IFS: Cuts to council services likely unless cost pressures abate – even with the biggest council tax increases for 20 years

Despite the evident pressures facing councils, the main parties' manifestos were almost silent on English local government funding (local government funding is a devolved matter in the rest of the UK). This means there is significant uncertainty about exactly how funding for councils will change over the next parliament.

But new analysis by IFS researchers shows that if demand and above-inflation cost pressures continue to grow in line with recent history, councils could be forced to cut back some areas of service provision. This would be true even if funding from central government was frozen in real terms (rather than being cut alongside other ‘unprotected' areas) and council tax was increased at 5% per year – equivalent to over 3% a year above inflation, its fastest real-terms rate since the 2001–05 parliament. More deprived areas, which rely more on central government funding relative to council tax, will face the biggest squeeze unless there is a significant redistribution of central government grants towards them. A combination of statutory duties to vulnerable residents and big cuts to more discretionary services during the 2010s means some councils, at least, would struggle to cut back services further – putting them at risk of severe financial distress.

The new report, funded by the abrdn Financial Fairness Trust and the Nuffield Foundation, sets out scenarios for English councils' funding and spending. Findings include:

• Existing overall spending plans imply that ‘unprotected' services could be cut by 1.9–3.5% a year in real terms between now and 2028–29. Manifestos give no indication of whether the next government would prioritise council funding (as has been the case since 2019) or cut it by more than average (as was the case in the 2010s).
• The scale of increases in council tax will matter more for councils' funding given that it makes up a much larger share of their funding (57%) than grants from central government (15%). If council tax increases by around 5% a year in the next parliament – in line with the maximum allowed over the last two years without a referendum – the average Band D rate would be around £600 higher per year in April 2029 than now. After accounting for household inflation, the real-terms increase in council tax bills (averaging just over 3% a year) would be the highest since the 2001–05 parliament (when they averaged 6% a year).
• If grant funding were cut by 2.7% a year in real terms (the mid-point of the range for unprotected services) and council tax increased by 5% per year, English councils' overall funding would increase by an average of 2.1% a year in real terms, after adjusting for whole-economy inflation. Even under a relatively optimistic scenario where grant funding was frozen in real terms, English councils' overall funding would increase by an average of 2.5% a year in real terms. The average real-terms increase in overall funding from 2019 to 2024 has been 2.9% a year.

• If demand and cost pressures continue to increase at the same rate as in recent years, analysis by the Local Government Association suggests that real-terms funding increases of around 4.5% a year would be needed to maintain service provision. This means growth in demand and cost pressures would need to almost halve for the change in overall funding to keep pace with these pressures across England as a whole, even with no real-terms cuts to central government grants and with council tax increasing by 5% a year. It is likely that recent high growth in demand and cost pressures will eventually slow down, but when and by how much is far from certain.
• Councils in the most deprived areas are likely to face the most difficult funding situation. For example, if all councils' grant funding were cut by 2.7% a year in real terms and council tax increased by 5% a year, councils covering the most deprived tenth of areas would see their overall funding increase by just 1.3% a year in real terms, compared with 3.0% a year in the least deprived tenth of areas. To avoid this, there would need to be significant redistribution of grant funding from less deprived to more deprived areas, which may be difficult to implement, especially if overall grant funding is constrained.

Kate Ogden, a Senior Research Economist at IFS and an author of the report, said:

‘Many councils are under clear financial strain. They are struggling to meet the surging demand and cost for services such as children's and adults' social care residential placements, special educational needs support and temporary accommodation for the homeless. Unless these pressures slow down significantly and quickly, or the next government gives a big injection of funding to local government, councils will likely need to make cutbacks to some areas of provision. Given that more discretionary services have often seen cuts of 40% or more since 2010, councils may struggle to do this. More could be pushed to the financial brink, like Birmingham, Thurrock and Woking. It is remarkable that the main parties have been silent on how they would address these challenges.'

David Phillips, an Associate Director at IFS and another author of the report, said:

‘With many councils struggling to fund their existing responsibilities, the next government should be particularly careful in ensuring plans are in place for funding any additional responsibilities they are given. This is particularly true for adult social care services, where the Conservative, Labour and Liberal Democrat manifestos made commitments to expand service provision. However, none has identified sufficient funding to fully cover the costs of their proposals. Without additional funding, these reforms would intensify the pressures on councils' budgets – potentially seeing some existing social care recipients losing support to help pay for expansions of provision to other, typically wealthier individuals, as financial means-tests are relaxed or abolished.'

Anvar Sarygulov, a Research Grants and Programmes Manager at the Nuffield Foundation, said:

‘With increasing demand for social care and other services, the next government needs to think carefully about how it enables councils to meet this demand. Any future funding plans need to consider that councils in more deprived areas are more dependent on central government funding, and that there are already significant inequalities in provision of local services across the country.'