A new three-year local government funding deal has been announced for English councils, introducing a 'Fair Funding' formula designed to prioritize urban areas with high social needs. This new system aims to reverse a decade of austerity, with ministers touting it as a fairer approach that will 'restore pride and opportunity in left-behind places' and allow local leaders to 'invest in getting back what has been lost – to bring back libraries, youth services, clean streets, and community hubs'. The government funding will be distributed with a higher weighting given to local authorities with high 'deprivation' scores, measured by factors such as income, employment, health, housing costs, and crime.

Under the new formula, several councils are set to receive significant spending power increases. These include deprived urban areas such as Manchester, Birmingham, Luton, Bradford, Coventry, Derby, Middlesbrough, and outer London boroughs like Haringey, Enfield, and Newham. Conversely, wealthier central London boroughs, including Kensington and Chelsea, Wandsworth, Westminster, the City of London, and the Royal Borough of Windsor and Maidenhead, alongside affluent home counties commuter belt councils like Surrey, are expected to lose out financially.

The settlement has, however, received a mixed and often critical reception. Some urban councils in the north and Midlands expressed disappointment, arguing that 'London’s suburbs' appeared to be the 'biggest winners' from the review, potentially leaving many of the most deprived communities facing further cuts after years of austerity. Leaders of county councils in English home counties and rural areas also criticized the deal, describing it as unfair and accusing ministers of 'cherrypicking' by disproportionately benefiting urban areas. The County Councils Network predicted that this approach would leave many of its members in financial trouble. Initial modelling by the Institute for Fiscal Studies had shown that a number of Labour-run inner London councils could lose significant grant funding, but an 11th-hour change to the formula, acknowledging the capital’s exceptionally high housing costs and dense concentrations of child poverty, significantly reduced London authorities’ exposure to the changes, further enraging some councils in Labour’s northern heartlands.

Regarding council tax, most councils, regardless of whether they are 'winners' or 'losers' in this settlement, are likely to increase bills in April to the maximum allowable of 4.99% for upper-tier authorities with social care responsibilities. The era when Conservative-run local authorities routinely froze council tax bills is considered over. Notably, a group of wealthy central London authorities, which already have relatively low council tax bills and high financial reserves but are expected to lose out on grant funding, will be allowed to set increases above the 4.99% maximum. The government believes these councils can absorb the loss of grant funding due to their high reserves and ability to levy second home premiums. Some Reform-led councils, such as Kent, are net gainers but aspire to limit or cut council tax bills. However, at other Reform-led authorities like Durham and Warwickshire, cabinet papers have revealed that reduced council tax rises would necessitate millions of pounds of additional cuts to already threadbare council services, potentially jeopardizing the council's viability.

Despite ministers' hopes that the settlement will 'turn the page on a decade of cuts', many councils are expected to continue struggling to meet soaring demand for services like social care and homelessness support. This indicates that more cuts are likely, reinforcing the sentiment that while the 'council cake' may be more fairly divided, it is not bigger. The local government finance settlement for 2026-27 is widely considered unlikely to stem the broader crisis in council budgets. A critical issue, the accumulated deficits on special educational needs services, forecast to reach £14bn by 2028 for English upper-tier councils, received little detailed attention in the announcement. Many councils are struggling to meet their legal duty to balance their books, with an increasing number expected to request Exceptional Financial Support (EFS) from the government to stave off effective bankruptcy. Last year, 30 councils received EFS, and speculation suggests up to 100 councils may apply in the coming months, highlighting that while the new settlement may offer some relief, it could push others closer to crisis.