Households in wealthier parts of England could face sharp council tax hikes and service cuts under proposed reforms designed to direct more funding to deprived areas, a leading think tank has warned.
Analysis by the Institute for Fiscal Studies (IFS) suggests Angela Rayner’s plans to overhaul how local government funding is allocated would leave some councils in central London and the Home Counties grappling with budget cuts of up to 19 per cent.
To help councils adjust, the Government plans to phase in the changes gradually over three years and limit how much funding any council can lose each year.
But the changes will still create clear winners and losers.
The IFS found that 10 per cent of councils could see their funding drop by 14 per cent or more, while another 10 per cent could see funding rise by 10 per cent or more.
Unless allowed to raise council tax beyond the current 5 per cent cap, services such as bin collections, road maintenance and social care may be scaled back, the IFS said.
The Government is currently consulting on the plans, which aim to align council funding with updated assessments of local needs. The consultation closes on 15 August.
Under the proposed system, councils in the north and Midlands – particularly the East Midlands – would see funding rise.
But councils in southern England, especially inner London boroughs, would see real-terms reductions even if the council tax is raised at the maximum permitted rate.
The IFS said Camden, Westminster, Wandsworth, Kensington and Chelsea, and Hammersmith and Fulham could each see real-terms cuts of 11 to 12 per cent by 2028–29, even with annual 5 per cent council tax increases.
Outer London boroughs such as Enfield and Havering, however, are set to gain funding, with increases of around 20 per cent possible if council tax rises by 5 per cent each year.
If the reforms were implemented all at once, without protections known as “funding floors”, inner London’s loss would be more profound still – a 19 per cent drop.
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Kate Ogden, senior research economist at the IFS, said that the current funding model had “lacked a rational basis for at least 12 years – and arguably more like 20”.
She added: “The changes will sting for those councils that are assessed to currently receive too high a share of the overall funding pot.”
Outer London, meanwhile, would benefit. Councils in Enfield, Havering and Hillingdon could see funding rise by 20 per cent in real terms over three years if they raise council tax to the limit each year.
Outside the capital, the East Midlands is forecast to see the most significant gains, with average increases of 15 per cent by 2028–29. Yorkshire and the Humber follows with 12 per cent. By contrast, councils in the South East are set to receive just 7 per cent more.
There is also significant variation within regions. For example, in the East Midlands, some rural districts like North West Leicestershire and Harborough could lose funding, while urban areas such as Derby and Nottingham may see gains.
Similarly, in the South East, some upper-tier councils like Surrey and Wokingham face significant funding cuts, but several shire districts, including Crawley and Worthing, stand to gain.
The IFS also said that rural areas may fare better than feared due to a “remoteness adjustment” in the funding formula, which increases funding for councils far from large towns.
Despite the intention to help deprived areas, the report found councils covering the most deprived 30 per cent of neighbourhoods will, on average, receive similar increases to those in middle-income areas. The IFS said this was partly due to technical changes in how needs are assessed.
The IFS warned that the reforms, if not reviewed regularly, could create similar imbalances in the future. David Phillips, an associate director at the institute, said: “To avoid such large changes in another decade or two’s time, these reforms cannot be a one-off.”
What are Angela Rayner’s council tax reforms?
The Government is proposing changes to the funding system for local councils in England, which it claims will improve fairness and better represent each area’s needs.
Under the plans, councils will be funded according to the costs of providing local services such as social care, children’s services, road maintenance, and fire services. The proposals also take into account factors like local wage levels, property prices, travel costs, and the remoteness of the area.
The reforms will look at how much councils can raise through council tax, assuming they set their rates at the national average. This means councils that can raise more will get less funding from the Government, while those with less ability to raise money will get more support.
To avoid sudden significant changes, the Government will phase in the new funding over three years, gradually adjusting council budgets. They will also put limits on how much funding some councils can lose each year.
Spending needs and councils’ ability to raise money will be updated every few years to keep the system fair and up to date. This is meant to ensure cash is better matched to the real demands and costs local councils face.
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