Local government worker

English councils’ core spending power is set to grow by up to 11% in real-terms over the next two years

Published on 16 December 2022

The local government finance policy statement confirms a boost to councils’ funding over the next two years, targeted at social care and poorer areas.

This week, the government set out its intentions for local government funding in England over the next two years. Funding allocations for specific councils will be published in the draft Local Government Finance Settlement in late December but we have enough information to have a fair stab at saying what the plans mean for the sector as a whole and for different types of councils.

Overall funding levels

In 2022-23, councils’ core spending power increased by 7.4% in cash-terms. When the government set out its plans in December 2021, this was expected to be worth £2.3 billion in 2021-22 prices, a 4.6% real-terms increase year-on-year. Higher-than-expected inflation has meant the actual real-terms increase was a much more modest £1.2 billion (2.4%). Even this may understate the pressures faced by councils this year, as many have reported faster cost rises than the measure of inflation typically used for public services, the GDP deflator (which is forecast to grow by 4.9%). Like much of the public sector, councils have faced much higher wage demands – council workers secured a pay rise averaging 7% – and have not been provided with additional in-year funding for these higher costs.1

Figure 1. Increase in core spending power since 2021-22, real-terms (2021-22 prices)

Increase in core spending power since 2021-22, real-terms (2021-22 prices)

Source: Final Local Government Finance Settlement, 2022-23; Local government finance policy statement 2023-24 to 2024-25; OBR Economic and Fiscal Outlook, October 2021 and November 2022.

Much smaller increases had been pencilled in for the next two years, with grant funding for existing services expected to be flat in cash-terms, and only modest growth in revenues from business rates and council tax. Instead, the government has now confirmed grant funding for local government will rise in each of the next two years. At the same time, elevated inflation in the year to September 2022 will mean a larger rise in income from councils’ share of business rates revenues next year. Together with the potential for bigger rises in council tax levels than allowed last year, councils’ core spending power is now expected to increase from £54.1 billion in 2022-23 to around £59 billion in 2023-24, and £63 billion in 2024-25. In stark contrast to many other public services, as a whole councils can expect two years of above-inflation rises in their spending power of up to 5.4% and 5.8% – although next year at least, forecast inflation may again understate the cost increases facing councils.

By 2024-25, core spending power is expected to be 7% higher in real per-capita terms than in 2015-16. This is far from fully reversing the substantial cuts made to local government in the first half of the 2010s. Real-terms per capita spending by local government fell by more than 20% between 2009-10 and 2015-16. But it does continue an important shift away from austerity for local government.

Figure 2. Core spending power from 2015-16 to 2024-25 

Core spending power from 2015-16 to 2024-25

Source: Final Local Government Finance Settlement, 2022-23; Local government finance policy statement 2023-24 to 2024-25; OBR Economic and Fiscal Outlook, October 2021 and November 2022; ONS 2020-based population estimates and projections.

Breakdown of changes in 2023-24

The most significant year-on-year changes in local government funding announced are: 

  • Additional social care grants worth £0.7 billion million to councils,2   from which the government expects “tangible improvements” to services, including addressing delays in hospital discharges.
  • Councils will retain the funding for implementing reforms to adult social care, which have been delayed by at least two years. This frees up funding worth £1.3 billion to support existing services.
  • Increased revenues from council tax due to larger rises in tax levels. If all councils put bills up by the maximum allowed, and the tax base grows as expected, revenues could be expected to increase by around £1.9 billion next year.3  
  • Higher inflation, which increases councils’ business rate revenues. Government has confirmed that councils will be compensated for the freezing of the business rates multiplier relative to CPI (10.1%) and that Revenue Support Grant will also increase in line with CPI. Together, these will add £1.5 billion to revenues next year, although this is less generous than the policy in recent years when councils have been compensated for any under-indexation relative to RPI (12.6%).
  • The ending of the Lower Tier Services Grant and some New Homes Bonus legacy payments (together worth £0.3 billion). However, a portion of this will be used to guarantee all councils at least a 3% cash rise in core spending power before they make decisions over council tax rises. If this guarantee applies to core spending power assuming no rise in bills, it would be worth around £0.1 billion in total.
  • The Services grant will be reduced by £0.2 billion next year to reflect the abolition of the Health and Social Care Levy, and will be reduced further to fund an increase in the Supporting Families programme.4  

Together, these changes will mean core spending power rises by up to £4.8 billion (8.8%) in cash terms next year. This is higher than most other public services; planned spending on the core schools’ budget and NHS England are due to increase in cash-terms by 6.5% and 5.1% respectively. Inflation is forecast to slow next year, with the GDP deflator forecast to grow by 3.3%. If this captures the cost increases facing councils, they can expect a real-terms increase of 5.4% on average next year, or £2.9 billion (in 2022-23 prices).

Councils with responsibility for social care will see the biggest rises

Estimates of allocations to specific councils based on some reasonable assumptions suggests stark differences across council type. Those with social care responsibilities (single-tier councils, and shire counties in two-tier areas) benefit in particular from additional social care grants, and have been allowed larger rises in council tax bills. On average, they can expect their core spending power to increase by 9.2% (5.8% in real-terms) in 2023-24, with more than 20 councils potentially seeing a cash increase of at least 10%.

In contrast, there are no new grants for lower-tier services, and shire district councils will lose more as a share of their spending power from falls in some existing grants. However, all districts can expect to receive at least some funding from the new funding guarantee, compared to a tiny minority (less than 5%) of single- and upper-tier councils. Largely as a result of this guarantee, their core spending power will increase by 4.9% on average next year (1.6% in real-terms), and every council will see a cash rise of at least 4.3% (1.0% in real-terms) if they take full advantage of allowed council tax rises.

Figure 3. Change in core spending power in 2023-24 by type of council, as a % of core spending power

Figure 3. Change in core spending power in 2023-24 by type of council, as a % of core spending power

Note: Bars show cash-terms change for each funding element as a % of core spending power in 2022-23. Yellow and white diamonds show cash-terms and real-terms overall change in core spending power. ‘All councils’ excludes fire and combined authorities and the Greater London Authority.

Source: Final Local Government Finance Settlement, 2022-23; Local government finance policy statement 2023-24 to 2024-25.

Bigger rises for more deprived areas

Over the decade to 2019-20, councils in more deprived areas – which were more reliant on government grants – saw much larger funding cuts. Last year’s settlement started to reverse this trend, with slightly larger rises in core spending power on average for more deprived areas. This new pattern looks set to continue in 2023-24, with larger rises on average in the most deprived tenth of areas (9.9% in cash-terms, 6.4% in real-terms) than in the least deprived tenth (7.6% and 4.3%).

Increases in council tax bills will generate more revenue in more affluent areas, but this is more than offset next year for two reasons. First, more deprived areas tend to have higher assessed spending needs, and so retain more income through the business rates retention scheme. They can therefore expect to benefit more from this source next year. Second, the increases in funding for social care are worth more in deprived areas, especially as the government has confirmed that the repurposed funding for delayed reforms will be allocated explicitly to offset the revenues councils can raise themselves from council tax.

Figure 4. Change in core spending power in 2023-24 by decile of area deprivation, as a % of core spending power

Change in core spending power in 2023-24 by decile of area deprivation, as a % of core spending power

Note: Bars show cash-terms change for each funding element as a % of core spending power in 2022-23. Yellow and white diamonds show cash-terms and real-terms overall change in core spending power. Deprivation deciles are based on IMD 2019 Average Score at the upper-tier authority level.

Source: Final Local Government Finance Settlement, 2022-23; Local government finance policy statement 2023-24 to 2024-25; English Indices of Deprivation, 2019.

 

Pain delayed?

Councils will welcome the extra funding – and extra certainty – government has provided for the next two years. They may be more concerned for 2025-26 and beyond. If delayed social care reforms do go ahead in 2025 as planned, will new funding be provided, in addition to the originally designated funding that is now being repurposed? The government has still not responded to a consultation on the future of the New Homes Bonus, which closed 20 months ago. And its latest plans suggest spending cuts from 2025, implying average annual real-terms cuts of 0.7% outside health, defence and overseas aid between 2024-25 and 2027-28.5

Even more importantly, the government has now confirmed that major reforms to local government finance, originally planned for 2019, won’t take place until at least 2025 – after the next general election. Even in 2019, the distribution of funding across areas was only weakly related to patterns of assessed needs. Those assessments haven’t been updated since 2013, and are based on data from as far back as 2001. It is shocking that they are still being used to allocate some funding between areas 22 years later. Relying on ad hoc fixes – such as allocating social care grants to offset additional council tax revenues – is a poor substitute for having a rational, fair system for funding local government.

A reassessment of the relative spending needs and revenue-raising capacity of different areas, and a ‘reset’ of the business rates retention scheme (also delayed), would inevitably create losers. Funding will need to be redistributed to reflect years of differential population growth and changes in local circumstances. Pushing changes back to 2025 – when, on current plans, overall funding will be much tighter – will make the transition more painful. It also takes us past the next election, meaning more uncertainty for councils over the timing and eventual shape of these much-needed updates.

Endnotes

  1. 1.

    Councils did receive £200 million from the Adult Social Care Discharge Fund in 2022-23 to support the discharge of patients from hospital. This, and other funding through the Better Care Fund, are not included in measures of core spending power.

  2. 2.

    This includes £400 million from a new ringfenced grant, and £300 million from the Better Care Fund recorded in DLUHC RDEL.

  3. 3.

    Throughout this analysis, we assume all authorities increase council tax levels in line with the council tax referendum principles, and that all areas see growth in the council tax base of 1% each year. This is slightly faster than forecast growth in the number of households (0.7%), but in line with average base growth between 2018 and 2022.

  4. 4.

    The scale of this reduction will not be known until the draft settlement. This analysis assumes the Services Grant (formerly the 2022/23 Services Grant) will be reduced by a total of £0.4 billion in 2023-24.

  5. 5.

    See Chart D, https://obr.uk/efo/economic-and-fiscal-outlook-november-2022/.