Paul Woods, local government finance consultant, argues that the cuts to legacy borrowing support in the fair funding review risks hitting the most deprived councils the hardest.
I welcome the vast majority of the specific proposals in the Fair Funding 2.0 review. However, the proposal to end c.£1.6bn of support for legacy borrowing costs as part of formula simplification needs more consultation, change or compensation.
It has significant implications, potential unintended consequences, and a clear distributional effect. It is also adversely impacting some of the most deprived areas in the country. In my opinion, the impact of the change is not transparent or sufficiently consulted upon in 2024/25 and is contrary to the aims and objectives of fair funding.
It is a complete change to the findings of the more detailed fair funding consultation under the previous government in 2017/18, which found a strong consensus to retain a legacy capital financing formula.
My estimate of the legacy capital finance cost in 2026/27 is a very significant £1.6bn. This is based on detailed information provided in 2018 and the assumption that annual costs reduce by 4% each year. The Ministry of Housing, Communities and Local Government (MHCLG) did not produce exemplifications of the scale or impact of their proposed change or details about the ‘case not to have a bespoke legacy capital financing formula’. In response to my questions, officials advised that the allocation could have been c.£1.8bn (not accurate in my view). They also expressed a strong view that the proposal has been consulted upon extensively.
At the recent LATIF 2025 conference in London, I did not find a finance expert that knew the financial impact of this proposal on their own council. I have to conclude that without any illustration of the scale of the impact of the change for councils, the consultation has been ineffective and insufficient.
Lack of government recognition
The department does not appear to recognise that this proposed change could have unintended consequences or that it could have a distributional impact. I have found that it does impact more adversely on the most deprived councils. This appears to be one of the reasons why some of the results of the exemplifications of the impact of the new formulae for some deprived councils are not what was expected.
It is important that the new secretary of state takes the opportunity to review this proposal in detail and the responses to the latest consultation. Alongside this undertake further more detailed consultation on this issue quickly with the Local Government Association (LGA), representative groups and individual councils, before the provisional settlement is published in December for formal consultation.
The simple proposal to end capital financing support could be perceived to be breaking previous government funding commitments. This would mean that councils could not trust future funding promises and it would prevent future governments from using supported borrowing, PFI arrangements, or similar future funding tools. Financial institutions may need assurances about councils still being able to service their legacy borrowing costs, despite the ending of specific government support.
It appears to result in very significant losses to councils, which are not evenly distributed or transparent. It will also particularly disadvantage councils that previously received large borrowing approvals for specific transport and education projects as well as councils in the poorest most deprived areas of the country.
‘Slipped under the radar’
As a former city treasurer, director of finance of a regional transport authority for 12 years and then a treasurer of a combined authority for three years, and a member of previous national needs and distribution working groups for decades, I am particularly concerned at this proposal. In particular, the lack of transparency, potential for wider unintended consequences, and what appears to be significant impacts for individual councils resulting in a less fair overall settlement.
I was closely involved in discussions around funding for legacy capital costs during the development of the Fair Funding proposals. During this period, two detailed reports were considered by the Fair Funding sub-group — one in 2016 (NR TWG 16/24) and another in 2018 (NR TWG 18-12). Both reports were published on the LGA website and made available to all councils.
The 2018 report estimated the total legacy debt at the end of 2019/20 to be £25bn. This estimate was based on assumptions of a 4% annual repayment of the opening-year debt and an interest rate of 4.4%. The associated capital financing costs for 2019/20 were calculated at £2.15bn, with the figures broken down by class of authority.
Using this data, I applied a 4% annual reduction to project future costs, arriving at an estimated capital financing cost of £1.61bn in 2026/27 and an outstanding year-end debt of £18.8bn.
In 2018, the department’s consultation set out some key principles, one of which was simplicity – but recognising that “this should not be at the expense of accuracy and fairness”. Councils expressed a strong consensus around the need for these pressures to be reflected through the use of a service-specific formula.
In the most recent consultations in December 2024 and June 2025, the department changed its view and is proposing that for further simplicity, the separate legacy capital formula is ending. While it is stated that there is ‘a case not to have a bespoke legacy capital financing formula’, this case does not appear to have been published. No figures about the scale of the legacy capital financing costs were included in the consultation and there was no specific question asking councils to agree to the ending of funding for legacy capital financing costs.
That consultation was published over the Christmas period, alongside the consultation on the 2025/26 funding settlement, and I believe this probably meant the issue slipped under the radar for many councils.
Not ‘fair or transparent’
In my 40–plus years’ experience of local government funding, this specific proposal does not feel like a ‘fair’ and ‘transparent’ proposal that should be part of the Fair Funding 2.0 Review. It threatens to weaken what I consider to be a generally good set of proposals. It also appears to set a dangerous precedent of national government breaching funding commitments to councils, given by previous governments.
It reverses the position taken after detailed and more informed consultation with councils by the previous government between 2017 and 2019, when ‘there was a strong consensus from councils that legacy capital funding support should continue’.
Since then, I have raised detailed questions about this proposal with senior officials at MHCLG and the written response has been simplistic. Despite my knowledge and experience, they have refused to speak to me. Below are some of the points and questions I raised in an email, following a request for further information about myself and my query:
“I received supported borrowing allocations for major transport and other projects in my council and authority from 1989 onwards and believed the commitment of various secretaries of state and the department that funding would be provided to meet the future borrowing costs of these projects for their lifetime. That commitment was the basis on which my and other councils/authorities made the investment in capital projects and undertook borrowing.”
“I know that SCE(R) allocations were not evenly allocated by population to all councils. Higher levels of borrowing were allocated to councils undertaking large transport schemes and I believe there was a resources element in some of the historic allocations which compensated councils with lower land values and lower ability to generate capital receipts.”
It came as no surprise to me that all 12 unitary councils in the North East have capital financing RNF allocations that are above the national average per head. The most significant losers being South Tyneside, Sunderland and Gateshead – three deprived councils with low council tax bases.
The official did not like my questions about this issue and is currently refusing to talk to me as I am a ‘consultant’ and not currently a direct employee of a local authority.
The official response I received to my question is shown below, regarding the quantum of legacy capital financing costs from 2026/27 and the distributional impact of not recognising them in funding support.
“Our internal estimate is that had legacy capital finance been included in our needs assessment, it would have received a control total of c.3%. This is roughly equivalent to £1.8bn of local government expenditure based on 2023/24 data.
“Given the formula’s weighting is relatively small, it’s unlikely to significantly change the distribution of funding. The principles behind our decision to remove it are set out in the two consultation documents. We have consulted on this issue extensively,” MHCLG responded.
This response raises several questions:
- Is a c.3% (£1.8bn) allocation per year so small that it does not have distributional implications?
- Has the consultation been effective and sufficient?
A detailed impact assessment would show wide variation in the legacy borrowing costs per head between councils. While the average in England is around £27 per person, the allocation in more deprived areas ( e.g. Blackpool, Knowsley, Gateshead, South Tyneside, and Manchester) can be up to £40 per person, and in wealthier areas can be as low as £20 or less (e.g. Wokingham and Richmond upon Thames). There is a clear distributional impact.
Councils with the highest deprivation scores have an Relative Needs Formula (RNF) around £40/person and would lose heavily from this change. Councils in the least deprived areas generally have a lower RNF and would lose less. There is a noticeable and significant distributional impact.
The information provided to councils during consultation was limited, with no data on the national scale of the change or the impact on individual councils. The consultation may have been widespread, but whether it was efficient or sufficient is highly questionable.
For information, I have provided data about the previous capital financing RNF used for each council and an indicative allocation to each council of an estimated £1.61bn control total for 2026/27. While annual allocations would fall by 4% a year, over a three-year period, this would still amount to over £4.6bn. . In larger councils such as Birmingham the annual supported borrowing cost next year could be over £40m, so these are significant amounts as a council level.
I support simplicity, but this needs to be balanced against fairness, which used to be part of the guiding principles. I do not know why ‘fairness’ has been dropped from the latest definition of the principle of ‘simplicity’.
If this funding is to be simplified, a compensating adjustment is needed to offset the losses and gains. In 2011, when even more significant changes were made to Housing Revenue Account supported borrowing, compensating arrangements were made for adversely affected councils via a transfer of Public Works Loan Board debt. A clear precedent has been set for this type of funding change.
I hope the new secretary of state and the department will reconsider this proposal when they evaluate the detailed consultation responses and consider the impact on individual councils, including the most deprived. Hopefully, the fair funding review can be made fairer and more transparent as a result.
