Response to ‘Fair Funding Review 2.0’ consultation by MHCLG

Preface

1. This is a response to the Ministry of Housing, Communities and Local Government’s (MHCLG’s) consultation on reforms to the English local government finance system by Kate Ogden and David Phillips from the Institute for Fiscal Studies (IFS). Kate is a Senior Research Economist and David an Associate Director at the IFS. All opinions set out in this consultation response are theirs alone; the IFS has no corporate views on the local government finance system, or other issues.
2. We do not answer all questions in the consultation. Instead, we focus on those that involve important trade-offs between the objectives that MHCLG is trying to meet, where we believe we can help clarify the issues at stake, and/or where technical changes to proposals are warranted.  
3. This response should be read in conjunction with the IFS report ‘Fair Funding Review 2.0: the impacts of reform options across English councils’ (Ogden and Phillips, 2025). The report analyses how the reforms would affect the funding received by different councils, and how this depends on the choices made over several key elements of the reforms. This formal response draws on that report in several instances but focuses more on conceptual design issues than impacts across councils.
4. We were commissioned by MHCLG to undertake a peer review exercise of some of the technical aspects of the proposed new funding system, including methodologies for the Area Cost Adjustments (ACAs), assessing council tax revenue-raising capacity, the design of the Foundation Formula, and the ‘macro model’, which brings the various components of the system together. MHCLG officials are advised to refer to the peer review report for further information for our assessment of these technical issues, and suggestions for improvement.

Response to consultation questions

Question 3. Do you agree with the government’s plans to simplify the grant landscape?

We neither agree nor disagree.

We note, however, that consolidating multiple grants allocated by different formula and with different grant conditions into a smaller number of larger grants can reduce administration and compliance costs for the government and councils, and provide additional flexibility to councils to allocate spending between services. The latter would be seen as beneficial if one believes (a) that councils have better information about the relative needs for spending on different services and/or (b) that councils can respond to differences in local preferences for spending on different services.

As discussed in Phillips (2024), local government systems with less central control of funding in other countries sometimes combine this with greater monitoring and accountability for service provision and associated outcomes. The government should consider changes to funding arrangements (including grant consolidation) alongside its plans for local government accountability. We note that the government proposes to publish notional funding allocations for adult social care services to help stakeholders hold councils to account for the amount they are spending on adult social care. We can see the intuitive appeal of this approach. However, assessments of how much councils need to spend on adult social care (and indeed all services) are just that – assessments – and are potentially subject to error. Councils may have better information on the relative need for spending across different services in their areas, and spending more or less on adult social care services than the central assessment is not necessarily indicative of over- or under-spending on this area. And with the continuation of the business rates retention system (following a reset) and limits on council tax raising (via referendum limits), councils’ revenues are subject to both risks and constraints. Without careful communication of the limitations of spending needs assessments in this context, publication of notional adult social care spending amounts may therefore confuse rather than inform stakeholders about choices and trade-offs being made by their council.  

Question 4. Do you agree with the formulae for individual services the government proposes to include?

We neither agree nor disagree with the specific formulas used.

We note however that the use of sub-council level data to develop the adult social care spending needs formulas and child-level data in the children and young people’s service formula -level) data means that these formulas are likely to be more robust than the other formulas, which have been developed using council-level data.

Formulas developed based on council-level regressions (such as the Foundation Formula and Highways Formula) cannot recover the ‘need’ for spending. In particular, any formula derived from analysis of council-level spending and service usage will be affected by the level of funding available to different councils at the time the spending/usage data relates to. To see this, suppose, for example, that the government previously chose to allocate more funding to council areas with high levels of deprivation and high levels of ill-health. If the resulting pattern of spending across council areas was used to estimate a spending needs formula, this would show a positive relationship between deprivation and ill-health and spending levels. But this formula would largely reflect these past funding allocations and may reveal little about the relative spending needs of different areas. Similar issues may arise when looking at service utilisation rather than spending – patterns of service usage may pick up where past funding has created the capacity to provide services, rather than the underlying need (and unmet need) for the services.

This makes the choice of year(s) used to develop formulas based on council-level data particularly important: the resulting relationships between spending (or usage) will to a large extent reflect the patterns of funding in the year in question. Seemingly objective statistical analysis therefore embodies subjective decisions about which prior years the government feels the system best allocated funding relative to needs. The government can and should be more explicit about this.

The Temporary Accommodation Formula makes use of past numbers of households in temporary accommodation in a council area to project its future spending needs. In general using actual spending or activity by a council to assess its spending needs is problematic as it incentivises councils to spend more on the service in question than they otherwise would in order to boost their future assessed needs and funding. To avoid this risk, one could hold the Temporary Accommodation Formula fixed, and not update it for changes in numbers of households in temporary accommodation in future. If demand for temporary accommodation is highly persistent, this would be an appropriate response. But the government should also consider further whether statistical proxies for temporary accommodation demand are possible (such as local demographics, property tenure and costs, and so on).

The Home to School Transport Formula includes separate relative need shares for mainstream home-to-school travel and travel arranged for pupils on the grounds of their special educational needs or disabilities (SEND). For the latter, the formula uses children of a compulsory school age (aged 5-16) in an area as a proxy for the number of children potentially eligible for special educational needs transport. It is reasonable to not use the actual numbers of children with an Education, Health and Care (EHCP) plan directly as this is potentially subject to council control: its use could incentivise councils to approve more EHCPs than they otherwise would as this would increase their assessed need for spending on special needs transport. There are also large differences between areas in the proportions of pupils with SEND or EHCPs that seem to be partly due to differences in identification practices (Sibieta and Snape, 2024). However, statistical proxies, such as child demographics, deprivation, and so on could be used, rather than effectively assuming all children aged 5 – 16 are equally likely to have special educational needs.

Question 5. Do you agree with the areas of need the government proposes to no longer include in the assessment through the Foundation Formula?

We neither agree nor disagree with dropping the fixed costs and historic debt servicing costs formulas. However, the currently stated reason for dropping the fixed cost element is fairly weak – as no other part of the system does explicitly account for fixed costs. One part of the system that may benefit (geographically) small councils though is the use of gross commuter flows and visitors in the client group for the Foundation Formula. As discussed further below, gross flows are likely to be larger relative to resident populations for small than large councils (because more commuting and visiting will be within-council, for larger councils). If, as we suggest, the government moves to using net commuter flows and weights commuters less than residents in the calculation of the client group for the Foundation Formula, this boost to (geographically) small councils would no longer be in place. And (geographically) small councils are not the same as the small councils for which the fixed cost element is most important (shire districts with small populations).

The government should therefore provide a stronger justification for removing the fixed cost element.

Question 6. Do you agree with the government’s approach to calculate the control total shares for the relative needs formulas?

We neither agree nor disagree.

The choice of control total shares to use is ultimately a decision about the relative need for spending on different services, and therefore judgements over expected service quality and efficiency. Using the average expenditure shares for different services by councils is one reasonable approach to setting the control total shares: these expenditure shares can be seen as the ‘revealed’ judgement of councils on where they see the relative need for spending on different services to lie. However, if the government believed councils were relatively under-prioritising some areas of spending and relatively over-prioritising others, it could choose different control total shares. These shares will also implicitly give more weight to the judgements of councils with higher expenditure in the year(s) of data used.

Looking ahead, the government should consider whether the control total shares should be fixed for a spending review period or change according to pre-planned profiles. Recent years have seen a growing share of spending go towards homelessness, home to school transport and social care, and using expenditure shares from the most recent year of published outturn data (2023–24) may already mean the formulas for these services are under-weighted relative to current council spending patterns. If the government aims to align control totals with current (and future) spending patterns it may therefore wish to consider projecting forward spending shares. If it does it should carefully explain the method used for its projections.  

The government should also consider the future robustness of its methodology for control totals as more authorities unitarise. In particular, it proposes to use information on how spending is split between shire counties and shire districts to split spending on services included in the Foundation Formula into upper-tier and lower-tier versions of these formulas for single-tier councils too (i.e. London boroughs, metropolitan districts and unitary authorities). As the number of two-tier areas declines, spending patterns in the remaining two-tier areas may become less representative of patterns of spending in England as a whole. Both more analysis and judgement may be needed to set appropriate control totals when the funding system is reset.

Question 7. Do you agree with the labour cost adjustment and rates cost adjustment equations in this chapter?

The IFS has undertaken a technical peer review of the Area Cost Adjustments (ACAs) and MHCLG officials are advised to refer to our review for feedback. Our overall assessment is that, taken together, the proposed approaches for the labour and rates cost adjustments are reasonable. However, there is scope for more robustness/sensitivity checking and for improvements to the specific equations and data used, both in the short- and longer-term. Key areas for improvement and further investigation include:

• Moving to using log hourly as opposed to log weekly earnings in the LCA equation;
• Assessing whether controls for industry and occupation included in the LCA equation are sufficiently robust to account for concentrations in particularly high-paid or low-paid sub-industries/occupations in particular council areas that could otherwise distort results;
• Investigating service delivery models to understand whether using wages from workplaces within a council area is appropriate, or whether significant numbers of employees of outsourced/commissioned services are from workplaces outside council boundaries;
• Considering whether other measures of earnings (for example median) are more appropriate for assessing relative labour costs for councils than mean earnings;
• Considering how LCAs relate to London weighting, and to national pay bargaining for in-sourced services;
• Investigating other approaches to account for the potential distortive effect of high-cost central business districts in certain councils that may not be reflective of wider property costs.

Question 8. What are your views on the proposed approach to the Area Cost Adjustment?

Our formal peer review of the ACAs also covered the accessibility and remoteness adjustments and the weightings of the different elements of the ACAs for different services. Again MHCLG officials are advised to refer to our review for feedback. Our overall assessment is that, taken together, the proposed approaches for the accessibility and remoteness adjustments and for weighting the various ACAs are reasonable. However, there is scope for more robustness/sensitivity checking and for improvements to the specific calculations and weights used, both in the short- and longer-term. This includes:

• Testing the sensitivity to alternative measures of remoteness, including the population threshold and journey times to a small set (rather than one) ‘large’ settlement;
• Considering whether the type of travel captured in the National Travel Survey is of the kind for which dispersal and traversal adjustments were intended;
• Investigating the delivery model of different services, including whether public transport and cross-council-boundary journeys are appropriate for inclusion in the measures of dispersal and traversal;
• Seeking more evidence on the nature and scale of additional costs councils face in relation to remoteness, to better understand the best way to proxy these and the weight to apply to this factor;
• Revising the application of different ACAs to certain types of spending listed in the Subjective Analysis returns.

We also note that while the weight for the remoteness adjustment is much lower than for the LCA, the remoteness adjustment factors vary by much more than the LCA – and in a way which to a large extent offsets variation in the LCA. Inclusion of the Remoteness factor therefore has a significant impact on the overall ACAs, especially for the Foundation Formula.

Question 9. Do you agree or disagree with the inclusion of the Remoteness adjustment?

We neither agree nor disagree.

We note, however, that there is a lack of evidence on the nature and scale of costs associated with Remoteness. For example, while remoteness may mean less competition between suppliers thereby raising costs, it may also mean less competition between purchasers of services (such as other councils commissioning from the same social care providers) thereby reducing costs. Better evidence would help determine whether to include such an adjustment, determine the weight to place on it, and design the approach to assessing remoteness (for example, as discussed above, is it distance to the nearest large town, or to several middle-sized towns, that matters most).

We also note that despite the relatively low weight on Remoteness, the significant variation in the Remoteness index means that it does have a significant bearing on many councils’ overall area cost adjustment for the Foundation Formula, especially in the most rural and most urban areas. For example, we estimate that the overall ACA for the Isle of Wight’s lower-tier Foundation Formula services would be 0.96 (meaning costs 4% below the national average) without the Remoteness adjustment, compared to 1.15 (meaning costs 15% above the national average) with the Remoteness adjustment. For Cornwall the respective figures are 0.99 and 1.13, and for North Devon, the respective figures are 0.98 and 1.12. At the other end of the spectrum, we estimate the ACAs would be higher without a Remoteness adjustment in more urban areas: 0.95 rather than 0.92 in Worthing, 0.92 rather than 0.89 in Blackpool, and 0.99 rather than 0.95 in Hastings. Impacts on overall assessed needs via the Foundation Formula would differ somewhat from this (as the ACAs are also used to adjust spending in the regression analysis underlying the spending needs formulas). But it is clear that the Remoteness adjustment is significant for some areas.   

Question 10. Do you agree with the government’s proposal to set a notional Council Tax level at the national average level to achieve the objective of full equalisation?

We neither agree nor disagree.

The appropriate choice of notional council tax rate and hence equalisation depends on subjective trade-offs between national consistency and local responsibility. Full equalisation would be consistent with the principles underlying the old standard spending assessments: that if all councils set the same council tax rate (at the average), they should be able to afford the same set of services (at least according to the relative spending needs formulas in place). This would be consistent with the idea that council services are ‘citizens’ rights’, that all people should have access to no matter where they live in the country. Conversely, if one believes that areas with many properties in higher bands and where residents typically pay more in council tax should retain some of the benefit to provide a greater quality and/or range of services or to charge lower tax rates, then one would want lower equalisation (and perhaps no council tax equalisation whatsoever). Other parts of the UK make different decisions on this: the notional rate is close to the average in Wales (100% equalisation), whereas it is closer to 60% of the average in Scotland (60% equalisation).

We also note that changes in the assumed notional council tax level have an important bearing on funding allocations. Ogden and Phillips (2025) shows that relative to assuming a rate equal to the national average, assuming a rate of 85% would substantially reduce funding for councils in more deprived areas and increase funding for councils in more affluent areas. In particular rather than seeing a bigger increase in overall funding over the next three years as under full equalisation (16% versus 12%) the most deprived 30% of upper-tier council areas would see a smaller increase in funding than the least deprived 30% of areas (13% versus 15%). Thus if the government wanted to avoid redistributing funding away from deprived areas, it would have to set a notional tax rate at or close to 100% of the average council tax rate.

Question 11. Do you agree with the government’s proposal to fully include the impact of mandatory discounts and exemptions in the measure of the taxbase?

On balance, yes. These policies affect the tax base of councils but are outside of their control.

Question 12. Do you agree with the government’s proposal to use statistical methods to proxy for the impact of Working Age Council Tax Support in the measure of taxbase?

On balance, yes. While councils are not required to put in place a Working Age Council Tax Support (CTS) scheme, there is an expectation that they will, and doing so will differentially affect the tax bases of different councils. Moreover, in the absence of a major data collection exercise it is not possible to directly assess the cost to each council of applying a common notional Working Age CTS system. It would also not be good practice to use each council’s actual CTS system as doing so would distort their incentives to put in place a more generous system: doing so would reduce their assessed revenue-raising capacity, and so increase their grant funding. Rather than use a statistical proxy, it would be possible to use data from 2012–13, when a common system was last in place across England. But this would be 14 years out of date by next year. Given this, a more up-to-date statistical proxy seems preferable.

Question 13. What are your views on the proposed statistical approach to proxy for the impact of Working Age Local Council Tax Support?

The variables used to predict the impact of Working Age CTS on the council tax base (a council’s average Index of Multiple Deprivation (IMD) score, and the share of the working age population in the total population) are not unreasonable: one would expect the cost of means-tested CTS for households headed by working age adults to be higher in areas with higher deprivation and a larger fraction of working age adults.

However, the IMD reflects patterns of income deprivation affecting pensioner households, as well as other dimensions of area-level disadvantage, such as crime rates, access to local amenities and housing qualities, as well as low income among working-age adults. It may be better to use alternative measures more closely linked to low income among working-age adults and hence eligibility for Working Age CTS, including the income and/or employment sub-domains of the IMD, or local caseloads for means-tested working age benefits.

In addition, the importance of households headed by working age adults to the council tax base may be better proxied by a household measure (rather than the share of working age adults in the population). One option would be to use a household-based measure which can be straightforwardly computed from Census 2021 results: specifically, the proportion of Household Reference Persons (HRPs) who are aged 16-64, as a proportion of HRPs who are aged 16+. This is likely to be the closest measure available in current official statistics. An alternative, available from the Office for National Statistics’s (ONS’s) mid-year population estimates, would be to use the proportion of residents aged 18 to 64 as a proportion of those aged 18 plus (instead of all ages). In practice, these two alternative measures are highly-correlated but the latter would have several advantages: it is available for each year, the ONS produces sub-national population projections, and it would be easy to substitute this into MHCLG’s existing model.

Finally, the generosity of CTS schemes may vary in systematic ways across councils that could lead to biases in the statistical proxy for costs under a common notional scheme. For example, when CTS was localised, all areas faced the same overall proportional cut in CTS funding (10%) but they were obliged to maintain the generosity of pensioner CTS. Previous IFS analysis has found that as a result, those for whom pensioners were a bigger share of their overall caseload cut back the generosity of working age LCTS by more (Adam et al, 2019). This means CTS schemes may differ systematically between areas with high and low shares of working-age recipients. Failing to control for differences in schemes’ designs in the regression may therefore give biased results. The IFS has historically been able to access databases of CTS scheme details from the New Policy Institute and entitledto, and Policy in Practice has also modelled the various localised CTR schemes in place across areas in recent years (Policy in Practice, 2025). MHCLG could seek to use these or similar data for further exploratory analysis and in the longer term could incorporate controls for CTS scheme design in the regressions underlying its statistical proxies (to strip out, rather than to utilise, this information).

Question 14. Do you agree with the government’s proposal to assume that authorities make no use of their discretionary discount and premium schemes in the measure of taxbase?

We neither agree nor disagree.

As with CTS, it would not be good practice to use each councils’ actual discretionary discounts and premiums as doing so would distort their incentives to make more use of discounts and less use of premiums in the future: doing so would reduce their assessed revenue-raising capacity and so increase their grant funding. Assuming zero use of these discounts and premiums is one reasonable choice and is probably the most administratively straight-forward.

However, it is likely that the yield (or cost) of potential discretionary premiums (or discounts) differs around the country in ways that are outside authorities’ control. If these premiums (discounts) have been set to reflect the cost (savings) of authorities in relation to dealing with, for instance, second home owners or empty homes, then it may be appropriate to ignore them: for example, if they reflect variations in cost of service provision, or correct for the negative externalities associated with particular types of residential property use. However, if we believe differences in yield reflect real differences in councils’ revenue-raising capacity, it would be appropriate to consider using non-zero notional discretionary premiums and discounts. These could be based, for example, on estimates of each authorities’ yield (costs) from a scheme that reflected the average premium (discount) levels across the country. This may be particularly important in the longer-run if councils’ powers are utilised heavily, and the yield (costs) are significant in scale. Accounting for ‘average’ discounts and premiums could be difficult though, as it would either require councils not making use of these powers to estimate the number of properties that would be subject to discretionary premiums and discounts if they were in place, or require a statistical proxy to be used instead.

Question 15. Do you agree with the government’s proposal to apply a uniform Council Tax collection rate assumption to all authorities?

We neither agree nor disagree.

We note, however, that collection rates do systematically vary based on characteristics that are largely outside of the control of councils: the incomes of local residents, and the frequency with which households move.

We also note that if a uniform collection rate is assumed, the level that rate is set at will matter for allocations. In essence assuming a lower uniform collection rate is akin to setting a lower notional Band D rate because less revenue is assumed to be generated by a given Band D rate. This means a lower collection rate would redistribute funding away from areas with a share of revenue-raising capacity below their share of assessed needs, i.e. deprived areas.

Question 16. Do you agree with the government’s proposal to split or allocate the resource adjustment in multi-tier areas according to the average share in Council Tax receipts in multi-tier areas?

We neither agree nor disagree.

The approach is reasonable, as basing funding allocations on the national average tier splits will minimise the extent to which the assumed tier split differs from actual practice in most areas. However, local tier splits may differ from this national average substantially. We provided further evidence on this point as part of our technical peer review for MHCLG. Especially for those councils whose share of council tax is much lower than assumed, MHCLG should consider whether more flexibility on council tax referendum limits would be appropriate.

Question 20. Are there any further flexibilities that you think could support local decision-making during the transitional period?

As set out in Phillips (2024) and Ogden and Phillips (2025), the significant reductions in funding that will be faced by some councils, could be addressed in part by giving councils greater flexibility over council tax levels.

Question 22. Do you agree or disagree that we should move local authorities to their updated allocations over the multi-year Settlement?

We neither agree nor disagree.

We note, however, that the choice of whether to phase in updated allocations and how quickly to update them is a trade-off between the timeliness and the stability of funding allocations. More rapid transition would mean councils move more quickly to allocations based on updated assessments of their need, but would mean bigger year-to-year changes in funding that councils may find hard to deal with. Ogden and Phillips (2025) shows that if the reforms were introduced immediately with no phasing, one-in-ten councils would see a reduction in overall funding (including from council tax) of 14% or more, with some seeing cuts of well over 30%. Even with 3 years of phasing (and increases in council tax, business rates revenue and the total quantum of grant funding over this period), a quarter of councils would face a real-terms cut in funding over the period (while another quarter would see a real-terms increase of 12% or more). Together with councils, the government must make a judgement about what pace of change it is feasible for councils to handle.  

Question 23. Do you agree or disagree that we should use a funding floor to protect as many local authorities income as possible, at flat cash in each year of the Settlement?

We neither agree nor disagree with this level.

We note, however, that in the absence of a funding floor, some councils would face real-terms cuts in funding over the next three years in excess of 30%, which is reduced to 11-12% by the proposed funding (lower) funding floors.

We also note that because some councils on funding floors could still be receiving around 20% more funding than their ‘target’ allocation in 2028–29, the decision of what happens to the floors in the next Spending Review is important. Will the floors remain frozen in cash-terms at these levels? Or will they be changed?

In addition, we note that recent years have seen councils face significant demand and cost pressures. A cash-flat funding floor would likely necessitate some very difficult choices in affected councils; lower floors for a subset of councils would entail even more difficult choices. This is why we suggest that the government consider giving affected councils greater flexibility over council tax levels. Alternatively, it could consider setting a higher floor (e.g. real-terms flat), noting that this would significantly raise the cost of the floor.

Question 24. Do you agree or disagree with including projections on residential population?

We neither agree nor disagree.

We note, however, that populations of different areas have grown substantially differently in recent years. Provided that population projections are sufficiently accurate, using them in future years would help ensure funding is closer to spending needs, while not distorting councils incentives related to population (as fixing the projections in advance means councils’ actions will not affect their funding allocations). Ogden and Phillips (2025) shows that, relative to accounting for projected population increases from the Office for National Statistics, the 10% of council areas with the fastest projected population growth would see 1.4% less funding in 2028–29 if that projected growth were not accounted for, while the 10% with the slowest projected population growth would see 1.4% more funding.

We also note that population projections are on the borderline of being sufficiently accurate to be appropriate to use in allocating funding. In particular, statistical analysis shows that each 1 percentage point faster projected population growth in the 2012- and 2014-based subnational population projections was associated with approximately 0.5 percentage points faster growth in (revised) population estimates. This is the cut-off point below which, on average, it is better to assume the same growth rate, rather than account for differences in projected growth rates. And projections only explain between 10% and 20% of the variation in subsequent estimated changes in populations. To some extent this weak performance reflects the fact that projections were especially poor for London: excluding London, the projections (especially the 2012-based ones) were substantially more closely linked to subsequent estimates.

Given this, unless there is evidence that population projections are now more accurate (for example due to use of administrative data to improve estimates), the case for accounting for differences in projected population growth is not clear-cut.

Question 25. Do you agree or disagree with including projections on Council Tax level?

We neither agree nor disagree.

We note, however, that if the government wants to maintain full equalisation of revenue-raising capacity, it should account for increases in tax rates: areas with higher tax bases benefit more from a given percentage tax rate increase. Ogden and Phillips (2025) shows that, relative to assuming an increase in rate of 4.3% across all councils (the Office for Budget Responsibility’s forecast for average increases in council tax), taking no account of future increases in the average tax rate would redistribute significant funding from areas with relatively low revenue-raising capacity and high needs to areas with relatively high revenue-raising capacity and low needs, e.g. from deprived to more affluent areas. After 3 years, assuming the average rate did indeed increase by 4.3% a year, the notional rate would fall to 87% of the average, which would be sufficient for deprived councils to fare less well, on average, from the reforms than more affluent councils.

We also note that assuming an average of 4.3% across all councils would be an increase exceeding what shire district councils can make. The government may therefore wish to set different assumed rates for different types of councils that are at or below their referendum limits.  

Question 26. Do you agree or disagree with including projections on Council Tax base?

We neither agree nor disagree.

We note, however, that if the government wants to maintain full equalisation of revenue-raising capacity, it should account for growth in tax bases, not just increases in tax rates: areas with higher tax bases to begin with benefit more in terms of revenue from a given percentage growth rate in the base, as well as from a given percentage tax rate increase. Ogden and Phillips (2025) shows that, relative to assuming a growth rate of approximately 1.0% across all councils, not accounting for tax base growth would slightly reduce funding for deprived areas (where revenue-raising capacity is typically relatively low and needs relatively high) and slightly increase funding for more affluent areas (where revenue-raising capacity is typically relatively high and needs relatively low).  

We also note that to the extent that council tax base growth is related to population growth, accounting for projected population growth and not accounting for projected tax base growth (or only accounting for a common growth rate across the country) would benefit areas with rapid projected population and tax base growth: they would gain on the spending needs side, but the additional revenues they could raise would not be accounted for on the resource side. Conversely, those with slow growth would tend to lose out.

Question 28. Do you agree with the proposed above approach to determining allocations for areas which reorganise into a single unitary authority along existing geographic boundaries?

We neither agree nor disagree.

We note that while this approach could be adopted in the short-term, when funding allocations are reset, the new unitary authorities will have to move over to formula-based allocations, subject to any transitional arrangements put in place at future resets, to ensure consistency across councils. This is because design of the area cost adjustments and the calculation of the client group for the Foundation Formula (including gross in-commuters) means that the formula-based assessed need for a new unitary authority would not be equal to the sum of its former two-tier councils (it would tend to be lower given lower gross cross-border commuting).

We also note that moving immediately to new formula-based allocations would lead to gains and losses for not only the new unitary but all other councils. This could be seen as undesirable as it would reduce certainty over funding for all councils, and could distort incentives for councils to amalgamate into unitary authorities.  

Question 29. Do you agree that, where areas are reorganising into multiple new unitary authorities, they should agree a proposal for the division of existing funding locally, based on any guidance set out by central government?

We neither agree nor disagree.

We note that while this approach could be adopted in the short-term, when funding allocations are reset, the new unitary authorities will have to move over to formula-based allocations, subject to any transitional arrangements put in place at future resets, to ensure consistency across councils.

We also note that moving immediately to new formula-based allocations would lead to gains and losses for not only the new unitary but all other councils. This could be seen as undesirable as it would reduce certainty over funding for all councils, and could distort incentives for councils to amalgamate into unitary authorities.  

Question 31. Do you agree with the proposed framework outlined at paragraph 11.2.3 for assessing whether a fee should be changed?

These are useful issues to consider. However, as briefly described in Phillips (2024), the government should also consider the features of the ‘market’ for specific services. On the one hand, where councils face competition for the provision of service from the private sector (such as for gym facilities or pest control services), such competition should constrain councils from setting excessive fee levels. On the other hand, where councils have a formal monopoly on the provision of services (such as licensing and planning fees), continued central setting of fees makes sense to avoid excessive fees, especially given that a large part of such fees may fall on non-residents – and hence non-voters. For services where there is some but limited competition, some form of intermediate regime may be appropriate: e.g. limits based on cost recovery (or some percentage of cost recovery), and requirements for supporting evidence for how cost recovery has been calculated.   

Question 41. Do you believe that the components of daytime population inflow should be weighted to reflect their relative impact on demand for services?

Yes. It is not reasonable to assume that the demand for services by commuters and visitors is the same as residents of a council area. These weights could be based on judgement, informed by evidence from councils about the users of their services.

As well as weighting, there should be a move from using gross commuter flows to net commuter flows. By using gross commuter flows, assessed need is higher in combinations of council areas with lots of flows across council boundaries, than in areas where residents commute within their council area. In turn this means higher assessed need in areas where councils are small and where residential and work locations differ more, because there will be more cross-council commuting in that instance. Unless one believes that cross-council commuting significantly increases aggregate demand for services above and beyond commuting within council areas, this is undesirable. Using net commuters would not have this effect, and would instead shift demand between councils based on where people commute from to where they commute to, without inflating aggregate demand for services.

A move to using net commuters should take place at the same time as weighting commuters and visitors. Using net commuters while commuters are given a weight of one would effectively assume those commuting across council boundaries do not demand any (Foundation Formula) services in their council area. This would be unreasonable. Using gross commuter flows offsets this issue. Thus these two offsetting issues (weighting and moving to net flows) should be addressed together.

References

Ogden, K. and Phillips, D. (2025) Fair Funding Review 2.0: the impacts on council funding across England, IFS report, https://ifs.org.uk/publications/fair-funding-review-20-impacts-council-funding-across-england

Phillips, D. (2024) Reforming local government funding in England: the issues and options, IFS report, https://ifs.org.uk/publications/reforming-local-government-funding-england-issues-and-options.

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