New analysis by the Institute for Fiscal Studies (IFS) reveals that a quarter of English councils are expected to face real-terms cuts in funding over the next three years under proposed reforms to local government finance — with inner London boroughs among the hardest hit.
The reforms, detailed in a government consultation closing next week, aim to overhaul how central government grants are distributed. According to the IFS, the new system would more closely align allocations with each council’s spending needs and revenue-raising capabilities, improving transparency in the process. However, the shift would also result in major disparities, producing clear winners and losers across the country.
Major Inner London Cuts Expected
If implemented immediately, the changes would reduce funding by a total of £2.1 billion for 186 councils, many located in London, the south east, and south west. In contrast, 161 councils, largely in the Midlands and the north, would see equivalent funding increases.
Inner London boroughs such as Camden, Wandsworth, Westminster, Hammersmith and Fulham, and Kensington and Chelsea face real-terms cuts exceeding 10%, even if they raise council tax to the maximum allowed each year, the IFS found.
Despite plans to phase in the changes over three years — during which overall council funding from central government, business rates, and council tax is expected to rise by 15% — the IFS estimates that around one in four councils will still experience a decline in real-terms funding.
Why Inner London is Losing
According to Kate Ogden, Senior Research Economist at the IFS, inner London boroughs are disproportionately affected due to:
- Lower-than-average council tax rates
- Population declines, which reduce funding needs under the new formula
Ogden suggested that while the reforms are designed to correct overfunding in some areas, the government should consider granting additional flexibility to affected councils — particularly in inner London — to raise council tax rates and mitigate the impact.
“The changes will sting for those councils that are assessed to currently receive too high a share of the funding pot,” she said.
Winners: Outer London and the North
Some outer London boroughs, along with councils in the East Midlands, Yorkshire, and the Humber, are among the biggest winners under the new formula. These regions are expected to see real-terms gains in funding, based on revised spending needs and revenue capacity.
Interestingly, councils in the most deprived areas are not expected to gain significantly more than councils in middle-income areas — contrary to earlier expectations. The IFS attributes this to the fact that previous funding rounds had already boosted their resources.
Meanwhile, rural areas are likely to fare better than expected, due to a new proposal that would account for the higher costs of delivering services in remote communities. As a result, the 10% most sparsely populated areas are forecast to receive funding increases in line with the national average.
The final decision on implementing the funding reforms will follow the closure of the government consultation. While aimed at fairness and efficiency, the proposals signal a major financial reshuffling, with some councils needing to make tough budget decisions in the years ahead.
