Town halls across the capital face an “impossible” challenge of bridging a funding gap of over £4 billion in the coming years, according to new analysis from London Councils.
The cross-party group warns a funding squeeze on this scale will mean “inevitable” cuts to local services and a growing number of boroughs will require emergency borrowing to avoid bankruptcy.
The figures are based on a survey of all 33 London local authorities organised by the Society of London Treasurers [1]. Several factors are driving these finance pressures, including the expected impact of the government’s reforms to council funding. London Councils predicts the current proposals set out in the Fair Funding Review 2.0 would significantly reduce London boroughs’ collective share of government funds, and this is reflected in the data from the boroughs.
With final decisions over the Fair Funding Review 2.0 due to be confirmed by the government in the coming weeks, London Councils is continuing to make the case for an approach which reflects London’s high levels of need, deprivation and the cost of delivering services, as well as additional funding to ensure no local authority is worse off as a result of the reforms. This is seen as vital to helping prevent more councils from needing emergency support.
Key findings from London Councils:
Funding gap jumps to £1bn this year
New data confirms London boroughs need to make savings of around £600m in this financial year (2025-26) to close the gap between available resources and spending on services. This is in addition to £400m of Exceptional Financial Support (EFS) received by seven boroughs, which means the annual funding gap for London local government has reached £1 billion for the first time.
Because local authorities also have a legal duty to balance their budgets (i.e. they cannot carry a deficit into the next financial year), boroughs will need to deliver savings to address this gap or face using their one-time financial reserves.
£4.7bn funding gap between now and 2028
Based on current trends in service demand and expected government funding levels, London Councils anticipates a cumulative £4.7bn shortfall for boroughs in the four-year period 2025-26 to 2028-29. This four-year gap has more than doubled since 2024-25, when boroughs forecast a £2.2bn gap.
The annual budget gap is expected to increase by around 50% next year, from £1bn this year to almost £1.5bn in 2026-27. This is partly due to the potential impact of the Fair Funding Review 2.0 and also driven by the relentless increase in demand for homelessness support and adult and children’s social care – all statutory services where boroughs have strict legal duties and limited ability to cap their spending.
After more than a decade of boroughs making significant savings and efficiencies, further savings on this scale will be a major challenge. While boroughs will initially look to non-statutory services, it is likely statutory services will also be affected. Local provision of libraries, children’s centres, waste collection, road maintenance, and sports and leisure facilities could all be impacted.
Half of London boroughs may require Exceptional Financial Support
Six London boroughs currently balance their core budgets through the emergency borrowing enabled by the government’s EFS scheme, with one reliant on such support to balance its Housing Revenue Account.
Boroughs qualify for EFS when their financial challenges are so extreme they would otherwise face the prospect of issuing a Section 114 notice – effectively a declaration of bankruptcy. The EFS framework enables councils to take emergency loans from the Public Works Loan Board or sell off assets to help address their immediate financial pressures.
London Councils’ analysis suggests the number of boroughs requiring EFS could rise to 17 by 2028. This would mean half of London boroughs requiring these emergency measures [2].
As well as signalling the worsening pressures on boroughs’ finances, this forecast also demonstrates the shortcomings of the EFS scheme. London Councils has previously described it as a ‘as it becomes less and less exceptional and fails to support boroughs back to financial sustainability.
Cllr Claire Holland, Chair of London Councils, said:
“These eye-watering figures show the frankly impossible financial challenge facing boroughs and the prospect of an enormous funding gap opening up in the coming years.
“After more than a decade of structural underfunding, the resources available to boroughs are nowhere near enough to meet the spiralling cost of providing vital local services to Londoners. Research from the IFS has previously shown London has the widest gap between resource and need of any region in the country when it comes to council funding.
“The current proposals set out in the Fair Funding Review 2.0 risk exacerbating these pressures on borough budgets. Without an approach that reflects London’s high levels of need, deprivation and the cost of delivering services, further rounds of cuts are sadly inevitable and many more boroughs will be pushed into emergency measures to avoid bankruptcy.
“The worsening crisis in council finances serves no one’s interests. Boroughs will continue working with the government to seek a solution that puts the sector back on a sustainable footing, after years of uncertainty and financial instability. This is critical to us delivering on our shared priorities, including building homes, creating jobs and driving economic growth.”
