LGIU Warns Of Deepening Financial Strain On Councils

The Local Government Information Unit (LGIU) has published its 2026 State of Local Government Finance in England research, finding that confidence in the sustainability of council finances remains critically low despite recent reforms.

The survey of council leaders, chief executives, cabinet members for finance and senior finance officers shows that 15% of councils indicate they are likely to require Exceptional Financial Support (EFS) in 2026/27, rising to 39% within the next five years. While EFS enables councils to use capital resources or borrowing to balance revenue budgets, respondents widely describe it as an unsustainable mechanism that increases long-term debt pressures rather than addressing underlying funding gaps.

Rising service demand continues to be the dominant financial pressure, with 85% of respondents identifying it as a very or fairly big problem. Temporary accommodation and SEND provision are highlighted as acute short-term pressures, while adult social care is seen as the most significant long-term cost driver. Although the Government’s decision to underwrite 90% of historic SEND deficits has been welcomed, particularly by upper-tier authorities, councils note that future deficits may continue to build without structural reform.

To balance budgets in 2026/27, 92% of councils intend to increase council tax, with 84% planning to raise it by the maximum permitted level. Most councils are also increasing fees and charges, while 57% expect to cut service spending and 56% plan to draw down reserves. Among those making service reductions, nearly one in five believe there is a risk they may not be able to fulfil their statutory duties as a result.

Support remains strongest for multi-year financial settlements, with 70% agreeing they will improve council finances. However, wider reforms attract more limited backing: only 36% believe the Fair Funding Review 2.0 will improve council finances, and just 13% believe local government reorganisation will do so.

Rural Implications

The report also highlights issues particularly relevant to rural authorities. Lower-tier councils identify temporary accommodation as their greatest short- and long-term pressure, with respondents citing record housing demand and limited affordable supply. Rural district councils further warn that the rollout of food waste collection under the simpler recycling reforms places disproportionate cost burdens on large, geographically dispersed areas.

More broadly, redistribution effects arising from the Fair Funding Review are described as a significant pressure by many councils, particularly where allocations are lower than anticipated.

The report concludes that while recent reforms, including multi-year settlements and the SEND deficit intervention, have provided some stability, they do not fundamentally increase the overall level of funding in the system. LGIU argues that more radical reform, including changes to local taxation and greater fiscal devolution, will be required to secure long-term sustainability.

Read the full report here

Kerry Booth, Chief Executive of the Rural Services Network: The LGIU report highlights the continued financial pressures facing councils across England, particularly in social care, SEND and temporary accommodation. For rural authorities, these challenges are often intensified by the higher costs of delivering services across large and sparsely populated areas. As local government finance reforms continue, it is essential that funding formulae properly recognise the full range of rural service delivery costs. Fair funding must ensure that residents in rural towns and villages are not disadvantaged or asked to contribute more locally simply because of where they live.

Read more about what the latest Local Government Finance Settlement means for rural councils and RSN’s Rural Fair Funding campaign here.