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What the formula for the Fair Funding Review will mean for council homes
With pressure on spending, the Fair Funding Review is set to overhaul how councils access government funding based on need – but could some local authorities end up worse off? Stephen Delahunty delves into the detail. Illustration by Gus Scott
With pressure on spending, the Fair Funding Review is set to overhaul how councils access government funding based on need. Stephen Delahunty delves into the detail #UKhousingThe Fair Funding Review 2.0 is a shake-up of how local authorities in England are funded, which the government says will make an “opaque” system fairer and put council finances back on a stable footing.
However, some councils face their residents being left worse off and footing the bill through council tax rises.
The government’s consultation on the reforms closed after two months in August. It outlined proposals that will look to reflect the changing needs of specific areas, differing delivery costs and the level of demand on frontline services that people rely on, such as social care. But what will the changes really mean on the ground?
For rural areas outside of town and cities, the plans will account for the additional costs in delivering services. In urban areas, deprivation will be recognised in the ‘assessment of need’ of councils, so vital services that support the poorest people in communities are properly funded.
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The formula used to work out funding for local authorities that provide adult social care will be updated to reflect the demands of the ageing population.
This will happen alongside wider reforms to children’s social care and special educational needs and disabilities (SEND).
Business Rates Retention reforms will also aim to ensure the system is linked to regional need.
Additional changes will scrap the existing competitive bidding processes councils often have to go through for small pots of money.
There is also an aim to simplify 300 grants, in order to cut time-wasting in councils and Whitehall, and prioritise value for taxpayers’ cash.
Overhauling the system
The Ministry of Housing, Communities and Local Government (MHCLG) says: “For too long, many residents have seen council tax hikes despite declining local services.
“This will be tackled by overhauling the decade-old, outdated funding methodology currently used to fund councils, so allocations are made based on the latest and best available data and recognise the areas where demand for council services is greatest. As a result of these changes, left-behind places will on balance see larger increases in available income.”
However, despite MHCLG’s claim, many regions could face greater deprivation as a result, and residents could still see higher council tax bills.
The changes, set to come into force in 2026-27, are being introduced in the context of financial pressures on councils, with some saying they face bankruptcy due to their spending on housing and homelessness services.
Earlier this year, a record 30 councils in England were granted “exceptional” financial support from central government to help them balance their books.
A more recent report by London Councils warned that boroughs in the capital must reduce their spending on council housing by £264m to avoid going bust over the next three years.
Plus, boroughs are facing a funding shortfall of at least £500m this year and nearly one in four are relying on emergency borrowing measures through the government’s Exceptional Financial Support scheme – the highest rate of any region in the country.
Post office proximity
As part of its consultation response, cross-party group London Councils highlighted the need to accurately measure the capital’s high levels of deprivation, with the impact of housing costs properly factored in.
Boroughs argue that flawed deprivation measures risk undermining the government’s aim of ensuring funding follows need. This is because the deprivation measure currently proposed gives “road distance to a post office” equal weighting to levels of homelessness – suggesting that these factors have the same level of impact on deprivation in a community.
While London Councils welcomes the government’s commitment to target areas of high deprivation when allocating funding, the cross-party group says the proposed deprivation measures do not sufficiently factor in housing poverty – with potentially devastating consequences for London boroughs’ future budgets.
Housing costs take up the largest portion of most household spending. How much someone pays for housing has a significant impact on their disposable income, and the wider impact of housing availability and homelessness is a significant driver of deprivation.
However, the government plans to use the Index of Multiple Deprivation to measure deprivation, which does not account for these impacts because it does not adequately reflect housing poverty.
Housing poverty is a particular concern for the capital, where one in 50 Londoners are currently homeless and living in temporary accommodation, and one in four London households are living in poverty when housing costs are taken into account.
Claire Holland, chair of London Councils, says: “We have long called for reform to local government funding to ensure money is distributed fairly on the basis of need. However, the current proposals risk failing to achieve this. After more than a decade of structural underfunding, rising demand and skyrocketing costs, the impact on London could be severe.
“It is right to focus resources on areas with the highest levels of deprivation, but we can’t ignore deprivation in the capital – London has the highest rate of poverty in the country once housing costs are factored in. It is difficult to explain how proximity to a post office affects someone’s life as much as homelessness, yet these factors are given equal weighting under the current proposals.”
30
Councils in England granted “exceptional” financial support from government to balance books
£500m
Funding shortfall for boroughs in the capital this year
22
County and rural unitary councils that will see funding increases
£845m
Total funding for these 22 councils
London Councils has also raised concerns about the inclusion of a new, unevidenced “remoteness” factor.
This would redistribute funding to account for a theoretically higher cost of providing services in more remote areas.
On the proposed formula for children’s services, the cross-party group explains that this “dramatically underestimates” the level of need in the capital and has “questionable” robustness and accuracy, according to research published by the National Children’s Bureau.
For county and rural communities, councils have warned that taxpayers are set to foot the bill of forthcoming government reforms.
Counties face ‘disproportionate burden’
The County Councils Network (CCN), which represents the largest authorities in England, says the changes are “better than feared” for its member councils, but some will face a “disproportionate burden”.
Some 22 county and rural unitary authorities will see grant funding increases totalling £845m under the review. However, on average, these authorities will still derive 70% of their spending increases from council tax rises, with some as high as 99%. Overall, without council tax rises of 5% over the next three years, the analysis shows that 33 of the 38 county and rural unitary authorities would see a real-terms reduction in funding.
Tim Oliver, chair of the CCN, says: “Reforms to the way council funding is distributed are long overdue, and we welcome the government’s proposals for new formulae for distributing funding for adult social care and home-to-school transport.
“Alongside an adjustment for the costs of delivering services in rural areas, this means the funding reforms are better than many of our councils feared, with some seeing a welcome uplift in funding.”
“However, some 16 county and rural councils across the length and breadth of the country will see reductions in grant funding, while the government’s proposals place a disproportionate burden on council taxpayers in county areas to fund local services and redistribute funding to urban areas.”
Around 16 authorities – including some in the Midlands and the North – will see cuts in government funding totalling £470m. One-third of council tax income raised in these areas over the three-year period is needed to offset cuts to funding.
In total across the 38 county and unitary councils, grant funding will rise by just £374m. In contrast, almost 50% of metropolitan authorities’ new resources will come from additional grant funding, some £1.2bn over the next three years.
Mr Oliver adds: “Those facing cuts in government funding will inevitably have to reduce vital frontline services, while the reliance on council tax rises leaves even those with modest funding increases facing an extremely challenging funding outlook.
“There is still time for government to rethink this and reduce the pressure on taxpayers. It is unrealistic to expect some of England’s largest social care authorities to provide life-critical services while receiving deep cuts in government grant over the next three years. It is therefore vital the government makes more money available to further mitigate the impact of these reforms.
“Importantly, the government should also revisit its proposals for full council tax equalisation. While we recognise the need to take account of how much councils raise in local taxation, the government’s proposals to fully equalise will unfairly redistribute hundreds of millions of local council tax to other areas, while weakening the incentive to build homes.”
Real-terms spending cuts
The District Councils Network (DCN) has made several similar points to the CCN. The body says: “We are concerned the proposed changes will mean real-terms spending cuts for many DCN members.
“This would be counterproductive for the millions of residents and businesses we serve. All DCN member councils must be properly funded to continue providing the vital frontline, place-based and preventative services that play a crucial role in driving growth and reducing demand on the NHS and wider public sector.”
The DCN is calling for stronger transitional protection for the councils facing the biggest funding cuts, alongside a New Homes Bonus to be kept until an alternative way is found to incentivise councils to build the many new homes our places need.
This call comes amid a recent MP-backed report by Policy Exchange that shows there is cross-party support for the building of 100,000 council homes a year.
The government has recently pumped in millions of pounds aimed at improving council housebuilding skills and capacity. However, concerns remain around the actual level of funding and upskilling needed.
Reiterating the other financial pressures councils are facing, the DCN has called for a phased approach to resetting the business rates baseline, plus dedicated funding for flood protection and coastal defences in the areas facing the greatest risks.
This is in addition to “full and transparent funding for the cost of operating weekly food waste collections”, alongside much greater financial flexibility and fiscal devolution for councils so local communities can make decisions about how money is spent in their area.
A September analysis by the Local Government Association (LGA) found the government’s shake-up of the Right to Buy is having a positive impact on council housebuilding and is already unlocking new schemes.
But the LGA’s response to the consultation echoes the concerns voiced by other local authority groups. While many of the proposals are welcome, “funding reductions in the 2010s, followed by rapid cost and demand increases in recent years, mean that the sector is under extreme financial pressure”.
The LGA says: “The government needs to ensure that reform does not put the sustainability of individual councils’ finances and services at risk.
“The consultation’s proposals on transitional protection are key in this context. While the offer of a cash flat floor appears reasonable at first, it does not protect councils from real-terms cuts in their Core Spending Power (CSP). The consultation is also clear that not all councils will receive the cash floor, meaning they potentially face cash-terms cuts in CSP over the period. Given the scale of cost and demand pressures faced by the sector currently, real-terms cuts and cash-terms cuts will be challenging for any council.”
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