London Councils warns funding reforms fall short as boroughs face financial pressures

London Councils has warned that the government’s Fair Funding Review 2.0 may not be enough to prevent boroughs sliding deeper into financial crisis, despite welcoming several aspects of the long-awaited reforms.

Responding to the government’s statement, Cllr Claire Holland, Chair of London Councils, said the overhaul of the local government finance system is “hugely significant” but stressed that many authorities in the capital are already at breaking point after years of underfunding, rising costs and growing demand for services.

At the centre of London Councils’ response is cautious approval of the government’s decision to use updated deprivation measures that factor in housing costs, a change the group has long pressed for. Holland described this as “a far more accurate approach”, noting that housing pressures are a key driver of need in London and across England.

Recent evidence highlights the scale of deprivation in the capital. Department for Work and Pensions data shows that one in four Londoners lives in poverty after housing costs, the highest rate in the country. The government’s updated Indices of Deprivation, published in October, also found London to be the most income deprived region overall, with the highest deprivation levels among both children and older people.

London Councils also welcomed plans to use the most recent council spending data in funding calculations, along with proposals for a multi-year settlement, greater flexibility through grant consolidation and new funding floors to help protect authorities during the transition.

But the group raised serious concerns about the new relative needs formula for Children and Young People’s Services. Holland said it “continues to dramatically underestimate levels of need in London”, calling for the untested model to be closely monitored once it begins shaping allocations.

The response comes against the backdrop of a worsening financial position for the capital’s boroughs. London Councils recently reported a £1 billion funding shortfall this year and predicts a cumulative budget gap of £4.7 billion between 2025-26 and 2028-29. The group warns that half of all boroughs could require emergency financial support by 2028 to avoid bankruptcy.

London is already the region most dependent on Exceptional Financial Support, which allows councils to borrow when they cannot balance their budgets. Holland said that even with the Fair Funding Review in place, “many London boroughs will continue to face huge financial pressures and are likely to require emergency borrowing”.

The government has said its reforms will produce a fairer and more transparent system for distributing funding across England.