The Overview and Scrutiny Committee of Ealing Council met on 6 November 2025 to discuss local government funding reform. The meeting was also scheduled to approve the minutes from the meeting held on 3 July 2025.

Local Government Funding Reform

The committee was scheduled to consider a report on local government funding reform. According to the report, since April 2025, the government has launched two major consultations on local government funding: Local authority funding reform – Resetting the business rates retention system in April 2025, and Fair Funding 2.0 in July 2025. The Spending Review 2025 in June 2025, also provided some information on local government funding.

The report stated that all three proposals would have a major impact on local government funding nationally, regionally in London and locally for Ealing. The proposed reform of the funding mechanism will be the first change in how total local council funding is allocated since 2013/14.

The report noted that a government cabinet reshuffle resulted in the appointment of a new secretary and minister of state for local government. It also noted that ongoing economic volatility and the announcement of a late autumn budget may prompt revisions to the spending review, with potential impacts on departmental expenditure limits and the money available to local government.

Funding Reform Objectives and Principles

The report stated that in December 2024, the government sought views on its approach to determine new funding allocations through the local government finance settlement. The current funding formula was based on 15 different Relative Needs Formulae including 120 drivers of demand.

The consultation:

• provided high level principles of allocating funding to reflect an updated assessment of need (including deprivation) and resources
• promised a multi-year settlement from 2026/27
• sought to simplify funding streams to allow local prioritisation.

The consultation set out the government's principal objective for local authority funding reform to:

develop a new distribution methodology, based on an updated assessment of need and resources, to allocate funding more efficiently to local authorities through the Local Government Finance Settlement…This new distribution methodology will be used to allocate grant funding and retained business rates income.

The methodology had three key components:

• A 'Relative Needs Formulae' for differences in costs of providing services taking into account drivers of demand including population and deprivation
• An 'Area Cost Adjustments' to account for differences in the cost of providing services locally
• An adjustment for the ability to raise Council Tax locally, to account for differences in resources available locally.

Business Rates Reset

The Business Rates Retention System (BRRS) was introduced in 2013 to incentivise councils to grow their business rates bases by allowing them to retain a proportion of any growth. The original intention was for the system to be 're-set' every three or four years so that all councils would benefit from growth. However, there has been no reset since the BRRS was introduced and the government announced a consultation on the reset in April 2025, to be introduced with a wider reform of local government from April 2026.

The aim of the reset is to redistribute retained business rates to areas with the greatest need. The proposed methodology for resetting BRRS focuses on two main objectives:

• Eliminate all growth and incorporate it into the Baseline Funding Level (BFL) figure nationally, which will then be divided according to the new needs assessment formulae.
• Allocate each authority a new Business Rates Baseline (BRB) amount that corresponds to what it should be able to collect from April 2026. This target collection will align with each council's BFL amount.

The report stated that for some councils, the lack of any reset over the last 13 years has meant that their funding has been inflated by the accumulated growth, with a reset resulting in potentially significant losses to current funding levels, which is likely to be the case for central and inner London councils and other areas of high economic growth over the last decade. The government has indicated that there will likely be some form of damping during a transitional period.

Ealing has achieved modest growth in business rates revenues over its BRB of approximately £4m per annum. Although the council could lose this growth as part of the reset, the ultimate impact will depend on the new Settlement Funding Assessment (SFA) when the new relative needs factors are implemented. The new funding formula will redistribute business rates revenues previously retained by individual authorities in line with the needs assessment. As a result, it is expected that redistribution of previously retained business rates should offset any loss of locally retained sums in Ealing.

Fair Funding 2.0

Following its initial consultation on funding reform objectives and principles, the MHCLG began its Fair Funding 2.0 consultation on local government finance reform in June 2025, closing in early August. The consultation proposes updates to resource allocation methods for local government, building on the 2016 Fair Funding consultation, which was not implemented. It is the first major update since 2013/14.

The report stated that the reform has at its base several fundamental principles, the first of these being simplification for which funding delivered through four consolidated grants:

• Revenue Support Grant (RSG) consolidating most of the Core Spending Power (CSP) grants with bespoke reporting on Adult Social Care funding. This will be based on the Settlement Funding Assessment (SFA).
• Homelessness & Rough Sleeping bring together funding for all homelessness and rough sleeping revenue funding, except for temporary accommodation funding rolled into RSG.
• Public Health consolidated alongside other service-specific grants to create a wider Public Health grant, delivered as a separate grant.
• Crisis & Resilience enable local authorities to build the financial resilience of their communities and assist those facing financial crisis, incorporating Discretionary Housing Payments.

In addition, the Children's Social Care Prevention Grant has been removed from the CSP and will be consolidated with the Children and Families Grant, alongside further investment in children's social care reform. The government will explore whether additional grants for children, families and youth services can be consolidated within this grant.

As described above with the Business Rates reset, all business rates growth since 2013 will be rolled into SFA and redistributed.

The SFA for each council will be determined by a relative needs formula, including an area cost adjustment, a deduction for relative resource and then transition arrangements over the three years of the Spending Review period.

Relative Needs Formula

The Relative Needs Formula (RNF) measures how a local authority's characteristics influence demand for services, assessing their expected relative demand. Each RNF uses data on service demand drivers, with methods varying by service.

The relative needs factors to be used are as follows:

• Adult social care
• Children's social care
• Fire & rescue not applicable for Ealing
• Highways
• Home to school transport
• Temporary accommodation
• Foundation formula to capture pressures and responsibilities not included elsewhere

Home to school transport and temporary accommodation are new factors to relative needs formula, while capital financing, concessionary travel and flood coastal defence have been removed to be picked up in the general foundation formula.

Funding will be shared between the formulae based on the relative size of actual expenditure in these areas.

Key elements of these formulae include population and deprivation. These formulae provide relative assessments of demand; they will determine an individual local authority's share of the funding available. Ealing's growth in population over the average growth since 2013/14 and relative levels of deprivation are likely to benefit Ealing however other elements of the formulae and their weightings may disadvantage Ealing, particularly in the Children's formula.

The council has considerable concerns regarding the measures of deprivation proposed to be used in updating Children & Young People's Services needs formula. The formula uses a measure of deprivation that does not include housing costs, which in London is a considerable factor in household expenditure.

Area Cost Adjustment

Within the RNF is the Area Cost Adjustment (ACA). This is an adjustment to the relative need 'score' to reflect unavoidable differences in costs of providing the same unit of service. The ACA breaks down into the labour element (wage disparities, travel times), rates element (cost of property) and the remoteness element (concentration of economic centres of activity which might help drive cost down through competition between providers).

The proposed Area Cost Adjustment includes a new element for 'remoteness'. This is aimed at councils in rural areas. However, this factor relies only on a theoretical case and contradicts the government's principle of using robust, evidence-based analysis. This change could result in an inaccurate assessment of service delivery costs, disadvantaging high-cost areas and leading to inefficient funding distribution.

Resources Adjustment

When the funding required to deliver services based on the RNF has been established, the amount of revenue (council tax) that can be locally raised is assessed, leaving the SFA to be distributed through the Revenue Support Grant. This is the Resources Adjustment.

The resources adjustment evaluates a council's capacity to generate council tax income by multiplying its attributable tax base (measured in Band D dwellings) by a notional rate of £2,000.

Ealing's Band D council tax for 2025/26 is £1,550.64. Therefore the council's resources adjustment (reduction in grant) will assume that the council would be able to raise more revenue through council tax than it can. Other areas of risk for the council is the cost of the council tax support scheme for working age residents where our scheme cost is likely to be higher than the expected reductions.

Transitional Protections

To avoid a financial cliff edge for authorities with significant past business rates growth, the new SFA will be phased in over three years. There will also be a cash funding 'floor' for the majority of councils that suffer a reduction in funding based on the 2025/26 level. A small number of councils that suffer significant reductions in funding will not benefit from the flat cash floor but will have 'bespoke' arrangements of a minus 7% floor. This is likely to include some inner London boroughs.

Although Ealing is unlikely to be either a big winner or loser from the reforms combined, there are concerns around the impact of the resources adjustment some aspects of the formulae, especially on the Children's social care factor and the area cost adjustment.

Spending review

Whilst funding reform will determine a local authority's share of local government funding (the slice of the pie), the Spending Review determines to total funding available (the size of the pie).

The Chancellor presented her Spending Review to Parliament on 11 June. Within the review, the Chancellor announced that Grant funding within CSP will increase by £3.4bn over three years, averaging increases of 1.5% a year in real terms. This will increase the total quantum of what is available for distribution under the new funding formula. However, the phasing of the additional funding is still uncertain as is the priority for allocating the new funding (such as to fund transitional arrangements).

Continuing global economic uncertainty will impact on the UK public finances, and the autumn budget, now set for 26 November 2025, may provide greater certainty around the funding available through the spending review to local government.

Impact on individual councils

The report referenced an IFS report on funding reform which estimated that if proposals were introduced in full immediately, funding would reduce by a combined £2.1 billion for 186 councils, and increased by the same combined amount for 161 others. One-in-ten councils would see a fall in overall funding (including from council tax) of 14% or more, while another one-in-ten would see an increase of 10% or more.

The IFS report reports that different types of councils would fare differently. The biggest losers are set to be inner London boroughs, and especially those in inner West London. In particular, it estimated that Camden, Hammersmith & Fulham, Kensington & Chelsea, Wandsworth and Westminster and would see the application of the lowest funding floor facing real-terms cut of 11–12% over the next three years even if they increased their council tax by the maximum allowed each year. Shire district councils see the widest range of impacts, with some losing significantly as their growth in business rates revenue is redistributed to other areas (e.g. Cherwell, Mid Suffolk and Northwest Leicestershire). Other more urban shire districts (e.g. Crawley, Harlow and Norwich) are set to be the biggest winners from the reforms.

The report sets out that regionally, London is the biggest loser, with a cashterms increase in funding of only 8% over the next three years. This is driven by large losses in inner London (–1%), with outer London as a whole set to fare slightly better than average (+15%). Outside of London, the East Midlands (+22%) and Yorkshire & the Humber (+19%) are set to see the biggest increases in funding over the next three years under the baseline reform proposals, with the Southeast set to see the smallest increases (+13%).

Next Steps

The government are yet to publish a formal response to the consultations on the business rates rest or funding reform. Key elements of the system are still being consulted upon, and the government plans to take account of new data when calculating the final funding allocations for councils. Therefore, the impact of reform on the council cannot be calculated with any degree of certainty at this stage. A 'policy statement has been promised during autumn 2025 that will set this out and provide greater clarity on what the funding may mean at an individual authority level.

Greater certainty on the impact of the funding reform and any changes to the spending review will only be provided when the provisional Local Government Finance Settlement is published. With the autumn budget now scheduled for 26 November, it is possible that the settlement will not be until mid to late December.

Final allocations are then expected in late January or early February 2026.

2025/26 Budget Monitoring

The cabinet will receive the Quarter 2 Budget Monitoring report at its meeting on 11 November 2025, after the OSC meeting.

The ongoing complexity and rising costs associated with demand-led children's social care, adult social care placements, and temporary accommodation for homelessness are expected to result in a significant forecasted overspend in service provision, similar to that reported to Cabinet in Quarter 1. However, time-limited surpluses in the council's treasury management budget and the use of contingency funds are anticipated to offset these pressures.

The surpluses from corporate budgets are temporary in nature and cannot be relied upon to cover service overspendings in future years. Managers are continuing to develop transformation plans to reduce the cost base of service provision to ensure the council maintains a balanced and sustainable budget.

As the council develops its Medium-Term Financial Strategy for 2026/27 onwards it will need to take into account the ongoing pressures being experienced in 2025/26 and the extent to which mitigations can be delivered and or savings identified to fund these.

The report recommended that the committee note the contents of the report.

Minutes of the meeting held on 3 July 2025

The committee was scheduled to approve the minutes of the meeting held on 3 July 2025. The minutes include a discussion of the call-in of a decision regarding the Improved Early Help Offer and Early Help Strategy 2025 - 2028. Councillor Malcolm presented the reasons for the call in, which included concerns about the closure of children's centres, the suitability of provision in religious settings, and the potential privatisation of early years services. Clare Welsby of Save Ealing Children's Centres and Clara Kraebber from Southall Community Alliance spoke in favour of sending the decision back to cabinet. Councillor Josh Blacker, Cabinet Member for a Fairer Start, responded to the points raised in the call-in. The committee voted to uphold the decision. The minutes also include the agreement of the Scrutiny Annual Report for 2024-25, and the scrutiny work programmes for 2025-26, presented by Sam Bailey, Head of Democratic Services.