Stop Looking at MHCLG, The Real Power Over Local Government Finance Lies with the Treasury

For far too long, the narrative around local government finance has centred on the Ministry of Housing, Communities and Local Government (MHCLG). It’s understandable MHCLG is the department most visibly associated with councils, responsible for distributing core grants, overseeing local accountability frameworks, and liaising with authorities on service delivery. But this focus misses a crucial truth: MHCLG is not the architect of local government finance. It is, in effect, the delivery arm. The real decisions the ones that shape council budgets, determine service viability, and influence the very survival of local authorities are made elsewhere.

That “elsewhere” is HM Treasury. It is the Treasury that sets the financial parameters within which MHCLG operates. It is the Treasury that determines departmental spending limits, allocates resources across government, and ultimately decides how much money flows into local government. Treasury decisions made during Spending Reviews and Budgets dictate the scale, scope, and flexibility of local authority funding. MHCLG merely implements those decisions often with limited room to manoeuvre. This dynamic has become increasingly visible in recent years, as councils face mounting pressures from inflation, demographic change, and rising demand for statutory services. While MHCLG may be the face of local government finance, it is the Treasury that pulls the strings.

Who Really Pulls the Strings?

MHCLG’s role is largely administrative: it distributes funding, manages grant schemes, and oversees compliance. But it is HM Treasury that controls the purse. Treasury officials decide how much funding is available, what conditions are attached, and how flexibly councils can use it. This centralised control has led to a system that is often reactive, fragmented, and misaligned with local needs.

“There needs to be a cross-government approach to local government finance reform, which must deliver effective accountability and value for money for taxpayers.” MHCLG spokesperson

This quote, while diplomatically worded, hints at the underlying tension. MHCLG recognises that reform cannot be delivered in isolation. It requires Treasury buy-in not just in terms of funding, but in terms of strategic intent. Without Treasury leadership, any attempt to overhaul local government finance risks being superficial.

The State of Local Government Finance

Local government finance in England is at a critical juncture. While headline figures suggest modest growth, the reality on the ground tells a very different story. Between 2015–16 and 2023–24, there was a 4% real-terms increase in combined funding from central government grants, council tax, and retained business rates. However, when adjusted for population growth and inflation, funding per person has actually declined. This erosion of per capita funding has left councils struggling to maintain service levels, invest in infrastructure, and respond to rising demand.

In the financial year 2023–24, councils collectively spent £72.8 billion. Of that, a staggering 58% was allocated to adult and children’s social care statutory services that are both high-cost and demand-led. In some authorities, particularly those with ageing populations or high levels of deprivation, social care now consumes up to 80% of the total budget. This leaves little room for discretionary services such as libraries, parks, community development, and economic regeneration all of which are vital to place-shaping and prevention.

The funding system itself is widely recognised as outdated, opaque, and overly complex. Councils must navigate a labyrinth of hundreds of fragmented grants, many of which are ring-fenced or time limited. Competitive bidding pots often designed to stimulate innovation or regeneration have become a costly administrative burden. Research shows that councils spend an average of £2.25 million per year simply preparing bids for these funds, with no guarantee of success. This not only wastes valuable officer time but also disadvantages smaller councils with limited capacity.

Moreover, the lack of a multi-year financial settlement has made long-term planning virtually impossible. Councils are forced to operate on annual allocations, often confirmed just weeks before the start of the financial year. This uncertainty undermines strategic investment, workforce planning, and partnership working. Taken together, these pressures have created a system that is reactive rather than preventative, centralised rather than place-based, and increasingly unsustainable.

Is a Major Reform Coming?

The short answer is yes and it’s long overdue. After years of piecemeal adjustments and short-term fixes, the government is finally signalling a shift in its approach to local government finance. The upcoming Fair Funding Review 2.0 and the 2025 Spending Review represent the most significant opportunity in over a decade to reshape how councils are funded, how resources are allocated, and how financial sustainability is achieved.

At the heart of this reform agenda is a commitment to increase Core Spending Power, which is projected to rise from £69.4 billion in 2025–26 to £79.3 billion by 2028–29. This equates to an average 2.6% annual real-terms growth, offering councils a more predictable and stable funding trajectory. While this growth is welcome, it must be viewed in the context of rising demand, inflationary pressures, and the cumulative impact of years of underfunding.

One of the most transformative elements of the reform is the introduction of a multi-year financial settlement, beginning in 2026–27. This marks a departure from the annual funding cycle that has plagued local government for the past decade, making long-term planning and investment incredibly difficult. A multi-year approach will allow councils to plan strategically, invest in prevention, and build resilience provided the settlement is both fair and flexible.

The government also intends to consolidate fragmented grants into the Local Government Finance Settlement, reducing the administrative burden associated with competitive bidding. This is a direct response to widespread criticism that councils are forced to spend millions each year preparing bids for short-term pots, often with little alignment to local priorities. Streamlining these grants could free up officer time, reduce duplication, and improve the efficiency of funding distribution.

In terms of targeted investment, over £5 billion in new grant funding is planned across the next three years. This includes a significant £2 billion earmarked for children’s social care reform, recognising the acute pressures in this area and the need for systemic change. If delivered effectively, this funding could help councils move away from crisis-driven models and towards early intervention and family support.

But Reform Comes with Risks

Despite the positive signals, there are serious risks that could undermine the reform agenda. One of the most pressing concerns is the impending end of the statutory override that currently allows councils to exclude Special Educational Needs and Disabilities (SEND) deficits from their formal accounts. This override is due to expire in March 2026, and without it, many councils will be forced to recognise multi-million-pound deficits on their balance sheets pushing them into effective bankruptcy. The SEND funding crisis is emblematic of a wider issue: demand-led services are outpacing available resources, and without structural reform, even increased funding will not be enough. Councils need not just more money, but greater flexibility, better alignment between responsibilities and funding, and a system that reflects real-world demand.

What Would It Take for Treasury to Deliver a True Financial Reset?

A genuine reset of local government finance not just a tweak or a temporary injection of funds would require a fundamental shift in how HM Treasury views and engages with councils. It would mean moving beyond short-term fixes and recognising local government as a strategic partner in delivering national outcomes, not merely a delivery vehicle for centrally determined priorities.

Here are five key pillars that would underpin such a transformation:

1. Political Will

At the heart of any meaningful reform lies political will. Treasury must make a deliberate choice to prioritise local government as a core part of the UK’s public service infrastructure. This means acknowledging the sector’s role in prevention, place leadership, and economic development and committing to long-term investment. Without this shift in mindset, reforms will remain superficial and reactive. A reset requires Treasury to stop viewing councils as cost centres and start seeing them as engines of public value.

2. Cross-Government Collaboration

Local government does not operate in isolation. Councils deliver services that span multiple departments from health and education to justice and welfare. A financial reset must be coordinated across Whitehall, with joint accountability and shared outcomes. This is especially critical for demand-led services like adult social care, children’s services, and homelessness, where siloed funding leads to inefficiency and duplication. Reform must be designed with input from DHSC, DfE, DLUHC, and others not just Treasury.

3. Statutory Reform

The current “New Burdens” doctrine which requires central government to fund any new responsibilities placed on councils is inconsistently applied and poorly enforced. A reset would involve strengthening this principle, making it legally binding and transparently monitored. Councils must be able to trust that new duties will be matched with adequate, sustainable funding. Without statutory safeguards, councils will continue to absorb unfunded mandates that erode financial resilience.

4. Fiscal Devolution

True reform means giving councils greater control over how they raise and spend money. This includes powers to introduce new local taxes (such as tourist levies or congestion charges), vary existing rates, and retain a greater share of locally generated revenue. Fiscal devolution would allow councils to tailor funding to local priorities, reduce dependency on central grants, and incentivise growth.

The UK remains one of the most centralised countries in the OECD and local government pays the price.

5. Data-Driven Allocation

Funding must reflect real-world need. The current system relies on outdated formulas and historic baselines that fail to capture demographic shifts, deprivation, and service demand. A reset would involve building a dynamic, transparent funding model based on live data, local capacity, and place-based indicators. This would ensure that resources are distributed fairly and equitably across the country. Councils serving high-need populations must receive funding that matches the scale and complexity of their challenges.

What’s the Cost of Reform?

Reforming local government finance is not just a technical exercise it’s a strategic investment in the future of public services, community resilience, and place-based leadership. But it comes with a price tag. The Treasury has committed £3.4 billion in new grant funding through the Local Government Finance Settlement between 2026–27 and 2028–29, alongside an additional £500 million from the Transformation Fund specifically aimed at reforming children’s social care. These figures represent a step in the right direction, acknowledging the acute pressures councils face and the need for targeted support.

However, the scale of the challenge far exceeds these allocations. The SEND (Special Educational Needs and Disabilities) deficit alone is projected to reach £5 billion in the next financial year. This is not a marginal issue it’s a systemic crisis. Over half of councils have warned that they may face effective insolvency when the statutory override allowing them to exclude SEND deficits from their formal accounts expires in March 2026.

“Public service reform and investment in prevention, especially in social care and SEND, can reduce costs and demand.” Local Government Association

The cost of reform must therefore be measured not just in pounds and pence, but in opportunity cost. Without a reset, councils will continue to operate in survival mode cutting non-statutory services, deferring investment, and losing the capacity to innovate. The long-term consequences include:

• Rising demand for crisis services due to underinvestment in prevention.

• Widening inequalities as deprived areas struggle to raise sufficient local revenue.

• Reduced public trust in local institutions as service quality declines.

• Increased central intervention as more councils face financial distress.

A true financial reset would likely require multi-year investment in the tens of billions, alongside structural reform, fiscal devolution, and a reimagining of the relationship between central and local government.

Final Thought

If local government is to thrive not merely survive we must fundamentally rethink the power dynamics that shape its financial future. For too long, MHCLG has been treated as the architect of local government finance, when in reality, it is HM Treasury that holds the blueprint. Reform is not just possible; it is essential. But meaningful change will only come when the Treasury stops viewing councils as cost centres to be controlled and starts recognising them as strategic partners in delivering national outcomes.

Local authorities are not passive recipients of funding they are active engines of prevention, innovation, and place-based transformation. They are where national priorities meet real lives: where housing policy becomes homes, where health strategy becomes care, and where economic growth becomes opportunity. Yet the current funding system fails to reflect this reality. It is fragmented, reactive, and short-term designed to manage risk rather than unlock potential.

We need a funding model that empowers councils to invest in long-term solutions, not just firefight immediate pressures. That means multi-year settlements, genuine fiscal devolution, and a shift in mindset at the heart of government. Councils must be trusted to lead, not just deliver. Because when local government is properly resourced and respected, it doesn’t just implement policy it transforms communities. The Treasury must now step up. It must stop treating local government as a liability and start seeing it as the solution. The future of public service reform, economic resilience, and social justice depends on it.