Council tax hikes will do the heavy lifting

Setting aside the dizzying range of place names dropped in the speech, the recent Spending Review was a must-see event for the UK’s public sector. The Chancellor has now divvied up the spending pie between different services for the next 3 years, the clearest illustration yet of where the government’s priorities lie.

This wasn’t the spending and investment bonanza that the speech, its supporters and detractors all seem to want to suggest. Instead after increasing by 3.4% above-inflation over the last 2 years, total departmental spending is set to grow much more slowly (1.5%) over the next three. This has allowed Ms Reeves to preserve a wafer-thin margin against her “ironclad” fiscal rules but made for starker trade-offs.

The wider picture for public services

As was widely expected, health and defence will take up the lion’s share of real-terms growth over the next three years. NHS funding will rise by 3% each year on average – faster than for other departments, but slower than the roughly 3.5% of recent years. Meeting the government’s ambitious waiting list targets will be a stretch. Defence spending is set to rise to 2.6% of GDP by 2027-28. Here, a pivot to a much stronger focus on capital spending means that the impact on the fiscal rules is less than it might have been. 

The core schools budget looks tight, with falling pupil numbers allowing for modest real-term growth in per-pupil spending but SEND likely to swallow most of any rise. There were cuts for DEFRA and overseas aid, among others, and substantial cuts to administrative budgets across the board.

Local government did better than average – but driven by large real-terms rises in council tax bills

Where did local government come in the queue? It has often been at the back, facing especially deep cuts in the 2010s, but has tended to fare better-than-average since 2019. Overall core spending power rose by an average of 3.5% above-inflation in each of the last two years. It will continue to increase above-inflation over the next three years, but more slowly – by 2.6% a year on average.

This is generous relative to many other public services, and probably better than many in the sector expected. But it will still feel tight. Even with the 3.5% rises of the last few years, we have seen rising numbers of councils seeking exceptional financial support, as demand and costs for some core services have been rising more quickly, perhaps by more like 4%. Whether 2.6% is manageable will depend on whether councils see some slowdown in these pressures. 

Grants from central government are set to increase by £1.35 billion in cash-terms by 2028-29, and will be front-loaded, with rises of £875 million next year followed by smaller increases in the following two years. Much more of the cash increase – around £7 billion – will come from higher council tax revenues. These figures assume, as ever, that councils make maximum use of allowed bill rises. Council tax rises of 5% each year would take the average band D bill from £2,280 this year to around £2,640 by 2028-29, a 9.2% rise after adjusting for inflation. Basing bills on 1991 property values gets more ridiculous every year, and matters more as bills get bigger, but the government seemingly has no plans to look at much-needed council tax revaluation and reform.

Still waiting on long-term plans for social care and SEND

Adult social care reforms also remain a distant prospect. Any fundamental reforms that emerge from the Casey Review will only come after 2028. In the meantime, the touted £4 billion cash increase in funding by 2028-29 – from some combination of council tax, grants and an increased NHS contribution – may not stretch very far. The commitment to give social care workers more bargaining power over pay and conditions this Parliament, and curbs on international recruitment, are likely to push up councils’ costs.

We have still to hear any more about plans for councils’ DSG deficits. The override that has kept these off councils’ balance sheets is set to expire in March 2026, by which point they might amount to £5 billion. For many councils, this looming threat to their solvency will make it impossible to budget for 2026-27 with any confidence. A permanent solution will require government to get a grip of rising SEND spending, with reform plans expected in a Schools White Paper in the autumn. £760 million over two years in the transformation fund for SEND is a welcome first step. There was also some welcome transformation funding for children’s social care, worth £79 million this year and £478 million over the following two years.

Funding reform means the outlook for individual areas could be very different

For the funding outlook for specific councils, the imminent consultation on local government funding reform will be even more consequential than what we heard from the Chancellor. The commitment to implement long-overdue funding reform is welcome, but it makes reading the tea leaves for individual councils even harder than usual. In general, deprived areas are likely to gain, and more affluent areas to see much slower, if any, growth in funding over the coming years. The government intends to apply some ‘transitional arrangements’ but, without lots of spare cash, we can expect protection for those facing cuts to be funded by introducing gains elsewhere more slowly.

The government remains committed to funding simplification and certainty for local government. With huge questions remaining over DSG deficits and funding reform, these were not delivered at the Spending Review. But they will be welcome when they do finally arrive.

This article was first published in Municipal Journal and is reproduced here with kind permission.