Latest on local government finance and devolution in England: Navigating the noise

Following the Government’s Devolution Priority Programme (DPP) announcement and the final Local Government Finance Settlement, experts from LGIU’s Local Democracy Research Centre have dissected what this week’s pivotal announcements mean for the sector and ask you to share your views and get involved in our 2025 State of Local Government Finance research.

After a period of intense speculation, this week saw successive major announcements on financial futures, devolution, and local government reorganisation which illustrate the UK government’s ambitious agenda for rapid and extensive change in the sector. On Monday, the final local government finance settlement was released, swiftly followed on Wednesday by the announcement of the councils admitted to the Devolution Priority Programme.

A lot is happening, and quickly. There’s much noise and many different views across the sector but LGIU remains committed to providing a measured view of the state of local government. To this end, our 2025 State of Local Government Finance survey, which has just opened for responses, will offer a vital reflection of sector sentiment.

Turning first to the final finance settlement, we see that, as expected, it does not represent a major deviation from the provisional statement set out in December 2024. One exception is that the 6.0% cash-terms increase in core spending power announced before Christmas has now been increased to 6.8%. However, a closer look reveals that much of this increase stems from the inclusion of grant funding for Employers’ National Insurance Contributions (NICs) in the calculation of councils’ core spending power. This is misleading and reminiscent of past attempts by Whitehall to overstate the significance of funding increases.

This grant is not an ‘uplift’ for local authorities – it simply offsets new costs incurred from a recently announced government policy. Moreover, the £515m that it represents is smaller than estimates of the size of NIC increases facing councils, and does not account for rising costs associated with externally contracted service providers. As a result, this settlement fails to adequately address both the direct and indirect costs associated with higher NICs.

Having said that, there are aspects of the settlement that are encouraging. The increase in councils’ core funding is welcome, particularly targeted uplifts in areas such as homelessness and children’s services – which our research from 2024 highlights as the most acute pressures on local authority budgets. However, the above-inflation surge in demand for these statutory services means that additional allocations will be swallowed up almost immediately by councils facing increased costs for temporary accommodation, social care and SEND provisioning.

Furthermore, a significant proportion of this increase in core spending power is provided by council tax, resting on the assumption that authorities will increase council tax by the maximum available, as the vast majority have done over recent years. Additionally, the government’s relaxation of rules for council tax does indicate that it is aware that the funding increases will be insufficient for many areas.

Local authorities do not want to increase the tax burden on the public. However, sustained reductions in core spending power, together with an extremely limited fiscal arsenal at their disposal, mean that almost all local authorities will have to raise council tax if they hope to meet the costs of service provision.

We have argued previously that a much broader set of revenue-raising fiscal options should be made available to local government. Our work comparing local government finance systems around the world shows that if there is a basket of fiscal options available at the local level then the system is more resilient and flexible. Where options are limited many areas will struggle. As the government consults on longer-term changes to council funding, this is a case we must continue to press.

Although the finance settlement reiterates the government’s commitment to reform, the changes that the sector most wants – multi-year financial settlements, a review of relative needs and resources, and reform of business rates – are still a year away and, for many councils, that could be a long way.

Now to the second hotly anticipated announcement this week – the response from the government to proposals for fast-tracking devolution. As we might expect there are winners and losers here.

Deputy Prime Minister Angela Rayner announced in the House of Commons that six areas, fewer than half of those that submitted proposals, would be included in the government’s Devolution Priority Programme:

1. Cumbria
2. Cheshire & Warrington
3. Norfolk & Suffolk
4. Greater Essex
5. Sussex & Brighton
6. Hampshire & Solent

Consultations will launch shortly and the government will give its backing to moving ahead on devolution arrangements in these areas on an “ambitious timetable”, culminating in mayoral elections in May 2026.  Crucially, elections will be delayed from this May across the county councils involved, as well as in Surrey. Rayner also announced legislation to set up two new mayoral authorities in Greater Lincolnshire and Hull and East Yorkshire, as well as new combined county authorities in Devon and Torbay, and Lancashire.

In addition, there is now a formal invitation for two-tier areas, including smaller neighbouring unitary authorities to submit proposals for structural reorganisation. The government is clear that it has a vision for simplifying the structure of local government as part of its move towards universal coverage of strategic authorities across the country with directly elected mayoral leadership.

This is the first step in a radical redrawing of local government – the largest shift we’ve seen in England in over 50 years.

It is worth noting the speed and scale of the government’s ambition, as set out in the Devolution White Paper at the end of 2024, and the development of legislation that is forthcoming. Our friends and partners at Browne Jacobson have looked at the detail that will need to be incorporated and processed to get this lined up. There is a lot and it will take a great deal of government capacity and resources to get it right.  Councils have moved fast to get to this point and there has been a notable spirit of pragmatism and collaboration but many political, financial and logistical obstacles remain to be overcome.

It is disheartening, to say the least, for many councils that worked through Christmas, reaching consensus on complex and contentious issues like the delaying of elections, to get proposals ready. To be marched up the hill at such pace and then marched down again with little explanation or rationale around the decision will feel familiar to many, who have experienced the merry-go-round of levelling up and devolution bids over the last few years.

In our paper How can 10 years of English devolution inform our response to the UK Government’s programme for Devolution?, published just ahead of the White Paper last year, we argued that there is an opportunity to break with the pattern of centralisation in English local government. To do that, we need to see:

• clarity of purpose;
• a solid constitutional foundation for local government;
• metrics, evaluation and data to measure progress and build innovation;
• a functional funding system as an essential component of devolution;
• a clear vision for towns and rural areas, as well as city-regions; and
• greater dialogue with local leaders as well as combined authority mayors.

None of these appear to be forthcoming in the government’s plans for the sector. Though the pace and scale of change are radical, there is still a lot of work to be done if we are to recalibrate the central/local relationship..

At LGIU, we are exploring the impact these measures are having on the confidence of local leaders and the decisions they will take over the next financial year. We have just opened our 2025 survey on the sustainability of the local government finance system. This will provide the first nationwide assessment of what the sector really thinks about the trajectory of change taking place across local government.

Over the last 12 years, we have been working with council leaders, chief executives, chief financial officers and cabinet members for finance to gauge the financial health of the sector. Last year, our survey revealed critically and unprecedentedly low confidence in the sustainability of local government finances, with more than half of councils indicating a likelihood of issuing a section 114 notice in the next five years.

One year later, we eagerly anticipate responses from council representatives. Have developments over the past year addressed concerns, or will we again see a familiar, dismal outlook for the sector?

Furthermore, this is the first year we have conducted this survey so soon after a change in government and we will seek to ascertain how – if at all – this has impacted an increasingly strained central-local relationship.

The survey also asks vital questions about the effect that devolution and reorganisation plans will have on the sector’s finances: is there a clear strategy; will it help to solve some of the big challenges councils face; and is the government working with councils to bring the plans to fruition?

As well as reporting back on this research, LGIU will work with and support our members in local government through this journey over the longer term. We will provide the information and analysis, as well as the connections and shared experiences to help the sector navigate a period of upheaval, disruption and change.

And, don’t forget that if your council is an LGIU member, you and your teams can benefit directly from our 2025 State of Local Government Finance research as we will be hosting an exclusive LGIU member-only briefing on Thursday 6 March (10:00-11:00am) to discuss the survey results and what they mean for the sector. Be sure to book your spot here.