Returning to the fold: initial reflections on the Fair Funding Review 2.0

Introduction

On 20 June 2025, the Government published a consultation titled The Fair Funding Review 2.0. This consultation proposed significant changes to the grant funding system for English local government. These are expected to take effect on 1 April 2026, for the 2026/27 financial year.

Much ink has been spilt on proposals for reforming local government funding in England in the 2010s and 2020s, though it rarely registers on the UK’s political radar. This poses a question in relation to whether the Government’s consultation is likely to have any long-term impact, and if so, how significant will it be?

The return of standard practices

Many of the proposals in the consultation will bring the English funding system into line with standard practice in other OECD and EU countries. And in many ways they will start to put England back onto its pre-2013 footing and reignite some of the intentions underpinning the ‘original’ Fair Funding Review, launched in 2016.

From 2026/27, grant funding will be allocated to English local authorities using a three-part system. This will consist of an assessment of relative need, based on socio-economic indicators; an area costs adjustment, taking into account local variations in the costs of providing services; and a resource assessment, measuring the capacity of each council to raise council tax. This methodology will apply to the Revenue Support Grant (RSG), the core general un-ringfenced grant for local authorities. As part of the reforms, RSG will swallow up a number of smaller grants, and it is likely to total between £9 and £12 billion in 2026/27.

The approach to, and methodology of, the reform also exhibits improvements. Separate and ringfenced grants will be reduced in number. Needs formulae have been simplified and the data underpinning the needs assessment will be updated. The rationales for most decisions in the Review are clearly set out.

These constitute major changes from the previous funding system. From 2007 to 2013 funding allocations were based on the ‘four block model’, leading to erratic and unstable results. In 2013 needs assessments were frozen and the Business Rates Retention Scheme was overlaid onto the four-block model. Funding outcomes in the years between 2013 and 2025, as a result, increasingly had little connection to any measured spending needs.

What are the outcomes for councils?

Because the existing system has been untouched for many years, the Government anticipates that the Review could lead to very large changes to some councils’ funding allocations. The Review will reallocate money without increasing the total funding available. This means there will be new winners and losers.

For instance, it is possible that authorities that have done well between 2013 and 2026, by expanding their business rate revenue (and potentially sitting on this during the original review), will lose out, because retained business rates revenue will be wiped out by the changes.

The changes will also take strong account of measures of need. That will mean more influence in the formula for recent spending on social care (which accounts for the majority of English local authority spend, and is need-driven) and for deprivation. Media reports indicate that London boroughs are concerned that they will lose significantly from this aspect of the changes.

The changes will also reduce funding for councils with a higher capacity to raise council tax. To calculate capacity to raise council tax, the formula will use the average council tax rate for England, instead of councils’ actual rates. This is standard practice internationally: it prevents councils from cutting local taxes in the expectation that the grant system will compensate them. But by the same token, councils that historically have charged low council tax rates will lose out, other things being equal.

The consultation recognises that the review will create winners and losers. It is consulting on whether a ‘funding floor’ should be used, to prevent any council from losing out in cash terms. Also, the full effect of the changes will be phased in over three years, only applying fully to each council by 2028/29.

Additional reforms to business rates (England’s recurrent commercial property tax) will also take effect from 2026/27. More multipliers (tax rates) are to be introduced, and a periodic revaluation of all property values will take effect. These changes too could affect individual councils’ revenues.

Biting the bullet of incentive funding

The review leaves in place the Business Rates Retention Scheme (BRRS), which has operated since 2013. This scheme enables local authorities to retain a share of growth in business rates revenue against a 2012/13 baseline. The review means that the baseline will be reset to 2026/27.

The immediate effect of the reset will be that allocations of funding will align much more closely with needs than in previous years. From that point, councils will be able to retain growth in business rates revenue, until needs and resource assessment are applied again at the next reset.

Future resets will take place alongside Spending Reviews, likely every three to six years. Regular resets mean councils will have less time to benefit from retaining growth and, therefore, the total revenue that they raise will be wound back regularly to align with the needs and resources assessment.

This begs the question of whether this system of incentive finance is worth retaining in the long term. This Government has been clear that meeting funding need is its primary consideration. That would bring England into line with most international practice. Few other countries use incentive-based approaches to distribute funding for core local authority services.

There’s always an elephant in the local government room

Most critically, the Fair Funding Review will not provide English local authorities with any additional money. This has long been the elephant in the room of local government finance in England. The total central funding to be distributed to local authorities was fixed at the cross-Government 2025 Spending Review: £73.2 billion for 2026/27, £76.1 billion for 2027/28, £79.3 billion for 2028/29. These figures continue the trend of small real-terms increases in funding that developed under the previous government.

These tentative increases come in the wake of heavy pressures on council spending. The NAO’s 2025 report Local government financial sustainability states that funding increases in the last 10 years have not kept pace with rising demand and rising costs of service provision. Specifically, many local authorities are running a large deficit for special educational needs and disabilities (SEND) education, estimated to hit £4.6bn by 2026/27. This debt is currently kept off local authority balance sheets until 2028/29. If it is not addressed, this debt has the potential to crash many councils’ balance sheets. As a result, the Fair Funding 2:0 can be seen as an effort towards making the existing system fairer and more efficient. This is welcome but amounts to treading water.

What options exist for extending local sources of revenue?

UK local government finance has long been notoriously centralised. English councils’ recent financial struggles have cast new light on proposals for fiscal devolution – giving councils access to a wider range of their own revenues. This would comprise a positive step towards greater local government resilience. For instance, devolving a share of personal income tax would bring England into line with many other countries. It would also radically expand the basket of available income sources at the local level – contributing to greater stability of revenue for councils. This model of local government finance is relatively common overseas. Local and regional authorities in Germany, Sweden, Finland, Denmark, Norway, Japan, Switzerland and Spain all share or levy personal income tax.

However, the Review makes no mention of fiscal devolution. Tourist taxes, or devolved or shared income tax, VAT or corporation tax – all common across European states – remain off the agenda in England. The Review does hold out the possibility of Mayoral Strategic Authorities being given a share of business rates revenue in the medium term. This, again, is a familiar approach from other countries, where some taxes are shared amongst two or three levels of government.

The Fair Funding Review does not touch on the question of local sources of revenue – and specifically council tax reform. The Government published a separate consultation on council tax administrative reform in June 2025. That consultation simply proposes minor alterations to the system of enforcement (how councils deal with unpaid council tax bills), and to discounts and exemptions. Council tax is highly unpopular: but the Government’s policy is to continue to expect it to take most of the weight of future spending increases.

April 2026 will see a big shift in how local authorities are funded in England. This will have major implications for many councils and the Government will be preoccupied over the next 12 months with shepherding these reforms through. This will stabilise the system – but the issue of local government funding will not then go away. That will be the point at which to consider more transformative ways of strengthening English local government’s financial resilience, and acknowledging its core role in delivering public services and local wellbeing.

See also: Explaining the Fair Funding Review 2.0 from the UK Parliament.