New councillors, same old challenges

Following the elections on 7 May, it is all change in council chambers up and down England. Labour have lost around 1,500 councillors and their previous majorities in 38 councils, while the Conservatives have lost around 560 councillors and majorities in 7 councils – albeit picking up Westminster at the same time. Reform UK have a large new cohort of around 1,450 councillors, securing majorities in 14 councils. The Greens have around 440 extra councillors and are now the largest party in 5 of the councils where elections took place. There are an extra 23 councils where no party has a majority, meaning negotiations to form new political executive teams.

But while the political make-up of England’s councils has changed significantly, the financial challenges they face remain the same. Changes in the political leadership of councils may change how they trade off different policies, but new leadership teams will still find themselves constrained by statutory duties and tight budgets.

Funding almost back to 2010 levels

First up, the level of funding itself. It is well known that English council funding was cut significantly during the 2010s – we calculate a 21% real-terms cut between 2010 and 2019, accounting for changes in both grant funding from central government and revenues from business rates and council tax. What is perhaps less well known is that since 2019, funding has increased substantially faster than economy-wide inflation: by around 12% in real terms between 2019–20 and 2024–25, and a further 8% since then.

With council funding outpacing general inflation by a significant margin in recent years – undoing most, although not all, of the previous cuts – why have councils evidently been struggling so much financially in recent years?

Spending pressures continuing to grow

For one, England’s population has increased substantially: over 11% between mid-2010 and mid-2024, for example, with the most rapid growth between 2021 and 2024. Councils’ funding has to be spread across many more people. Funding per person is still likely around 15% lower in real terms this year than in 2010–11.

Even more important is a range of cost pressures outpacing economy-wide inflation, and growing demands for some of the most costly services. Big above-inflation increases in the National Living Wage mean the cost of social care placements and care packages increased by much more than economy-wide inflation in the decade to 2025. There have been big increases in the number of households in temporary accommodation, and especially in the most costly forms of accommodation (such as B&Bs). A shortage of foster families and increasingly complex needs mean an increase in the number of children in secure children’s homes. And rising diagnoses of special educational needs and disabilities have meant a surging bill for specialist home-to-school transport.

Looking ahead, funding is projected to continue increasing in real terms across England as a whole – albeit at a slower rate, and with higher inflation as a result of the Iran war now likely to eat into those increases somewhat. And some cost pressures are abating – a series of large pre-planned increases in the National Living Wage has come to an end, for instance.

But an ageing population and still-increasing numbers of working-age adults presenting with care needs will continue to push up demand for services.

There is also uncertainty about how some recent socio-economic changes will play out for councils’ budgets. Will a slowdown in immigration, for example, push up costs by making recruitment and retention of social care workers more challenging? Or will the resulting slower population growth mean lower demand and costs when it comes to homelessness prevention? At this stage, the data are inconclusive.

Either way, the pressures on council finances seem unlikely to immediately and significantly ease. There will still be more calls on funding than can be met in full, requiring difficult trade-offs between council tax and spending and between spending on different services.

Winners and losers from funding reform

Those trade-offs will differ in different parts of the country. To some extent, this will reflect differences in how well different councils have managed their budgets in recent years. Some may have done more already to address spending pressures, while others may have been less able or willing to make the tough calls needed to balance the books.

But one reason why the funding outlook – and hence the trade-offs – differ between councils is that the government is now implementing a long-overdue update of how funding is allocated between councils. The so-called ‘Fair Funding Review’ is rolling out new allocations of central government grant funding to all councils in England over the period 2026–27 to 2028–29. Prior to this, allocations were based on a combination of data from the early 2010s and earlier (in some cases back to the 1980s!) and ad-hoc year-to-year decisions. The new allocations aim to reflect more up-to-date estimates of how much different councils need to spend and how much they can raise themselves, relative to the average council.

The new grant allocation process is an improvement on the process it replaces – which, after so long, had become essentially arbitrary. However, it still relies on subjective judgements about what constitutes ‘need’, and it has seen the outcomes of the process tinkered with – to provide additional funding to some deprived areas that would otherwise have lost out – when the resulting allocations were deemed politically unpalatable.

Some parts of the country are set to be big winners from these new allocations. This includes many councils in outer London (e.g. Enfield, Havering, Hillingdon, Hounslow and Newham), many urban parts of the Midlands and North (e.g. Birmingham, Coventry, Bradford and Manchester), and some county areas (e.g. Kent and Lincolnshire). Others are set to be big losers. This includes large parts of inner-West London (such as Camden, Hammersmith and Fulham, Kensington and Chelsea, Wandsworth and Westminster), as well as both some more affluent and more rural parts of the rest of the country (such as Hampshire, Surrey, Trafford and Wokingham) and a handful of deprived areas where the population has stalled (such as South Tyneside and Sunderland).

The challenge for those losing funding is obvious – they will need to either cut back spending or seek to raise revenues (including via council tax). That means tough decisions for new council leadership teams in their first budgets – perhaps including council tax increases above the 5% usually allowed, either with special permission from the government or via holding and winning a local referendum. Even with large council tax increases, some councils (especially those in inner London mentioned above) are set to see substantial falls in their overall funding over the next few years.

Those that are relatively little affected by the redistribution of grant funding will also likely require substantial above-inflation increases in council tax to meet the rising costs of social care services – unless those (or other) cost pressures can be substantially reduced. Earlier this year, we estimated that if councils increased their council tax in line with inflation, the average council would see its total funding increase by an average of 1.2% above inflation each year between 2025–26 and 2028–29, compared with 2.9% if council tax was increased by the maximum possible allowed.

The challenge for those gaining funding is rather nicer to have – the need to ensure that the additional funding is well spent on delivering the priorities of local residents. But that is no less important.

The redistribution of grant funding also poses issues for voters as they come to assess their new councillors. Councils gaining funding are likely to have to make fewer of the most difficult choices over council tax and service provision than those losing funding. But the complexity of the funding reforms means their salience to voters is likely to be limited: they will focus more on the outcomes in terms of tax increases and the quality of services. There is a risk new councillors take the credit for tax and spending choices facilitated by higher funding, rather than better decision-making. On the other hand, there is also a risk other councillors are punished for tougher choices necessitated by funding cuts, rather than bad governance. Organisations such as the IFS and the media have a role to play in explaining how funding reform is affecting council funding – to help ensure appropriate accountability for both councillors and national politicians.

Ring-fences and statutory duties

The scope for big changes to councils’ budgets may also be more limited than some new councillors expect.

On the revenue side, most councils are subject to limits on how much they can increase council tax without holding and winning a referendum of local voters – although the government has announced it will waive this for some of the biggest losers from the funding reforms. There are also limits placed on what councils can charge for many services, and commercial activity (such as investment in businesses or property) comes with potential risks as well as rewards – as some councils have found out.

On the spending side, both funding ring-fences and statutory duties – legal requirements to provide particular kinds of services or to support particular types of needs – will constrain the scope for cutting or reallocating spending. For example, funding for schools and public health are both provided via ring-fenced grants – although in the latter case, some councils have argued that wider spending on parks and recreation has had a public health benefit (rather than spending all the money on formal public health services). And among a series of duties, councils are required to provide a library service, to safeguard children, and to assess and provide support to those requiring care who meet care need thresholds and financial means-tests.

There may be scope to pare some of these service back – there is usually some degree of subjectivity when defining individual as well as council-level ‘need’. But council decisions can be challenged, leading to potentially costly legal action. After the funding cuts of the 2010s and the spending pressures of the 2020s, many councils have also already tightened eligibility criteria for services such as social care, to try to contain costs. Further cutbacks to reduce overall spending or to reallocate spending to more discretionary, universal services may be possible – but will unlikely be easy.

The bottom line on the bottom line

The new councillors and council leadership teams will therefore face a tricky financial in tray: increasing overall funding across England as a whole, but high and still-rising spending pressures; an update to the funding system that will create big winners and losers; and referendum requirements, ring-fences and statutory duties that reduce the scope for the big reshaping of budgets that some councillors would favour.

Alongside managing these underlying budgetary challenges – and expectations – councillors in those parts of the country undergoing local government reorganisation will have to grapple with negotiating how to merge and split budgets as districts are brought together and counties split apart. The long-term aim is simpler local government – with a single council responsible for local services, rather than separate district and county councils – with more joined-up services. But in the short term, it is another task that may take time and resources away from other activities.

That does not mean that nothing will change – new councillors will have different priorities and will find council officers focused on helping them achieve what is possible. But neither councillors nor their electorates should expect changes to be easy, or for a rapid reshaping of councils’ budgets or services. New people may be in charge in many places. But they face the same challenges and constraints as the old guard.