Local Government Finances: London

Louie French Excerpts

Wednesday 26th March 2025 Westminster Hall

[Mr Bailey]

The hon. Member is right, but we cannot adjust the market situation without adding more houses to the stock. Once we have increased the number of houses, we can start tackling the private rented sector. We are doing so, and I hope that the Minister will expand on some of the measures that this Government are taking to bring our landlords into line and improve the quality of the private rented sector.

As a result of the problems I have described, London’s boroughs are facing an unprecedented financial crisis, one that threatens the vital public services that millions of Londoners rely on, including my constituents in Leyton and Wanstead. Our communities are strong, but we also face significant challenges, ranging from crime and antisocial behaviour to a shortage of decent, affordable homes and the need for better opportunities for young people. All those issues can only be addressed effectively if our excellent councils can invest in our future.

Many councils are now teetering on the edge of issuing section 114 notices—meaning effective bankruptcy—and those risks are increasing, because the drivers of increased costs have simply not been accounted for. Seven London boroughs, nearly a quarter of the total, require exceptional financial support for 2025-26 amounting to over £400 million, and London accounts for almost a third of the total national EFS funding of £1.3 billion. We need to seriously engage with these challenges and chart a sustainable path forward. According to London Councils, London boroughs are forecast to overspend by £800 million this year; particular pressures include homelessness at £330 million, adult social care at £200 million and children’s social care at £160 million. The cost to the public purse will be so much greater in the long run if we do not deal with this crisis now.

By far the most acute financial pressure facing London boroughs is homelessness. The scale of the crisis is staggering: London Councils assesses that one in every 50 Londoners is currently homeless and living in temporary accommodation, including nearly 90,000 children. First and foremost, this is a human tragedy. Like many other colleagues, I have been engaging with individuals and families who are suffering as a result of the housing crisis, including a very powerful visit that I had this Christmas with Crisis in central London. In addition to this human suffering, homelessness represents the fastest-growing financial risk to London’s local authorities, with our councils spending £4 million per day on temporary accommodation—a figure that has surged by 68% in just one year.

[Mr Louie French (Old Bexley and Sidcup) (Con)]

I thank the hon. Member for giving way and for securing today’s important debate. I agree a lot with what he is saying about homelessness and the challenges it creates for London authorities, whether in inner London or outer London, but it prompts the question of why his Government have cut the housing targets for Labour councils in central London.

--- Later in debate ---

[Mr Bailey]

I thank my hon. Friend for her intervention. She refers to one of the three main stresses on our councils: addressing that would bring the greatest relief to all of them. Another step that the Government could take to tackle the homelessness crisis would be to ensure that the LHA rates reflect actual housing costs. London rents have risen so fast in recent years that just 5% of private rented properties are affordable on LHA, pushing more and more families into homelessness. I hope the Minister will set out the steps the Government are taking to review LHA rates, because that could make a huge difference to many families as well as to council finances.

Additionally, a longer-term social rent settlement would stabilise council housing revenue accounts and allow boroughs to increase the building of the new genuinely affordable homes that Londoners need, which we know is the only way to tackle the housing crisis.

When deprivation measures—rightly—have such a significant impact on funding formulas, it is vital to ensure that they effectively account for the impact of rents. Housing costs are one of the biggest drivers of deprivation in London, which is the third most deprived region in England once housing costs are considered. Beyond housing, the fundamental issue at the heart of London’s council funding crisis is a growing disparity between funding allocations and actual levels of need. The main local government funding formula has not been updated since 2013, meaning that allocations are based on outdated data that fails to account for population growth, demographic changes or London’s high housing costs.

Such difficulties can be illustrated by the councils that serve my constituents in Leyton and Wanstead. Redbridge has had population growth of 11.4% since 2011 and has huge pressures from homelessness, with a spend of £52 million a year on temporary accommodation. This is driven by the fact that Redbridge has an enormous private rented sector, comprising 75% of renters locally. The eviction rate in Redbridge is at 4.6% per 10,000 renters, almost triple the London average, with 86% of those evictions coming from the PRS. There is no escaping the reality that shocking numbers of people in constituencies like mine are now being evicted as the housing market changes, and identifying creative policies to tackle it is truly urgent.

Waltham Forest is facing massive pressures from increased homelessness, with a 55% increase in temporary accommodation in just one year up to last October. The requirement to spend under 51% of the homelessness prevention grant on temporary accommodation, although obviously a step in the right direction, will mean that still more of the bill for rising homelessness costs will have to come from the general budgets, including from reserves and other spending.

Costs from special educational needs and disabilities have also been surging, with a forecast overspend of £4.6 million, but the increase in the high needs block funding has not recognised that. Across London the upshot of the large gap between assessed need and actual funding, which the Institute for Fiscal Studies has identified as 17%, is the largest shortfall of any region in England. Many outer London boroughs are among the lowest funded per capita in the country, despite significant pressures.

We welcome the Government’s commitment to reviewing local government funding, because this is a huge opportunity to create a system that accurately reflects the current levels of need. In particular, we need to make sure population figures are robust, which requires serious attention to whether the figures for London reported in the last census are accurate, given that many people left the capital during the pandemic and have since returned.

[Mr French]

I echo the hon. Member’s comments about funding not keeping up with demographic changes. That is a cross-party criticism—not one aimed just at the Labour Government—because the problem is historical. Other price and funding challenges coming through include contract inflation, and the impact of the jobs tax on all local councils. The impact on Bexley council is expected to be around £5 million next year, but the Government are only providing £1.6 million of funding. Does the hon. Member agree that Ministers must address that issue, as well as the issue of fair funding, to ensure that councils can be financially sustainable?

[Mr Bailey]

No, and I will allow the Minister to explain why later.

The Tories’ legacies are a local government funding formula that does not recognise London-wide changes, pressure and needs, and a woefully outdated division between outer and inner London. Even 15 or 20 years ago, the traditional distinction between the core city and its outer areas made some sense: density and deprivation were more concentrated in the centre, as a legacy of slums and deindustrialisation. But the impacts of affordable housing and demographic changes have since consigned that situation to the past.

The population, especially people on lower incomes, have moved outwards, but the funding formula has not kept up. The places we live in have changed massively. Populations have grown as new people have come in, which has pushed up rents and house prices, contributing to real social exclusion and deprivation for many. I will quote just two of the many statistics that illustrate that. The borough of Redbridge has more than 80,000 children and young people; Islington has less than half that figure, but the figures for spending on children’s services are almost the inverse—Islington is able to spend £81 million and Redbridge just £44 million. That cannot be justified by deprivation rates, because Redbridge sits above the London average rate, and Islington below it. The situation is no different for public health, where outdated formulae mean that Waltham Forest receives 2.5 times less public health funding per person than Kensington and Chelsea, despite having higher levels of deprivation.

We must recognise that this is not just about the grant formula itself. Inner London weighting has impacts across many policy areas and therefore affects the quality of life of my constituents. Performance levels across education, health, crime and antisocial behaviour are becoming harder to sustain due to recruitment and retention issues, because teachers and police officers can earn up to £6,000 more just by travelling 15 minutes on the Tube. The disparity impacts both revenues and costs, because many inner London boroughs have a greater ability to raise funds from business rates and charges. That also needs to be further taken into account in the Government’s funding reforms.

Ultimately, we need significant change that recognises the impact of huge London-wide demographic shifts, but we also need specific, special consideration for outer London. I welcome the steps that the Government have taken so far to reform the local government financing system, including by giving councils multi-year settlements, which allow them to plan more effectively. That said, local government funding reform will not, on its own, guarantee the financial sustainability of local government, and we all know the challenging financial position that the Government inherited.

If greater resources cannot come from national Government, one alternative would be to empower local authorities to raise revenue through greater fiscal devolution. The fact that seven London boroughs now require exceptional financial support should be a wake-up call for us all—but EFS is not a solution; it is an emergency measure that does nothing to address the structural funding problem. The two London boroughs that required EFS in 2024-25 need even greater support in 2025-26. Relying on EFS would only kick the can down the road and allow financial instability to deepen. That presents a further concern for my constituents because our local councils have managed their budgets prudently and well. They have dealt with the inadequacies of the funding settlement and have often had to increase council tax as a result.

We cannot continue to see success punished, as happened under the previous Government, through policies that direct funding towards life support instead of tackling the underlying drivers of increased costs, which affect well-managed and poorly managed councils alike. I urge the Government to work with the local government sector to explore alternative support mechanisms, such as long-term debt restructuring, to give councils a genuine route to financial stability. We look forward to the funding reforms due in the next 12 months, but we must recognise that the pressure driving costs for our councils is linked to other policies across Government, from housing and planning to special educational needs and disabilities reform.

Strong and empowered local government in London is vital to support delivery of our national missions. Whether we are talking about raising living standards, delivering 1.5 million new homes, getting our NHS and social care system back on their feet, or creating good jobs and strong communities, it all comes back to local councils such as Waltham Forest and Redbridge delivering for local communities. Our Labour councils can do so much more if those challenges are tackled.

Despite the challenges, our hard-working local government staff and council leaders are already innovating and delivering change. In Waltham Forest, the council aims to deliver 27,000 new homes and 52,000 square feet of working space. Redbridge has taken forward a new empty property strategy to tackle that element of the housing crisis, alongside plans to deliver 19,000 new homes and 7,000 new jobs over the next decade. London MPs across the House, along with our hard-working councillors and council officers, are keen to work in partnership with the Government to address the huge challenge we face, and I look forward to playing my part in that.