Inner London Councils Face Cuts Under New Funding Shake-Up
Inner London boroughs are bracing for significant funding cuts under a planned overhaul of how the government allocates money to local councils, according to new research by the Institute for Fiscal Studies (IFS). The think tank warns that some councils could see their funding drop by up to 12% in real terms once inflation is factored in.
The proposed changes, set to roll out from 2026 over three years, are aimed at modernising a funding system many agree is outdated. But the shift could result in a dramatic redistribution of money across England — with inner London councils among the hardest hit.
Winners and Losers in the New System
While inner London loses out, outer boroughs and urban areas outside the capital are expected to benefit. Councils in places like Nottingham, Wolverhampton, Slough, and parts of Yorkshire and the East Midlands are among those likely to gain from the new formulas.
The government’s revamped system will place more weight on areas with a higher proportion of homes in lower council tax bands and will rebalance how business rates are shared — a source of funding councils have been partially allowed to keep since 2013.
In total, the IFS estimates that £2.1 billion in annual funding will be redistributed under the plan. Around 186 councils will see cuts, while 161 stand to gain.
The Impact on Inner London
Some of London’s most prominent boroughs — including Camden, Westminster, Wandsworth, Hammersmith and Fulham, and Kensington and Chelsea — could see real-terms funding losses of up to 12%, even with a proposed safety net to limit the steepest reductions.
The reason? These boroughs tend to have lower council tax rates and a higher share of properties in the top tax bands, which means they’re disadvantaged by the government’s new attempt to “level out” council tax revenues across the country.
Outside London: Where the Money’s Going
The IFS says regions like the East Midlands and Yorkshire and the Humber are set to receive the largest increases. Medium-density urban areas such as Blackpool, Slough, and outer London boroughs are also expected to benefit.
However, the changes will have a mixed impact across the country. Some shire districts that have seen significant growth in business rate revenues — such as Mid Suffolk and North West Leicestershire — may lose funding. Meanwhile, urban districts like Harlow, Crawley, and Norwich are among the biggest winners.
A Long-Overdue Reform — But at What Cost?
The government says the funding overhaul is essential. A spokesperson for the Department for Levelling Up, Housing and Communities described the current system as “outdated,” arguing that the link between funding and local demand for services has broken down.
Local authorities currently receive about half their income from central government, with the rest raised locally — though yearly council tax increases are capped at 5%.
Despite recent increases in real-terms funding, many councils say it still falls short of covering the rising cost of essential services like adult social care and special educational needs provision.
Political Fallout Ahead of Local Elections
The planned shake-up has already sparked political backlash. Labour says the current funding model fails to reflect growing needs in poorer communities, while the Liberal Democrats have criticised the changes as simply shifting hardship from one area to another.
“This will come as a shock to the system for many councils,” said Lib Dem deputy leader Daisy Cooper. “The government is moving the pain of chronic council underfunding from one community to another, instead of growing the economy to increase revenue across the board.”
While there’s broad consensus that the funding system needs reform, the IFS report makes clear that redesigning it is politically fraught — especially with major local elections looming next year.