Good afternoon from New Economy Brief.

On 2nd February 2018, Northampton became the first council in 20 years to issue a Section 114 notice, a public admission they’d run out of cash. Since then, six other councils have followed, including Birmingham, Europe’s largest local authority. Earlier this year, the National Audit Office warned nearly half of English councils are at risk once temporary government support for Special Educational Needs and Disabilities (SEND) spending expires.

The government hopes a combination of its newly announced Pride in Place scheme and its long-trailed Fair Funding Review 2.0 will shore up local authority finances. But with local coffers in the spotlight ahead of crunch local elections next year, with a third of council seats being contested, have ministers done enough to fend off another Reform surge

A crisis decades in the making.

The roots of today’s crisis are found in the UK’s unusual approach to local government funding. In 2014 just 7% of UK tax revenue was raised locally, compared to 32% in Germany and 50% in Canada. According to New Local, that makes the UK one of the most centralised taxation systems in the OECD.

Limited funding options. Councils rely on three main funding streams: central government grants, council tax and business rates (property taxes on residents and companies respectively). Unlike those in other countries, UK local authorities have limited powers to raise money themselves. When one of these three streams falters, disaster looms.

Austerity bites. 

As comedian Alexei Sayle once said, “Austerity is the idea that the global financial crash of 2008 was caused by there being too many libraries in Wolverhampton”. Through the 2010s, English local authorities were hit hard by government cuts. Some saw 40% of their central government funding disappear. Even now, after increased funding during Covid and more recent uplifts, core spending power remains below 2010 levels.

The cuts deepened regional inequalities. The Institute for Government finds that, as of 2024, councils in the most deprived areas have seen real terms funding fall by 18% since 2010, compared to growth of 1% in the wealthiest areas.

Squeezed dry. The theory was that councils would make up for lost funding from the centre by raising more locally. However, rules on retained business rates have left councils short, with reform promised but never implemented. Meanwhile, many have maxed out council tax rises (capped at 5% annually), squeezing low-income households who are left paying proportionally more than richer ones. Many of them can’t afford to pay and as a result, collections rates have dropped and arrears doubled in a decade to £8.3bn. It’s notable that English councils are considered amongst the most aggressive creditors; council tax remains the only debt that retains the punishment of imprisonmentScotland and Wales have fared slightly better, with devolved governments maintaining higher levels of grant support, but similar pressures remain.

Fixing the foundations?

Fair Funding Review 2.0. In August, the government closed its consultation on the Fair Funding Review 2.0, with a response expected ahead of the 2026/27 financial year. The review promises to reform central government funding through a new “needs-based” formula based on three factors: relative need (local deprivation), the costs of providing services locally, and local capacity to raise taxes.

Pride in Place. Meanwhile, the recently announced Pride in Place scheme pledges £5bn over 10 years to the hardest-hit towns, based on a combination of deprivation and community need. With “fake barbers” in the crosshairs, the fund hopes to rejuvenate high streets by allowing councils to buy up boarded-up shops and abandoned businesses for community use. 

Too little, too late? Labour hopes this will correct the policy failures of successive previous governments. However, the funding increases being announced are relatively modest, and some councils will lose out under the new fair funding model, with London boroughs hit particularly hard. Further, Institute of Financial Studies modelling suggests that the redistribution proposed doesn’t go far enough, and could even transfer money from deprived areas to wealthier ones.

Vital services on the line

Councils do much more than just collect bins. They have a statutory duty to deliver essential parts of the security net such as emergency housing, child protection and adult social care. With budgets under pressure, councils often face difficult decisions, forced to cut preventative services like public health as the need for more immediate services rises. These needs have grown as the cost of living crisis continues and the housing crisis worsens; they will keep growing as the country grapples with the challenges of caring for an ageing population.  

Essential services. Transport for children with SEND illustrates the problem. Costs have ballooned as councils turn to private taxis to get children with Education, Health and Care Plans (EHCPs) to school, while local bus routes have been cut and in many places, local special school provision remains insufficient, requiring pupils to make long journeys to access the support they're entitled to.The picture with housing services is equally bleak; Eastbourne Borough Council says it’s expecting to spend the equivalent of half the council tax it collects on temporary accommodation this year. 

Doge fail. As newly Reform-led Kent County Council recently discovered, councils are already “down to bare bones” and promises of new ‘DOGE-style’ cuts are unlikely to get far. The new political leadership is already looking at raising taxes to fill the gap.

The visibility of cuts. This means that the services on the chopping block are the ones most of us notice. Libraries close, potholes go unrepaired, local buildings are left to degrade. Communities feel cuts to these services deeply, and confidence in local councils has been falling

The invisible costs. New Local argues that councils are in a weak position when bargaining with the private sector – they depend on outsourcing to provide essential services, but are too small to shape the terms on which this is done. In practice, this means they are often forced to pay steep fees to private providers, such as care homes run by private equity firms, but have limited influence over the quality of services delivered. Smaller or rural authorities are particularly exposed, with little leverage to challenge prices or improve standards.

Breaking point?

Reforming tax. Fundamentally, councils need more money. Recent reports suggest council tax reform may be on the table at the upcoming budget. Organisations including Fairer Share have proposed replacing council tax with a proportional property tax, under which homeowners would pay a fixed percentage of their property’s value every year. This would both be a fairer, more progressive tax, and raise an extra £5.6bn. IPPR has also suggested a tourist tax, a model already common across Europe, which could raise millions in additional revenue for local areas.

Rebuilding local resilience. For years, organisations like the Centre for Local Economic Strategies (CLES) have called for Community Wealth Building to retain wealth and opportunity for local people. They believe that by using public procurement to nurture local supply chains, and playing to the area's strengths when managing their assets, local councils can invest, locally, ultimately improving their long term financial resilience.

Rethinking service delivery. As well as funding, organisations like We Own It call for insourcing and service provision reform to wean local governments off  expensive private provision in social care and housing. They argue this would save councils money, improve services and boost local investment.

The consequences of over-centralisation. While the upcoming English Devolution and Community Empowerment Bill promises to hand more powers to local areas and communities, financial autonomy remains much less certain. Without true fiscal devolution, accompanied by sustainable funding, piecemeal measures like the Pride in Place scheme or Fair Funding Review 2.0 seem unlikely to deliver the resilient, locally rooted services that communities desperately need. 

Weekly Updates

Housing

Green Homes for All. The latest report in the Universal Basic Services series from the New Economics Foundation and the Social Guarantee tackles housing. Using the principles of sufficiency, sustainability, security and setting, it outlines how to provide for the 8.5 million people with unmet housing needs, while cutting residential greenhouse gas emissions, which currently make up a fifth of the country’s total. 

Finance

Voice, agency and investment. A new report from the Fairness Foundation warns that short-term, shareholder-driven finance is undermining our shared economic resilience. Cooperative, credit union and community ownership models could help counter these risks if backed by both stronger policy and a new narrative rooted in dignity, fairness and security. Recommendations include reforms to company law so firms serve employees, communities and the environment, not just shareholders.

Poverty

Poverty in Scotland 2025. The latest JRF annual report shows that poverty rates in Scotland have crept back up, especially among working-age adults. Poverty has also continued to deepen, with 1 in 10 people in Scotland living in “deep poverty”, with incomes below 40% of the median. The report warns that without additional investment in social security, employment, and targeted support, Scotland is on track to miss both its interim and 2030 child poverty reduction goals.

Climate change

Climate Jobs UK. Tessa Khan from Uplift highlights the new Climate Jobs UK campaign, launched at Labour Conference last week by GMB, Prospect and other trade unions. They promise working-class voices will be heard throughout the energy transition, shaping climate policy and ensuring good green jobs are a central outcome of Labour environmental policy.

Tax

How the super-rich avoid paying taxes. Ever wondered why billionaires only pay themselves $1 salaries? Mark Bou Monsour from Tax Justice Network sets out the answer in this interview for the It’s Complicated podcast. He also talks about the importance of a wealth tax: not just for government policy, but for rewiring the economy to be fairer. 

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