The “outdated and inefficient” system of council funding will be replaced by a fairer process focused on the needs of communities, the government has said.

The announcement coincides with the publication of the interim local government financial settlement for 2026-26, which includes a £600 million recovery grant for councils in deprived areas and a £680 million increase in social care funding sterling.

A children’s welfare grant will provide £250m for preventative initiatives, while the government has confirmed it will keep the threshold for council tax increases at a maximum of 4.99% without it is necessary to hold a local referendum.

The planned funding is a combination of measures from the autumn budget and “re-allocated funds”, including grants to councils serving rural communities, the government said.

A consultation on funding reform will be launched next month with a focus on what the government said was a move away from an “outdated and ineffective approach, which has seen some councils increase their reserve levels and others struggle to provide services and balance their budgets.” , and move to a fairer system that matches funding to needs.”

It is claimed the changes will build on ‘lessons learned’ from the previous government’s fair funding review, which many councils hoped would address variation in the amount of revenue councils could raise to fund services through the housing tax, but which has not been implemented.

The planned reforms will be implemented alongside multi-year funding deals, which have not been awarded since the middle of the last decade, the government said.

Deputy Prime Minister Angela Rayner said: “For too long, local councils have been let down by an outdated and inefficient funding system which has led to the collapse of public services and inefficient spending of taxpayers’ money .

“While there is no magic wand to fix what we inherited, we are taking the necessary steps to repair the foundations of local government by creating a fairer system and ensuring that every penny is spent on those who need it. services that so many people depend on every day. »

However, the Departmental Council Network (CCN) said that “at first glance” the way the government plans to distribute resources is concerning.

CCN chairman Tim Oliver said: “Considering that increases in the minimum wage and national insurance contributions will more than wipe out extra funding for social care, it is possible that most CCN member councils will , and many others across the country, will receive nothing from the “recovery grant”, which will be heavily targeted and weighted exclusively according to deprivation.

“We are also very disappointed that the government has chosen to reallocate some grants and redistribute this funding elsewhere, which will have a negative impact on rural councils. »

“While deprivation is a key indicator of a municipality’s needs, it is not the only indicator or the most important measure of financial distress. The reality is that it is demand and market failure for adult and child social care and special educational services that are pushing local councils to the brink.”

He said the way the funds will be distributed next year “does not adequately take into account the current and future demands and costs of councils”.

“We would be very concerned if that was the direction to go.” The Government must ensure that this review is a truly fair funding review and based on a solid and independent evidence base,” he added.

District councils have also expressed concerns about the regulation.

Jeremy Newmark, financial spokesperson for the District Councils Network, said: “District councils, like other types of councils, continue to feel the financial strain.

“Today’s financial report contains welcome news of an increase in core spending power, but it inevitably falls short of delivering the financial stability that will secure the long-term future of essential local services. »

The settlement will result in a real term increase in basic purchasing power – an estimate of the amount of money available to councils through grants and council tax – of around 3.2 per cent.

On average, councils serving rural populations will benefit from an increase of around 5% in their base purchasing power.

The government said extra funding for social care will help councils deal with long-standing pressures, while the Children’s Social Care Prevention Grant is intended to “help ensure children stay with their family or in safe and loving homes, where possible, as part of a planned overhaul of the welfare system. system next year.

Referring to concerns about private companies running children’s homes charging high fees, the government added: “Legislation will be introduced to crack down on profiteering from vulnerable children and ensure local government can provide safe and loving homes for children supported. »

The overall financial settlement will see £1.3 billion distributed to councils, while the Budget provides more than £4 billion of investment to build new homes, invest in special educational needs and disabilities, improve services to the homeless and tackle potholes, the government said.

In a statement on planned funding reform, Local Government Minister Jim McMahon said: “This Government is under no illusions about the scale of the problems facing local authorities.

“We know that the demand and cost of services have increased significantly, making it much more difficult for municipalities in recent years.

“After a decade of budget cuts and fiscal mismanagement inflicted by the last government, compounded by galloping inflation and a failure to grow our economy, municipal councils of all political stripes are in crisis.

“Our fiscal legacy means tough choices will be made on all sides to put us back on the path to recovery, and that will take time. »

Mr McMahon added that the Government will “reset” the relationship with local government and ensure it operates “to the highest standards of probity and value for money; while giving the sector more autonomy, certainty and flexibility.”

“We will rebuild the system of accountability and control in local government, including an overhaul of audit, control and local standards, and consult on strengthening the standards and framework for conduct of local authorities in England,” he said.