The LGA is writing to the Chancellor to highlight and demonstrate the support and value that councils can provide to UK Government in delivering the objectives of the Autumn Budget 2025.
Letter to the Chancellor
Rt. Hon Rachel Reeves
Chancellor of the Exchequer
HM Treasury
1 Horse Guards Road
London
SW1A 2HQ
Dear Chancellor,
Ahead of your Budget on 26 November, we are writing to you to highlight and demonstrate the support and value that councils can provide to you in delivering the objectives of your Budget. Be it building new homes, unlocking economic growth or improving the health and life chances of the most vulnerable in our society, councils are the key to solving our biggest local and national challenges.
From Cumberland to Cambridge and Devon to Darlington, council members and officers are working every day to strengthen and grow their communities. From Bath and North East Somerset Council unlocking the development of 950 homes on a riverside brownfield site, to Folkestone and Hythe Council working to deliver a 8,500 dwelling garden town, councils are crucial to the delivery of new housing and economic growth. Councils are also turbocharging public services through the use of new digital technologies such as Wigan Council's adoption of AI in its care service to equip staff to provide more patient-centred care.
Alongside driving local growth and service innovation, councils work tirelessly to develop local solutions to complex issues that are priorities not only for local communities but also for central government. By tackling challenges such as meeting growing demand for support for children with special educational needs and disabilities (SEND), sourcing desperately needed temporary accommodation, or working to develop sustainable asylum accommodation and support systems, councils are at the forefront of efforts to address key national policy issues.
Ultimately, empowered and financially sustainable councils hold the key both to addressing the needs of their local communities and to enabling Government to tackle challenging areas of policy reform. In particular, as locally rooted bodies with a democratic mandate, councils have local legitimacy and are best able to work with residents and across public services to find ways to meet communities’ needs, drive change and improve services.
We recognise and welcome the reset relationship and new way of working between central and local government as clearly demonstrated by the introduction of the Leaders’ Council. This has laid the foundations for closer working between local and central government. But there is more to do, and we urge you to use your Budget to invest in and support councils to allow them to deliver to their full potential both to support local communities and also to address national priorities.
In the following sections, we set out how councils can contribute to key national objectives such as supporting children and young people and kick-starting economic growth. We also demonstrate how councils can contribute to the public sector reform agenda set out in the 2025 Spending Review. In each case we set out the actions Government should take to capitalise fully on the sector’s offer. A fuller list of our proposals is set out in our submission to the 2025 Spending Review.
However, while councils have huge potential to support Government in delivering its objectives, we cannot shy away from the scale of the financial challenges the sector currently faces. If councils are to deliver to their full capacity, for both local communities and national objectives, Government must take further action to address the sector’s financial issues. We set out below the scale and nature of the sector’s pressures and the steps that Government should take to address them.
Fixing the sector’s financial foundations
The sector’s financial challenges are rooted in a sustained period of austerity combined with rapid increases in cost and demand pressures. While funding levels have increased in recent years, the cuts of the 2010s are far from fully reversed. Core Spending Power remains 16.4 per cent lower in real terms in 2025/26 compared to 2010/11.i
Cost and demand pressures are unrelenting, particularly in key demand-led services such as children’s social care, adult social care, homelessness and home-to-school transport for children with SEND. Despite budget growth in these areas in recent years, annual spending pressures continually outstrip budgeted resources, leading to annual overspends:
- Our analysis shows that in the three years from 2022/23 to 2024/25, the sector had annual average overspends of 5.2 per cent of budgeted spend for adult social care, 14.2 per cent for children’s social care, 25.1 per cent for home-to-school transport for children with SEND,ii and 51.9 per cent for homelessness.
- Councils’ budget data for 2025/26 again shows large increases in annual planned spend: 9.0 per cent for adult social care, 10.1 per cent for children’s social care, and 38.8 per cent for homelessness. Nonetheless, data for councils’ Quarter 1 spending across these three services indicates that their 2025/26 budgets are already under pressure and that there is a clear potential for overspends in line with the previous three years in these services.iii
Overall, this demonstrates that demand and cost increases are outstripping councils’ available resources. Consequently, councils balance their books through measures such as in-year cuts to discretionary service areas and/or drawing on their diminishing reserves. This is not financially sustainable.
It also means that council services are becoming concentrated on a residual body of demand-led services. This reduces councils’ service offer to local residents, and limits councils’ ability to invest in cost-saving preventative measures or tackle shared local and national objectives such as house building or economic growth.
The financial implications of the sector’s financial pressures are clearly demonstrated by the fact that 29 councils required Exceptional Financial Support (EFS) in 2025/26 to set a balanced general fund budget. Almost all these councils (26) had social care responsibilities. This meant that the sector entered 2025/26 with 1 in 6 social care councils (17 per cent) dependent on a significant one-off relaxation of the financial framework – an agreement that revenue spend could be capitalised and/or council tax rates can be set above the referendum threshold – to set a balanced budget.
The 29 councils with EFS in 2025/26 represent a significant increase on the number (18) in 2024/25. Overall, since its introduction in 2020/21, 42 local authorities have accessed over £5.0 billion through EFS, with many councils using the scheme over multiple years. Arguably this arrangement is no longer exceptional. Instead, the use of borrowing or the application of capital receipts have become normalised as a means for funding councils’ day-to-day spend on vital services such as children’s social care. This is clearly not a sustainable financial model.
In addition to these general fund pressures, many councils face growing deficits on the high-needs block of their Dedicated Schools Grants (DSG). The LGA has estimated that the sector’s deficit will reach £5.0 billion in 2025/26. The announcement that councils can continue to keep these deficits off their main balance sheets until 2028/29 is helpful. But in the absence of a long-term solution, these deficits are still an existential threat for a number of councils.
Furthermore, because these deficits are financed by cash, the sector incurs substantial cash flow costs. These are primarily due to lost interest received, but may also include additional interest paid if councils are forced to supplement their cash flow by borrowing. We estimate that the forecast deficit of £5.0 billion in 2025/26 means councils will lose £200 million in unearned income alone.
The demand pressures associated with the growth in DSG deficits have also driven the costs faced by councils for home-to-school transport for children with SEND. In this context, we would urge Government to think through fully the potential cost implications for councils of recently reported proposals to change VAT arrangements in the taxi and private hire vehicle sector.
We recognise that Government has proposed a range of financial reforms as set out in the recent Fair Funding Review 2.0 consultation. While we welcome many aspects of the reforms, such as the guarantee of multi-year settlements, there are a range of measures that Government should take both as part of the planned reforms and more widely to address the sector’s financial pressures:
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Effective transitional protection is needed as part of the reforms
The reform of the funding allocation model should not put the sustainability of individual council’s finances and services at risk. The Government must take steps to protect councils from both cash terms and real terms cuts as a result of the reforms. However, this should not be accomplished by curbing the gains of those that benefit from the proposals. If additional funding outside the current envelope cannot be found, Government must provide additional flexibilities to support councils in this period.
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Additional funding is needed
The current reform proposals are a first step towards greater certainty and sustainability, but they are not a resolution to the sector’s financial problems. Prior to the 2025 Spending Review the LGA estimated that councils faced a funding gap of £8.4 billion by 2028/29, compared to 2023/24. While we have not updated our analysis, the funding announcements set out in the Spending Review are largely in line with our original projections. This implies that a substantial funding gap remains. Councils need a significant increase in overall funding to stem the emerging risk of system-wide financial failure and to ensure that councils can meet demand for the vital services needed by their communities.
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Need for deeper funding reform
The core components of the funding system are largely unchanged by the current proposals. The Government should undertake a cross-party review of options to improve the system, including widening the tax base by giving more freedoms on local taxes and charges. This has to include a review of council tax, including consideration of fairness in the system, alongside other council funding sources, and whether business rates retention represents a viable future funding model.
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DSG deficits and their associated cash flow costs must be addressed
We continue to urge Government to write-off these deficits as part of its SEND reform plan. Furthermore, Government must support councils in managing the costs of financing their current deficits with cash.
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New unitary authorities must be financially sustainable
The Government’s funding reforms are taking place alongside a broad programme of devolution and local government reorganisation. The Government needs to ensure that the outcomes of the proposed funding reforms are considered in the light of the measures set out in the English Devolution and Community Empowerment Bill. It is imperative that any new unitary councils are financially viable. To support this, we are calling for Government to fund the costs of local government reorganisation.
We also want to draw your attention to the workforce issues generated by the sector’s financial challenges. The great majority of councils are involved in sector-wide national collective bargaining. The National Employers, acting on behalf of local government, have to prioritise affordability alongside legal compliance with the National Living Wage (NLW). The focus on affordability means that the local government pay agreements reached for 2025/26 amount to an increase of 3.2 per cent across all salaries and bargaining groups.iv This is notably lower than pay awards agreed by central government for comparable workforces. Lower pay increases undermine the sector’s competitiveness in the labour market leading to recruitment and retention issues.
In this context it is vital that the consequences of the impact on the wider local government workforce of new pay, terms and conditions offered to parts of the local government workforce by the Adult Social Care Negotiating Body and the School Support Staff Negotiating Body are fully thought through:
- The scale of the ambition for reforming pay in these sectors must be matched by additional funding. Unless the agreements for these groups attract additional Government funding, they will be a major drain on councils’ finances and will further limit the affordability of pay awards for council staff not covered by those bodies. For instance, the allocation of £500 million from the announced £4.0 billion funding for a Fair Pay Agreement in 2028 for adult social care provides an expectation that funds will be available then, when in reality the figure is likely to be reduced by the scale of increases in the National Living Wage by that point.
- The current limited involvement of the sector proposed for the Adult Social Care Negotiating Body poses additional funding risk relating to the deliverability of Fair Pay Agreements. Local government must have a sufficient level of involvement in the Adult Social Care Negotiating Body to ensure councils’ statutory duties can be properly executed.
The sector’s offer – delivering locally and nationally
A financially sustainable local government sector has huge potential to support local communities and deliver national objectives.
1. Supporting children and young people
Council support for children and young people is central to the Government’s objective to break down barriers to opportunity for young people. There is clear evidence of the benefits to individuals, society and the economy of council service provision in this area. For example:
- Early years education is likely to be the highest-returning investment a government can make to improve social and economic outcomes for low-income families.
- In parental support, the Sure Start model has been shown to improve health and education outcomes for children and there is early evidence that Family Hubs can provide savings to the public purse.
- In children’s social care, evidence suggests that if Family Group Conferencing was to be rolled out across England, 2,293 fewer children would go into care in a 12-month period, saving over £150 million within two years.
- Youth work is likely to deliver high value for money for the taxpayer due to the impact it has on young people’s mental health, wellbeing, educational and employment opportunities. There is an estimated return on investment between 3.2:1 to 6.4:1.
To support councils to deliver services for their children and young people, and to capitalise further on councils’ capacity to innovate and provide value for money services, the Government should take the following steps:
- Ensure that all councils receive sufficient funding to invest long-term into family help, child protection, child in care and care leaver services.
- Develop a cross-government strategy for children, young people, and families to ensure that all partners are working towards a shared ambition.
- Fundamental reform of the SEND system is needed urgently. Councils, with their democratic mandate, are ideally placed to lead local SEND systems. To do this they need adequate powers to improve local systems and hold partners to account. This must be a core component of the Government’s plans for reform.
- Investment in the Best Start Family Service (including Best Start Family Hubs) is welcomed. Government now needs to ensure that the funding can be used flexibly and that different funding streams are joined up to enable councils to act strategically.
- Councils need the powers and resources to manage the early education and childcare market. We are concerned that moving the entitlements pass through rate to 97 per cent means that councils will not retain sufficient funding to be able to support providers and families, and manage the provider market.
- The upcoming youth strategy needs to ensure that it brings together different government initiatives for young people in a holistic fashion. Recent funding from the Government has been piecemeal and short-term.
3. Kick-starting economic growth
Despite ongoing financial pressures and challenges, councils have a proven track record of delivering growth for their local communities. They are vital to the Government’s ambition to kickstart economic growth and meet national housing targets. Furthermore, as major local employers, councils are key players in the local markets that underpin local economies and drive their growth. Evidence of the contribution councils already make to national growth objectives includes:
- Recent reforms to the council housing finance system such as increased right-to-buy flexibilities and the removal of the borrowing cap have empowered many councils to accelerate delivery of new housing schemes. Local authority delivery of new build social rent homes is at its highest level since the early 1990s.
- There are multiple examples of councils driving economic growth such as Barnsley Council increasing its town centre footfall by a third through a programme of cultural events and town centre renewal. Looking across England as a whole, recent analysis for the LGA shows that councils could unleash £276 billion of economic potential.
- Independent cost benefit analysis of the LGA’s Work Local model shows that devolving and pooling skills and employment budgets locally has the potential to increase the number of people moving into work and improving their skills.
To support councils to increase further the supply and quality of affordable housing the Government should take the following steps:
- Make the Public Works Loan Board preferential borrowing rates for social housing permanent. Extend this to councils without housing revenue accounts (HRAs).
- Allow local authorities to have access to the £2.5 billion of low-interest loans for social housing providers announced at the Spending Review 2025.
- Continue to invest in the One Public Estate programme, Brownfield Land Release Fund and the Local Authority Housing Fund and commit multi-year funding to the Council Housebuilding Support Service.
- Amend the New Burdens doctrine so that all new burdens placed on local authority HRAs – including proposals for a revised Decent Homes Standard and Minimum Energy Efficiency Standards – are fully assessed and funded.
- Implement rent convergence from April 2026 at a minimum of £2 per week until all properties have reached formula rents.
To support councils to continue to drive local economic growth, the Government should take the following steps:
- Councils, working in partnership with their Mayoral Strategic Authorities (MSAs) where they exist, need to be sufficiently resourced to be able to deliver effectively. However, councils’ economic development teams have been diminished by budget cuts.
- All local authorities must be enabled to play a role in Government policy, such as in the development of Local Growth Plans. This includes those places not currently in a Mayoral Strategic Authority area, as well as rural areas where there is a need for a replacement for the Rural England Prosperity Fund.
- We welcome recent moves to simplify local growth funding. However, we need further clarity on the funding available for local authorities and MSAs. This should include detail of the targeted Local Growth Funds announced at the Spending Review, as well as future funding for business support, skills and employability services that are currently being funded by Shared Prosperity Fund.
- Local road networks are at the heart of local economies. Government can support efficiency and planning by providing multi-year settlements for highways capital funding and by investing in programmes that help councils use AI to plan repairs.
To support councils to continue to drive economic growth through skills and employment support schemes, the Government should take the following steps:
- Build on the positive Get Britain Working reforms by working with us to develop a co-design strategy to make individual reforms work for local people and places.
- Local Get Britain Working Plans should form the basis for a clear role for councils in steering the work, health and skills system locally. The Plans should evolve to become funded outcome agreements between national and local government.
- Pilot ways to bring together the job support offer locally so Pathways to Work, the reform of jobcentres, and local government’s Connect to Work join up.
- The Youth Guarantee for 18–21-year-olds should be broadened to 16–24-year-olds, co-designed with partners and drawing on learning from devolved trailblazers, and with a key role for councils as set out in our Youth Pathways proposal.
- The end of the UK Shared Prosperity Fund in March 2026 will impact local employment and skills activity. The LGA proposes a Local Labour Market Fund combining support for local employability, skills and health initiatives as a replacement.
- Step up efforts to cohere the skills offer locally as set out in our Skills for All proposal.
4. Local climate action
As community and place leaders, as housing, planning, and transport authorities, and as procurers, asset holders, conveners and enablers, councils already make a huge contribution to addressing climate change. There is clear evidence that locally led models drive down costs and drive up co-benefits. For instance, local climate action can achieve Government targets for half the cost of a national approach and deliver three times the growth, jobs, skills and health benefits. Local approaches can also best build place-based resilience.
To capitalise fully on councils’ potential contribution to addressing climate change, the Government should take the following steps:
- In principle, local authorities need statutory backing, sufficient funding, and robust support to lead on climate action. Over the coming months the LGA will develop clear proposals for Government on next steps.
- Councils need clarity and certainty on the longer-term role of local government, including Strategic Authorities, in the delivery of the Warm Homes Plan.
- Simplify and devolve Warm Homes funding to local areas to allow councils to develop schemes linked to local skills, growth and housing strategies. Assess local spending through an outcomes framework that allows local places to develop and deliver their own interventions.
- We welcome the Government’s commitment to provide financial support to councils for the significant costs the Emissions Trading Scheme will add to waste services. In our view, it is simpler not to pass the costs on to councils in the first place, and prioritise mechanisms for making producers pay, such as producer responsibility schemes.
- The packaging Extended Producer Responsibility Scheme needs to have packaging waste reduction as the priority, as well as supporting reuse and recycling. We want to work with Government and producers on a positive approach to improving overall scheme 'effectiveness', rather than a punitive top-down system of financial penalties.
5. Safer streets and communities
Government objectives for safer streets and communities cannot be delivered without local authorities as key partners. Councils have a proven track record in preventing and tackling crime and disorder. For instance, councils, often as part of community safety partnerships (CSPs), already deliver prevention-oriented services such as wardens, CCTV, early intervention in youth offending, and mental health and wellbeing services. These preventative initiatives reduce overall public sector costs.
To maximise the contribution councils can make to the safer streets mission, the Government should take the following steps:
- Provide sustainable funding for CSPs and community safety services through a single, multi-year (three to five years) funding stream for all community safety-related services, paid directly to councils or CSPs rather than via competitive bids or intermediaries such as Police and Crime Commissioners.
- Reform the duty and partnership landscape so CSPs have the powers, partners and mandate to deliver outcomes. Encourage alignment of responsibilities between local partners and ensure clarity in their local roles.
The sector’s offer – public service reform
The 2025 Spending Review is clear that a programme of public service reform is needed. Key principles within this reform programme include: a focus on prevention rather than crisis management; the devolution of power to local areas that understand the needs of their communities best; and the development of strong digital and technology foundations to drive public service productivity and efficiency. Councils already make a huge contribution across all three areas:
1. Prevention
Councils have a long track record of delivering innovative preventative programmes that represent value for money. For instance:
- Tameside Council has focussed its leisure provision on clients with ongoing health conditions and medical problems leading to reduced inactivity levels and a reduction in the number of people requiring health and social care services.
- Council-led prevention activity continues to be the most effective intervention in relation to homelessness, both in human terms and for the public purse, with estimated cost-to-outcomes savings ratios of up to £10.92 for every £1 spent.
- In public health, analysis by the University of York shows that the spending through the ring-fenced public health grant is more productive than NHS spend.
To maximise the contribution councils can make to the development of a preventative model of service delivery, the Government should take the following steps:
- Uprate Local Housing Allowance (LHA) rates to the 30th percentile of local rents beyond 2025/26 and uprate temporary accommodation reimbursement rules to 90 per cent of the prevailing LHA rates.
- Remove the ringfence within the Homelessness Prevention Grant.
- Joint commitments to prevent homelessness could be impacted by the reduction of the Move On period back to 28 days for single adult asylum seekers and we would welcome working across Government on resolving this issue.
- Restore the Public Health Grant, which has suffered a cut of 27 per cent in real terms since 2015/16 and move to multi-year settlements.
- Review the distribution of public health funding to meet significant changes in population, deprivation and need.
- Implement the Hewitt report recommendation that the share of total NHS budgets at Integrated Care System (ICS) level, going towards prevention, increases annually by at least 1 per cent over the next five years.
2. Devolution
Local government is a committed partner in delivering genuine devolution. Transferring powers and resources to local places enables more effective and efficient delivery across a range of outcomes. For instance:
- There is a large body of research that indicates that fiscal decentralisation is linked to increased growth and reduced regional inequality.
- Community empowerment initiatives such as the Wigan Deal show how councils, residents and other public bodies can collaborate to solve problems, improve outcomes and support the Government’s broader public sector reform goals.
To ensure that councils are able to contribute fully to the devolution agenda, the Government should take the following steps:
- Clarify and strengthen the role of councils in devolution by clearly defining the role for councils in delivering each of the competencies, setting out clear expectations for how councils will be involved in regional strategies and strengthening the role of council leaders in the governance structures of strategic authorities (SAs).
- Provide sufficient and sustainable funding for SAs. This should include clarity on long-term funding for mayoral SAs, assurance that new powers will be backed by new resources and a commitment to expand the Mayoral Capacity Fund.
- Allow greater fiscal devolution. There is a strong case for a local tourism levy.
- Build on the Devolution Priority Programme and provide a clear and financially viable roadmap for further devolution across England.
3. Technology-led public sector reform
Local government is driving public service innovation and is a vital part of delivering the Blueprint for Digital Government. Local government is already harnessing the power of AI to build more responsive, efficient, and resilient communities. Evidence of council activity includes:
- Unlocking the power of AI to transform services and boost productivity, from 24/7 chatbots and predictive road maintenance to transcription tools that free up social workers’ time, and allow for smarter case management, and faster, data-driven planning decisions.
- From St Helens Councils building in-house AI solutions, to Swindon Borough Council transforming how they communicate with service users, local authorities are leading innovation across the public sector and are key to unlocking the £45 billion in annual efficiency and productivity savings identified in the Blueprint.
To capitalise on councils’ full potential to contribute to technology-led reform, the Government should take the following steps:
- Ensure local government is integral to the rollout of the National Data Library, starting with access to Department for Work and Pensions data.
- The LGA supports the Digital Commercial Centre of Excellence and sees local government reorganisation as an opportunity to tackle market concentration, improve supplier engagement and address legacy technology and cloud use across local government. The LGA is ready to support in assessing legacy debt and calls for investment to modernise systems and reduce long-term costs.
- Building on the great ongoing work through LGA AI networks and specific pilot communities with central government departments, the LGA calls for more funding for communities of practice and a funded innovation pathway to support councils build their own tools collectively, and share best practice and templates on buying tools.
- Councils are best placed to tackle digital exclusion, long-term investment in local digital inclusion teams and initiatives is essential to build robust ecosystems and for the Government to reach its growth and digital ambitions.
The LGA’s sector support offer
A well-resourced sector support offer is critical to enabling local government to deliver on government priorities and promote public service reform. Sector support enables local government to improve and address the challenges the sector faces. Increased and sustained support to councils to address those challenges at an earlier stage will lead in turn to fewer councils requiring more intensive and costly statutory intervention.
It is imperative that funding matches the sector’s need for support. Continued grant funding, plus pay and price inflation –at a very minimum – is required to respond to the ongoing needs for improvement support identified in the sector, with further funds to support authorities meet additional challenges such as devolution and local government reorganisation. Three-year sector improvement support grants would enable more ambitious programmes that deliver greater value for money and even greater impact.
As ever, we would welcome the opportunity to discuss any aspect of our proposals.
Yours sincerely,
Cllr Louise Gittins, Chair, Local Government Association
Cllr Kevin Bentley, Conservative Group Leader and Senior Vice Chairman, Local Government Association
Cllr Bev Craig, Labour Group Leader and Vice Chair, Local Government Association
Cllr Joe Harris, Liberal Democrat Group Leader and Vice Chair, Local Government Association
Cllr Hannah Dalton, Independent Group Leader and Vice Chair, Local Government Association
Cllr Stephen Atkinson, Reform UK Group Leader and Vice Chair, Local Government Association
Endnotes
- Using the CPI deflator series published by the OBR in March 2025. CSP excludes the National Insurance Contribution compensation funding announced in February 2025.
- This only includes 2022/23 and 2023/24 for home to school transport.
- The definition of homelessness used in the estimated overspend for 2025/26 draws on line18 of MHCLG’s QRU data set. This is a slightly broader definition than for the preceding analysis of budget increases and overspends which draw on MHCLG’s RA data (line 440) and the equivalent lines in RO4.
- Agreement has been reached with all groups with the exception of Craft.