PRAGMA

Problem Register - #1 · Local Government & Communities

Local government finance

Priority Score

29/35
  • Scale5/5
  • Severity4/5
  • Cost of inaction5/5
  • Tractability4/5
  • Deliverability3/5
  • Cross-partisan viability3/5
  • Time-criticality5/5

Seven dimensions, each scored 1-5 and summed to a total out of 35. It is a triage and communication tool to compare problems - not a measure of truth. How it is derived is set out in The Method.

Government-created distortionPublic goods

The problem

The system that funds local councils - the bodies responsible for adult and children's social care, special educational needs, homelessness, road maintenance, planning, libraries and waste - is structurally unsound. A small number of demand-led statutory duties are consuming council budgets and crowding out everything else, and a growing number of councils are being pushed to the edge of effective insolvency.

The evidence

After almost none for two decades, eight councils issued twelve section 114 notices - the local-government signal that a council cannot balance its books - between 2018 and 2023. The number of councils needing Exceptional Financial Support from central government rose from 8 in 2023-24 to 19 in 2024-25 to 29 in 2025-26. Councils face a combined funding gap estimated at around £4.1bn for 2026/27. London boroughs alone recently reported overspends of roughly £180m on adult social care, £150m on children's social care and £270m on homelessness.

Why the market fails

Local services are largely public and merit goods - there is no market that will provide child protection or a homelessness duty. The acute failure is government-created distortion: the central-local funding architecture, the reliance on a council tax still based on 1991 property values, and annual rather than multi-year settlements are all design choices of central government.

Why it has persisted

A decade and more of real-terms grant reduction; repeated postponement of the promised "fair funding" review; one-off bailouts in place of structural reform. Exceptional Financial Support is itself a sticking plaster - it largely lets councils borrow, or treat asset sales as revenue, to paper over a recurring gap rather than close it. Council tax revaluation has been ducked by every government since 1991 because it produces visible losers.

Who bears the cost

Residents, through the steady erosion of the services councils still control; the most deprived areas, which combine the highest need with the weakest tax base; and future residents, who inherit the debt.

Policy direction - outline only

Proposed mechanism

The reform core has five evidence-settled elements - multi-year (three-to-five-year) settlements on a needs-and-resources formula published in full, with each council's winners and losers visible before the period begins (building on the live Fair Funding Review 2.0); a transparent equalisation engine that computes each council's need-minus-resources gap and fills it (the engine is built; how far to equalise is the public's dial); a rebuilt audit and graduated early-warning regime with hard commercial-risk limits (turning the May-2026 capital-risk powers and the new Local Audit Office into the front of a transparent escalation ladder, with binding limits on the reckless commercial borrowing that sank Woking and Thurrock and rules bringing council-owned companies back into the accounting line of sight); a defined deficit-resolution route that recognises, stabilises, resolves and returns a failed council on rules set in advance, rather than papering the gap over with more borrowing (including bringing the off-balance-sheet special-educational-needs deficits on-book before the statutory override expires); and national or ring-fenced funding of the demand-led duties (adult social care, SEND, homelessness) so they stop cannibalising everything discretionary - the how of that funding inherited from Pragma's adult social care and SEND work (entries 3 and 6), not re-opened here. A separate delivery-vehicle sub-study supplies the even-handed evidence on whether to "hive off" a council service to an independent body: the finding is that structure is a weak lever and the operator the strong one - what matters is the quality of the operator and whether the public keeps a clear line of sight, not whether the body is technically public or private - so the hive-off lean is routed to the public, not prescribed. On top of the core sit the three public choices, each a costed, neutral menu with no option recommended: what councils are for and who runs their services (compulsory or optional, national or local, in-house or handed off); how the money is raised - re-rate-and-reband council tax (about +£3.9bn), a full proportional property tax (about +£5bn), a land tax (carried honestly but weakly evidenced), a local income tax, a business-rates lever, plus low-controversy local charges - each shown with its honest winners and losers; and how far to even things out (the redistribution dial, from full levelling to keep-what-you-raise). A fourth, sharper question - who should pay for the cost of councils that have already failed - is surfaced honestly inside the deficit-resolution regime rather than dressed as a technical allocation.

Must resolve

The three value choices themselves, which are the public's to make - what councils are for and who delivers their services; how the revenue is raised and how the burden falls between cheaper and more valuable homes; and how far to equalise - together with who pays for past failure; and the channel through which the public choice is taken (a Pragma-hosted deliberation platform, with the costed choices published now and the voting wired in later); the technical design - the settlement and equalisation machinery, the audit and commercial-risk regime, and the deficit route - is settled on evidence in the worked product.

Main risks

"Better machinery" alone being dismissed as what was promised before and failed (answered by binding commercial-risk limits, an opinion-bearing audit standard rather than the disclaimers the backstop regime relied on, and a defined deficit route, not the monitoring that did not catch the failures); political backlash from the revaluation losers (mitigated by the deferral-against-the-property unlock for the asset-rich but income-poor, so nobody is forced to sell their home, and by making winners and losers explicit rather than hidden); and the central winners-and-losers figures resting on 1991 values nobody has re-rated - which is not a reason to duck the question but the single strongest argument for finally doing the revaluation, with the magnitudes carried openly as illustrative.

Sources

  1. House of Commons Library, Why are local authorities going "bankrupt"?
  2. Institute for Government, Performance Tracker 2025: Local government
  3. London Councils, £4bn funding gap
  4. the Institute for Fiscal Studies on the Fair Funding Review 2.0 impacts, council-tax revaluation and business-rates retention
  5. the Resolution Foundation on options for reforming property taxation
  6. Fairer Share, the proportional-property-tax campaign with its deferral unlock
  7. the Organisation for Economic Co-operation and Development (OECD) on fiscal federalism and equalisation comparators
  8. GOV.UK on Exceptional Financial Support for local authorities
  9. the Redmond Review of local authority financial reporting and external audit
  10. the independent Teesworks review
  11. the local-government-finance worked-product set published with this entry

Worked policy product

Local government finance

Worked product · developed to Method standard