Fair Funding 2.0 – LGIU’s consultation response

Summary: The Fair Funding 2.0 review aims to modernise local government finance and align funds with need, but falls short of full reform. While proposed changes may address inequalities, total resources will remain insufficient. The necessary shift towards sustainable local government finance will require ongoing needs assessments, broader fiscal devolution, and stronger local democracy to ensure accountability and resilience – all of which are conspicuously absent in this consultation.

Overview

The Fair Funding 2.0 review is a necessary step towards a sustainable and resilient system of local government finance that works for communities. However, it does not get us the whole way there. The formulae address many of the inequalities in the current grant allocation process, and help to ensure that funding matches need more closely. The review meets its own worthwhile objectives in all but a few small ways – outlined below. For most councils, it will be a welcome modernisation.

The review will not, on its own, repair the system of local government finance in England. A more equitable distribution of funds will help, but the problem is not only that funds are concentrated in more affluent areas; it is that the total resources within the system are inadequate for dealing with the demands on local government.

Our response highlights areas where the review leaves work to be done. Council tax equalisation will help get funds to the right places, but it does not change the inadequacies of council tax as a mechanism to raise revenue for councils. The business rates changes are welcome, but raise the question of why or if the government still intends to use the funding system to incentivise growth. This review will help, but it must be both an ongoing process of repeated needs assessments, and part of a larger review of how council finances should operate moving forward. The whole system is under immense strain, and shifting money around that system will not ultimately solve the problem. Additional fiscal devolution is essential for embedding resilience and flexibility within the system.

Finally, there is the most important question: where is local democracy in this review? This absence is most prominent in the questions asking about the statutory duties on local councils, or what safeguards are in place to prevent councils from overcharging fees or misusing fiscal flexibilities. Councils are first and foremost accountable to their electorate, and the ever-diminishing capacity that councils have to make decisions aligned with the preferences of their local electorate is an essential part of why council funding is in need of reform in the first place.

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

The simplification of the grant landscape is welcome. Our finance surveys over many years have demonstrated that councils support the consolidation of existing grants and the end of competitive funding bids. In February 2025, our survey of leading figures from 150 unique English councils found that 77% were in favour of ending competitive funding bids.

Simplification will, if implemented with due consideration of council needs, help to ensure that local governments spend less time and resources managing different grants. Ideally, the simplification of the grant landscape would also take into account grants from other government departments (such as DEFRA) to further reduce the burden on local authority resources. The model of integrated settlements across combined authorities should offer a useful template for this work.

Crucially, the consolidation of funds should lend itself to more flexibility on the council side to determine how grant income is spent, with the long-term aim of minimising ring-fencing and directed spend.

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

In this section the government’s position is outlined as: “our approach does not seek to capture absolute need. Instead, our wider assessment aims to capture the relative need of local authorities, including both fixed and variable cost differences.” Within this framework the approach taken appears sensible.

However there should be an assessment of absolute need to accompany this fair funding review, and an attempt to discern whether the current revenue-raising options available to councils can make up the difference between their grant income and their absolute need.

The challenge of local government’s financial sustainability is not only a question of where funds are allocated within the system, but also about whether the total funds within the system are adequate for performing every task local government is expected to complete.

In the current climate of council funding, it is increasingly important to be clear about what we expect councils to do, whether they have the capacity – through a combination of grant income and revenue-raising powers – to perform their statutory and democratic functions, and what changes are needed to embed their resilience in the long term.

In the longer term, there are unanswered questions about how council service delivery can be made less expensive, and the relationship between central and local government in the delivery of services, particularly social care, that this funding review does not seek to answer. Answering these questions through future consultations and policy changes will be essential for understanding the long-term sustainability of councils and the future direction of financial reform.

Question 9: Do you agree or disagree with the inclusion of the Remoteness Adjustment? Do you have any evidence to support or contradict the theory that rural areas face additional costs due to separation from major markets?

Several of our rural member councils have raised the specific difficulties they face due to separation from major markets, alongside the additional complications of larger geographical areas. One particular example is in the sourcing of staff across all service levels, which is more difficult in remote areas that tend to have a smaller working-age population.

A similar complication has also been raised by our coastal councils, who have both overlapping and distinct cost pressures caused by their geography. Due consideration ought to be made to how coastal local authorities will be affected by the proposals, particularly coastal local authorities that are not also remote given they will not benefit from the remoteness adjustment but may also have additional costs due to their geographies.

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?

The principle of council tax equalisation is a proportionate and useful way to assure a minimum service standard in local authorities across England. Full equalisation across the country is one potential solution to the problem of differing capacity to raise council tax, although partial equalisation or regional notional council tax levels could also be considered. In our view, full equalisation is a reasonable objective if councils will also be given other means by which to raise revenue through enhanced fiscal devolution.

Council tax is an imperfect tool for council revenue raising, and the future of local government finance should be one in which council tax itself is reformed.

Given that setting council tax levels (within the thresholds established by referendum principles) is one of the few fiscal freedoms councils currently have that can raise significant revenue, there is an unanswered question about how full equalisation impacts what influence residents can have on their local councils’ financial decisions. If a resident population decides that they do or do not want higher spending, how does a funding regime with full equalisation (and increases priced into the spending review) allow for this?

LGIU agrees wholeheartedly with the statement: “[t]he strength of Council Tax bases is usually down to several factors, including historical house prices and land values, and, in general, is not an outcome of the decisions that local authorities make.” However, another conclusion that can be drawn from this assessment is that councils should have a larger number of mechanisms for raising income that are dependent on the democratic decisions of residents, and that either the design of council tax, or the range of local revenue-raising options for local authorities should be reassessed with this in mind.

In our international research, we have found that in jurisdictions like Germany, where each federal state has its own method for equalising between local governments, equalisation is aimed at ensuring a minimum level of service provision – taking into account capacity to raise income, and local governments have significantly more freedom to go beyond the minimum level of service provision by setting their local taxes and charges accordingly. These methods are common in countries with resilient local financial systems, such as Germany, Japan or Italy.

Question 17: Noting a potential trade-off of an increased levy charged on business rate growth for some local authorities, do you agree that the level of Safety Net protection should increase for 2026-27?

LGIU does not have a view on these reforms to business rates, but would like to question whether the funding formulae, with the assumption of regular business rates resets, are aimed at incentivising business growth through funding allocations. It is no longer clear whether councils with high levels of economic development can expect to retain the proceeds of that growth or if that is the government’s objective.

We would suggest that the introduction of Mayoral Strategic Authorities represents a new opportunity to introduce further devolution of mechanisms that could allow councils or strategic authorities to benefit more from growth in their areas. Visitor levies are one example for a specific industry, but a variety of local taxes, charges and reliefs should be considered to ensure that councils can raise revenue in ways beyond business rates.

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

The primary flexibility that should be considered is whether councils that are most likely to see their grant income reduced should be able to increase their council tax beyond the referendum principles. Levels of council tax should be locally determined, and this flexibility could be used to offset losses in grant funding.

Equally, given that many (although not all) of the councils that will see their grant funding reduced as a result of the new grant allocation formulae are councils in economically prosperous areas, it is worth the government considering how that prosperity can contribute to council funding in a way that allows these councils to offset their potential losses. This could be alongside the Mayoral Strategic Authorities, and may involve new devolved taxes or further flexibilities on existing powers.

Question 21:What are the safeguards that would need to go alongside any additional flexibilities?

The removal of referendum principles may result in significant divergences in council tax rates across councils over time, which could, eventually exacerbate the regressive nature of the tax.

In order to offset the potential negative effects of removing or extending council tax referendum limits, the government should also commit to a redesign of local property tax funding away from council tax, taking into account international best practice (and examples from Wales and Scotland), and a diversification of local authority revenue raising powers to avoid reliance on council tax.

Fiscal devolution is essential for embedding the autonomy of local government and improving their financial resilience. As the devolution programme moves forward, the government should consider what new fiscal powers could be introduced for local authorities, particularly in terms of the configuration of powers between local and strategic combined authorities.

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? Please provide any additional information, including on: The level of protection or income baseline, considerate of the trade-off with allocating funding according to the updated assessment of need and resources; and the possible impacts on local authorities’ financial sustainability and service provision.”

We believe that a funding floor is an essential measure to protect local authorities’ income. However there are three issues with the funding floor as it is currently designed. First, it is a flat cash floor, which means it is vulnerable to inflationary shocks. Second, the end of the transitional period represents a cliff edge for those councils affected by the decrease in funding. Finally, the funding floor mechanism may slow down the transition of funds towards the authorities that are the net beneficiaries of the Fair Funding Review.

Because of these three risks, we believe that the funding floor should be combined with increased flexibilities on council tax, and guarantees about what happens to affected councils after the end of the transitional period. We also believe that the funding floor should be funded with additional resources from outside the settlement, to ensure that it does not result in the overall movement of resources slowing down.

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 agree that this allocation works to reallocate funds to successor authorities in areas where the existing geographic boundaries are unlikely to change. However, a significant number of the interim LGR proposals (e.g: Plymouth, Gloucestershire) include proposals to review principal area boundaries. In these cases, the government should provide clear guidance about how to reapportion funds as a matter of urgency to help councils in their long-term financial forecasting during reorganisation. In our view, failure to take this into account risks jeopardising the financial certainty that is the objective of the fair funding review.

Question 30: Do you agree that the government should work to reduce unnecessary or disproportionate burden created by statutory duties? If you agree, what specific areas of statutory duties impose significant burden without significant value for residents? Please provide any examples of changes you would like to see to statutory duties, being as specific as possible.

The cost burden of statutory duties on councils is a significant cause of many of the greatest pressures on councils that have grown over the last 15 years. For example, the changes in SEND obligations have caused a large increase in the financial burden on local authorities, as have the changes to home-to-school transport responsibilities and temporary accommodation costs. Two changes, both structural, would be more effective in tackling these burdens than examining them on a case-by-case basis.

First, there should be a comprehensive assessment of the current statutory duties placed on local authorities. Our international research has demonstrated that, in comparison to many democracies, the relationship between and corresponding responsibilities of local and national governments in England are opaque and vague. There are areas of significant overlap, and changes are made through ordinary legislation, meaning that statutory duties, and the work of councils more generally, are difficult for residents to understand and that new burdens can be added at any time – potentially with long downstream effects that last beyond new burdens funding. A useful place to start would be to understand exactly what the statutory duties of local authorities are, and have a place where this is published. The period of Local Government Reorganisation offers an opportunity to do this, given that a single type of unitary local government means that responsibilities will be broadly the same across councils.

Second, there should be a forum, defined in statute, between local authorities and central government, where any changes to local government’s statutory duties can be discussed in the open before changes are made. We see similar institutions in Italy and within the German states, to ensure that there is significant consultation of local authorities whenever a new duty is considered. This helps to reduce the chance of unfunded mandates, which this fair funding review will help to alleviate, but also to avoid repetition of the same escalation of unfunded mandates that allowed the previous funding formula to become unfit for purpose.

Question 33: Do you agree that the measures above provide an effective balance between protecting charge payers from excessive increases, while providing authorities with greater control over local revenue raising? Please provide a rationale or your response. We are also interested in any further mechanisms which could be applied to fees that are updated or devolved, that will help strike a balance between those objectives.

Although we take no view on the exact range of fees or charges that should be available to councils, we do believe that local democratic accountability is the mechanism that is designed to protect residents and that in general councils are in a better position to determine proportionate fees in their areas than central government.

If the government is set on providing maximum fees, in other jurisdictions we have seen examples of multipliers that councils can make use of, where the central or state government sets a basic rate and then local governments have the power to set multipliers on that fee (for example, from 0.5 time to 1.5 times).

Question 42: Do you agree with/have any comments on the design of the Foundation Formula?

Our members, particularly in inner-London boroughs, have raised concerns about the use of the Index of Multiple Deprivation as the measure of deprivation, given that it does not take into account the proportion of income spent on housing costs. We note the government’s commitment to updating the IMD in the consultation document, which appears to be a useful opportunity to tackle this discrepancy. However, it does mean that it is hard to draw conclusions about the long-term effect of the use of IMD in the foundation formula.