London Councils warns of £400m shortfall as MPs vote on funding

Boroughs in the capital warn they face a funding shortfall of at least £400m in 2024-25, as MPs prepare to vote on the local government finance settlement on Wednesday [1].

The cross-party London Councils group says that despite a 5.5% real-terms increase in their core spending power in the settlement, boroughs will continue to grapple with an “enormous” funding gap due to service pressures and costs.

The £400m funding shortfall is roughly the same amount as London boroughs collectively spend on homelessness in a single year.

London Councils highlights the following:

Boroughs are seriously struggling to balance the books. All but two of the capital’s 33 local authorities are forecast to overspend their budgets this year (2023-24), totalling over £600m. Councils have a legal duty to balance their budgets, so the funding shortfall must be addressed through spending cuts or use of reserves (which can only be spent once).
The government’s plans for increasing council funding rely too heavily on council tax. The boost to councils’ core spending power does not come entirely from new government funding. Almost 40% of the core spending power boost projected for London boroughs relies on council tax going up by the maximum permitted amount – an extremely difficult decision for boroughs while so many Londoners continue to struggle with the cost of living.
Pressures on local services continue to intensify. Rising demand for services and inflationary costs will pose major budgetary challenges in 2024-25. Adult social care, children’s services, and housing and homelessness are the key drivers of boroughs’ finance concerns, as government funding is insufficient for addressing budget gaps in these service areas.
The need for long-term, sustainable funding. The finance settlement for 2024-25 will be the sixth single-year settlement in a row. This significantly hinders boroughs’ ability to plan beyond the coming year and to enable strategic investment in local services.

London Councils says the spate of recent warnings of financial failure across local government is the result of many years of underfunding – with boroughs in the capital badly affected. The increased frequency of Section 114 notices in the last year should not be taken lightly and more are likely if the sector does not receive further funding support [2].

Last week the LUHC committee’s report on financial distress in local authorities urged ministers to address systemic underfunding in local government and tackle the £4bn gap in council finances nationally.

Research from the Institute for Fiscal Studies think-tank found an estimated 17% gap between funding need and the actual levels of local government funding in London. This was by far the largest gap of any region in England.

Outer London boroughs face a particularly tough outlook as they are amongst the lowest funded per capita in the country, with growing populations who are becoming more deprived.

London Councils calculates the 2024-25 finance settlement will leave boroughs’ overall resources 15% lower in real terms than in 2010. Demand for services has risen substantially, as the capital’s population has grown by 800,000 during that period. Boroughs’ spending power per Londoner has decreased by around 30% in real terms since 2010.

Cllr Claire Holland, Deputy Chair of London Councils, said: “Boroughs will continue to face a bleak financial outlook for the foreseeable future.

“The increase in funding set out in the government’s finance settlement will not be enough to address the enormous funding gap we are grappling with. Massive pressures on local services, skyrocketing costs, and years of inadequate funding have left town hall finances teetering on a cliff edge.

“It is in no one’s interests for a council to find itself in a Section 114 situation. Londoners want stability for their local services. We will continue to urge ministers to increase funding support and to work with us in making the local government finance system fairer and more sustainable.”

London Councils is calling for the upcoming Spring Budget on 6 March to address the financial pressures facing boroughs.

London Councils’ priorities for the government include:

Continuation of the Household Support Fund (HSF), which is currently due to end in March. Boroughs are spending £137m on HSF-related activity to support their lowest-income residents. Ending the HSF would create critical service gaps for vulnerable Londoners.
Housing and homelessness funding. London faces the most severe housing crisis in the country, with London Councils estimating that one in 50 Londoners are homeless and living in temporary accommodation. Boroughs continue to seek greater investment in affordable housing and homelessness prevention.
Reforming the broken local government finance system, so funding better reflects local need, boroughs have greater certainty through longer-term funding settlements, and more devolved funding to reduce reliance on council tax.

More information can be found in London Councils’ consultation response to the local government finance settlement, which is available here.

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