London Councils has welcomed a new parliamentary report on the financial crisis facing local government.
Among its recommendations, the Housing, Communities and Local Government Committee says that reforms to the council funding system should ensure local housing costs are properly accounted for in measures of deprivation used to allocate resources.
London Councils has flagged this issue as a major concern, warning that the deprivation measures in the government’s Fair Funding Review 2.0 proposals do not fully reflect housing poverty and risk significantly underestimating levels of need in the capital. This could lead to London boroughs receiving less government funding than is required to deliver vital local services and return to financial stability.
London has the highest rate of poverty in the country once housing costs are factored in, with one-in-four households living in poverty. London Councils says that in the context of the capital’s astronomical rents and housing costs, any measure of deprivation that does not sufficiently factor in housing will fail to account for the single biggest cost of living for residents and a significant driver of service pressures for local authorities.
Cllr Claire Holland, Chair of London Councils, said:
“As this report makes clear, the local government funding system is fundamentally broken and change is long overdue.”
“The government’s plans to reform council funding are pivotal for ensuring local areas receive funding that genuinely matches their levels of need and enables them to cope with fast-rising costs and pressures. It’s right that the government is targeting deprivation in the new formula, but we are concerned that the measures used in the current proposals will not sufficiently account for London’s extreme housing poverty. This could mean London is left without the funding we need to deliver vital local services and return to financial stability.
"We will continue to raise these and other issues with government and we welcome the opportunity to work with them to ensure the new funding system is fair, robust and distributes funding efficiently.”
In its Fair Funding Review 2.0 proposals for updating the formulae through which funding is allocated to local authorities – due to be rolled out from 2026-27 – the government is using the Index of Multiple Deprivation as the default option for measuring deprivation. However, this dataset does not reflect the full impact of housing as a driver of deprivation.
London Councils is pushing for any income deprivation measure used in the funding formulae to calculate income after housing costs, and for deprivation measures more broadly to reflect the wider impact of housing and homelessness on deprivation.
In its report, the HCLG Committee recommends that “the government’s new funding formula must consider the effect of disparities between wards and sub-wards within single local authorities, which can be hidden when only considering the data at the level of whole local authorities. Measures of deprivation used in the new funding formula must account for local housing costs” (Recommendation, Paragraph 133).
Boroughs in the capital are already grappling with enormous financial pressures. London Councils’ analysis suggests that boroughs face a collective funding shortfall of at least £500m this year. This follows years of structural underfunding, skyrocketing costs, and fast-rising demand for services – particularly homelessness support, adult social care, and children’s services/SEND.
London boroughs rely on Exceptional Financial Support more than any region in the country. Seven (nearly one-in-four) London boroughs are relying on emergency borrowing measures through the EFS scheme to balance their budgets.
London has the largest funding gap of any region in the country according to Institute for Fiscal Studies research that found an estimated 17% gap between funding need and the actual levels of local government funding across the whole of London. The majority of London boroughs have lower Core Spending Power per capita than the England average, and several are amongst the lowest funded per capita in the country
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