing spiralling costs of temporary accommodation and the broader impact of the employers’ National Insurance increase on borough supply chains will add new pressures.

London Councils’ analysis shows that boroughs’ funding per Londoner fell by 28% since 2010, amid an 11% growth in London’s population and dramatic rises in demand for services.

Last year the Institute for Fiscal Studies published a report suggesting London local government funding is 17% lower than its estimated relative need – the largest gap of any region in England [2].

London Councils says a clearer picture of the outlook for boroughs’ finances will come when detailed allocations are confirmed in the provisional local government finance settlement, which the government is set to publish in December.