CIH responds to the HCLGC inquiry into the funding and sustainability of local government finance

The current finance system for local government is not fit for purpose. Due to years of budget cuts and loss of resources, local authorities have increasingly been asked to perform more roles with less support or capacity. Reductions in grant funding, increased expectations and complexities in service delivery, and inflationary pressures have all contributed to a difficult operating environment. The resulting impacts of these pressures are palpable, and ultimately impact on the tenants living in council homes and on homeless households who look to local authorities for assistance.

Local authorities play a vital role in society, particularly in relation to housing, where they often support the most vulnerable groups. It is therefore essential that the government adequately resource local authorities, to ensure local areas across the country can thrive and grow. This reflects the government’s aim to devolve power and partner with local leaders. Local authorities and representative bodies are best placed to outline the most appropriate and necessary models for funding, such as in the Local Government’s Association’s (LGA) December report. Our response highlights the broader financial environment and solutions to improve the sustainability of council finances.

In relation to HRAs, a recent survey from Southwark Council found that two-thirds of councils fear the collapse of their housing budgets by the next general election. Councils are reducing maintenance of existing homes, scaling back development projects and selling off stock, just to ensure that their budgets are balanced. Nine in 10 councils reported to be under financial stress, with 68 per cent expected to scale back commitments to new council homes, which will ultimately impact the government’s 1.5 million homes target. This builds on Southwark Council’s previous report, signed by over 100 councils, which outlined the necessary recommendations to protect the future of council housing.

This difficult operating environment was exacerbated following the Autumn Budget, where National Insurance Contributions (NICs) changes will negatively impact local authorities’ budgets. The LGA has estimated that the increased contributions will cost £637 million for direct staffing, with indirect costs with commissioned services costing an extra £1.13 billion next year. These upcoming costs will push many councils into cliff-edge scenarios, with difficult decisions around development and selling homes.

The government announced an additional £515 million of extra funding in December 2024 to support local authorities weather the impact of the NICs increase. The total amount was decided following a national assessment of the costs of the rises for direct employees only. Although this funding is not ring-fenced and can be spent on commissioned services, it is likely that this funding will not reach those providers. In the case of supported housing, which provides homes for older persons, people with lifelong physical and mental disabilities, those experiencing homelessness, substance misuse and more, the shortfall created by the NICs raises will contribute to the ongoing crisis facing supported housing providers following years of reduced contracts and short-term funding cycles leading to a permanent loss of services. A failure to address the existential crisis effecting the supported housing sector presently will impact local authority finances in the future as they fail to meet rising levels of need adequately within their constituencies.

Whilst many councils act as direct providers of housing, they also work in areas that impact up on housing provision and homelessness. The increasing numbers of homeless households owed a main statutory duty has resulted in spending on temporary accommodation (TA) to increase to unprecedented levels. In the past year alone, reported spending has risen by £500 million, and in reality the figure is likely to be much higher. Adding considerably to this pressure on local authority finances are TA subsidy rules, which are frozen at 2011 rates, meaning that the shortfall is made up from council tax collections, at the detriment of other services. These circumstances have seen some local authorities needing to seek emergency funding from the government, such as Eastbourne Borough Council reporting that 49p of every £1 of council tax it collects is being spent on TA. These shocking statistics demonstrate the vital and complex role local authorities play in supporting homeless families, which has a significant impact on their budgets and ability to spend money on other services or the development of new homes.

Finally, the local authority sector has increasingly felt the lack of resource, capacity and skills required in order to fulfil its role effectively. This has been most clearly reflected in the planning system, as highlighted in our response to the National Planning Policy Framework consultation. Local planning departments across England have faced significant reductions in staffing levels over recent years, largely due to budget cuts and the ongoing challenges in recruitment and retention of skilled staff. This reduction in capacity has led to increased workloads for existing planning officers, resulting in delays in processing applications, reduced capacity for proactive planning, and limited engagement with communities and stakeholders. In parallel, the complexity and volume of planning applications have grown, further exacerbating the strain. This also impacts upon the ability of local authorities to use new CPO powers, which are crucial in releasing land to build the homes required, as highlighted in the government’s recent consultation. Although we welcome the government’s commitment to reforming the planning system to boost housing development, the effectiveness of these reforms will continue to be limited by the lack of resource in local authority planning departments.

In addition to capacity issues, there are notable skills gaps within the planning profession; the rapid evolution of planning policy, including increased emphasis on sustainability, climate resilience (such as issues mentioned elsewhere in our response), and digital technology, requires planning officers to possess a broad range of skills and knowledge that extends beyond traditional planning training. The commitment to introduce 300 new planners and the Planning Skills Fund are an opportunity to address this somewhat, but further consideration is needed of action to boost current and future staffing of planning officers. As the recent Resolution Foundation report, Building Blocks, highlights, an increase of 300 planners translates to fewer than one additional planner per local authority in England, and represents less than 10 per cent of the total fall in public sector planners since 2010. Such a small increase is unlikely to have a material impact on equipping the planning system for kickstarting housebuilding to the levels required.

In 2012, the government and local authorities agreed a self-financing settlement, aimed at making HRAs sustainable. The assumptions made then no longer fit with the financial and policy environment as it has evolved since 2012: the context of restrictions in rent policy, rising additional costs, increased right to buy discounts, and major changes to the operating environment. Our report with Savills outlines the need to revisit the 2012 debt settlement, and how this could be done via the transfer of £17 billion of unsustainable debt from local governments to central government. This would provide councils with the capacity to invest in their existing stock as improve their ability to develop new homes.

CIH welcomed the government’s recent reforms to the right to buy (RTB) scheme. The RTB was aimed at making homeownership more accessible to households otherwise unable to buy. However, the scheme has had significant negative impacts on social housing supply across England, particularly since the discounts were raised in 2012 and because insufficient replacement homes have been built. Every home sold that is not replaced pushes more families into the private rented sector, driving up rents and benefit costs, and exacerbating the homelessness crisis, which ultimately ends up costing local authorities further. For these reasons, CIH has repeatedly called for reform of the RTB, and pointed to the successful ending of the schemes in Scotland and Wales. Our response highlights the need for local authorities to be able to control their own assets and receipts, as well as further restrictions to protect existing and new social homes.

Another welcome announcement from government was the long-term social rent settlement. As we outlined in our response and accompanying commissioned analysis from Savills, HRAs will continue to operate in a deficit without the re-introduction of rent convergence. A 10-year settlement at CPI+1 per cent is estimated to provide an additional income of £5.6 billion for local authorities. Without convergence, it is clear from our members that the additional capacity created by CPI+1 per cent for 10 years would be insufficient to meet the full range of investment challenges faced by the sector. Reintroducing rent convergence would increase the total additional rent income over 10 years to £11.6 billion for local authorities and provide long-term certainty on income. It is vital that the government implement these changes to sustain local authority finances.

This response has highlighted key areas that impact upon the sustainability of local authority finances. The current system is not sustainable, and it is vital that the government acts now to protect the future of council housing, which provides a foundation for so many people. We have outlined crucial policy interventions that the government should implement, in order to ensure that the financial future of local authorities is viable and allows for effective support of their communities both now and into the future.

For more information on the inquiry visit parliament's website.

For more information on our response please contact Megan Hinch, policy manager megan.hinch@cih.org.