Local Government Finance Reforms

Monday 23rd February 2026 Written Statements

[The Minister for Local Government and Homelessness (Alison McGovern)]

Earlier this month, this Government delivered the first multi-year local government finance settlement in a decade, coming good on our promise of reforming the system—which previous Governments failed to do.

After 14 years of austerity and decades of centralisation, councils around the country were on their knees. After being forced to cut libraries and youth clubs, there was nothing left—especially in the most deprived communities —as funding was not matched to need.

Our reforms tackled this head-on, delivering a fairer settlement which puts funding where it is needed most. As a result, by the end of the multi-year settlement period, the most deprived places will receive 45% more funding per head than the least deprived. Before our reforms, only around a third of councils were given the funding that broadly matched their assessed need. Our reforms bring that up to nine in 10 councils by 2028-29.

Getting funding to where it is needed is a critical step to support local government—but we are going further. For too long councils have been left footing the bill for expensive services that do not support residents quickly enough, and operating in a wider system that has not provided the right safeguards on financial risk. That is why, alongside our funding reforms, this Government are:

Resolving special educational needs and disabilities deficits by writing off 90% of councils dedicated schools grant (DSG) high needs deficits accrued to the end of 2025-26—projected to be worth over £5 billion.

Investing in prevention to end the cycle of councils footing the bill for expensive statutory services—with £2.4 billion into the Families First Partnership and £2.7 billion in homelessness, rough sleeping and domestic abuse.

Taking action to strengthen safeguards over local government borrowing—bringing forward a consultation on the use of powers to reduce capital risk.

Rebuilding the broken local audit system—including the local audit backstop programme and, through the English Devolution and Community Empowerment Bill, creating the Local Audit Office in autumn 2026.

Granting additional council tax flexibilities to seven councils with below average bills to help them reach financial sustainability.

These steps are helping to fix the foundations, but we know that recovering from the legacy of the broken local government finance system overseen by previous Governments will take time.

That is why today, I am confirming in principle support for councils in the most difficult positions. Unlike the reckless attitude of the previous Government, our approach will ensure that support is predicated on transforming services, so that councils in difficult situations move towards a sustainable recovery.

Failing system that exposed councils to increased risk

We know that the financial risk that councils have been carrying has increased in recent years, amid underfunding and the broken local government finance system.

And we also know that the most extreme financial failure in the sector was driven by a small number of councils who have amassed extreme levels of debt.

Between 2016-17 and 2018-19, councils spent an estimated £6.6 billion on acquiring commercial property, a fourteenfold increase on the preceding three years. This rapid expansion of debt-financed commercialism took place against a backdrop of funding reductions and a failure to stop bad practices that has left some councils highly exposed to risk and led to severe financial failure in others—leaving some residents facing the consequences of hundreds of millions of pounds of unsupported debt. The previous Government’s failure to address fundamental problems with the Special Educational Needs and Disabilities system has left the sector billions of pounds in deficit, forcing councils to borrow to meet costs—adding to sector debt and soaking up capacity to invest in communities.

Sensible capital investment by councils is essential to support decent services, provide jobs and build much-needed homes. We need councils to have the capacity to play their part in delivering growth. But this needs to happen in a system with the right safeguards to ensure that councils invest prudently. Too often, this was not the case under the previous Government. Residents do not deserve to pay the price for bad decisions they never made.

We are already taking extraordinary action to provide debt repayment support for two councils: Woking and Thurrock. Debt repayment support is not a decision this Government are taking lightly, especially in the context of constrained public finances. But past failures left us with little other choice if we want to protect taxpayers from the spiralling cost of ever-increasing debt, and to protect services for residents in these areas. To safeguard against such failures arising in future, we will fully utilise the statutory capital powers available to Government to ensure the capital system is effective at supporting good, value-for-money investment while preventing reckless practices.

The steps this Government have taken to reform the local government finance system will reduce the unacceptable risk that built up in the sector throughout the previous Government.

But we know that the legacy of the previous system has left some councils struggling to set balanced budgets, with crisis spending leaving them unable to deliver long-term plans for service transformation.

We have been clear that we will continue to support councils in the most difficult positions and I have today agreed in principle exceptional financial support for councils where I have been assured that there is a need in 2026-27 or in relation to previous years. In some cases, these agreements reflect a reprofiling of existing support.

Under the previous Government, increasing numbers of councils seeking exceptional financial support became an accepted part of the finance system. This should clearly not be the case, and I am determined that we begin to break this cycle as part of our reforms to the system—but we cannot undo 14 years of damage overnight.

I am pleased to inform the House that several councils have told me that our reformed settlement has made it unnecessary for them to request support. Many of those who have requested support will go on to see significant increases in core spending power over the Parliament—demonstrating that we are getting money to where it is needed most.

Our reforms have allowed some councils to move away from a long-term reliance on Government support. The total figure is significantly lower than some of the extreme numbers speculated in the media.

The in-principle support agreed today is necessary to enable councils to get on with their budget processes, protecting services for residents in the context of the deep fragility left by the previous Government. But I am clear that this sort of flexibility is designed to be temporary.

Our package of reforms will directly help these councils. Most will also benefit from our 90% write-off of DSG high-needs deficits, which will free up capital budgets and reduce the amount spent on finance costs. That means more money available for services every year. And we will continue to reduce pressure on councils in receipt of exceptional financial support by removing the payday loan premium imposed by the previous Government, which made it more expensive for such councils to borrow to get out of crisis situations.

But the work does not stop there. We will continue to support these councils to transform their services to make them sustainable. As part of the exceptional financial support framework, we will ask these councils to develop robust plans for improving services, so they reach a stable position over the multi-year settlement.

We know that investment in prevention can deliver better outcomes for people and improve financial sustainability. That is why we will take a targeted approach to supporting and challenging these councils to deliver better, more efficient services.

While Government recognise the challenges all councils face, in a minority of cases, these have been exacerbated by poor decision making, excessive risk taking, and a lack of the capability and leadership needed to ensure councils are delivering modern and efficient services.

We will not hesitate to act where there is any evidence of failure. Residents deserve high-quality services, and responsible and prudent financial leadership from their councils. We are also clear that individuals should be held to account where the actions of councils have not been good enough. We are continuing to strengthen local safeguards and ensuring we have a fit-for-purpose framework for stepping in when councils are not delivering—including rebuilding the audit system and updating best value guidance.

[HCWS1346]