Local government could receive a 5% real-terms funding increase next year, following chancellor Rachel Reeves’ budget, according to analysis from the Institute for Fiscal Studies (IFS). However, questions remain over whether this will be enough to keep councils from going “over the edge”, with funding cuts anticipated beyond 2026.
The Autumn Statement announced a 9.7% real-terms funding increase for the Ministry for Housing, Communities and Local Government (MHCLG) from 2023-24 to 2025-26. This was a move welcomed by those in local government, as MHCLG emerged as one of the budget’s “big winners”, according to the IFS.
David Phillips, associate director at the IFS, noted that local government funding is expected to increase by 3-3.5% overall next year. With additional streams, such as extended producer responsibility, increasing it to a 4.5-5% real-terms rise.
This is taking into account greater grant funding, business rates in line with inflation and the assumption that council tax will increase to 5% next year, he said.
Housing151 | March 2025 | Local authorities. Building homes
‘Tighter’ Budget from 2026/27
Despite this uplift, Phillips warned it may be short-lived. From 2026/27, funding growth is projected to slow, with public services facing tighter budgets and increases falling to between 1.5% and 2.5%.
IFS research economist Bee Boileau explained that the Autumn Statement is a “front-loaded budget”, meaning that spending is much faster in the first year and much slower in the final year of the spending review.
There will be “generous settlements this year and next year, and then they will start to cut unprotected services in real terms”, Boileau stated. “To avoid making these cuts in 2028/29, it will require a top-up of around £9bn.”
Demand the ‘heart of the issue’
So, with latest research suggesting that councils face a cumulative funding gap of £54bn over the next five years, is Rachel Reeves’ budget enough to stave off section 114 notices?
Phillips explained that, despite funding increases, the growing demand for council services is the “heart of the issue” in whether authorities can balance their budgets.
“Over the last few years, even though there have been big increases in council funding, their demands and costs have gone up by even more. That means looking ahead, whether the 3-5% funding increase will stabilise the system, will depend on whether those demand and cost pressures start to slow down.
“If they don’t, even that substantial increase might lead to a sort of standstill, and some of those councils most struggling, potentially could be pushed towards the edge even with these big increases,” Phillips explained.
Last year, 19 local authorities required Exceptional Financial Support to balance their budgets. Phillips suggested that “if councils can’t control service demands and costs” through reform, “even with substantial increases, it could still feel very, very tough for councils”.
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