The “outdated and inefficient” system of funding councils will be replaced by a fairer process focused on the needs of communities, the Government has said.

The announcement coincides with the publication of the provisional local government financial settlement for 2026-26, which includes a £600 million recovery grant for councils in deprived areas and an increase in social care funding of £680 million.

A children’s social care grant will provide £250 million for preventative initiatives, while the Government has confirmed it will maintain the threshold for council tax increases at a maximum of 4.99% without the need for a local referendum.

The funding outlined is a combination of measures in the autumn budget and “repurposed funds”, including grants for councils serving rural communities, the Government said.

A consultation on funding reform will be launched next month with a focus on what the Government said will be a move away from “an outdated and inefficient approach, which has seen some councils increasing their level of reserves and others struggling to deliver services and balance budgets, and shifting to a fairer system which matches funding with need”.

It is claimed the changes will build on “lessons learned” from the previous Government’s fair funding review, which many councils hoped would address the variation in the amount of revenue councils could raise to fund services through council tax, but was not implemented.

Planned reforms will be implemented alongside multi-year funding settlements, which have not been provided since the middle of the last decade, the Government said.

Deputy Prime Minister Angela Rayner said: “For too long councils have been let down by an outdated and inefficient funding system which has led to public services creaking and taxpayers’ money not being spent efficiently.

For too long councils have been let down by an outdated and inefficient funding system which has led to public services creaking and taxpayers’ money not being spent efficiently.

“Whilst there’s no magic wand to fix what we’ve inherited, we’re taking the necessary steps to fix the foundations of local government by creating a fairer system and ensuring every penny is spent on the services so many people rely on every day.”

However, the County Councils Network (CCN) said that “at first glance” the way the Government intends to distribute resources is a concern.

CCN chairman Tim Oliver said: “Considering that increases in the minimum wage and national insurance contributions will more than wipe out extra funds for social care, it is possible most CCN member councils, and many more across the country, will receive nothing from the ‘recovery grant’ which will be heavily targeted and weighted exclusively by deprivation.

“We are also very disappointed that the Government have chosen to repurpose some grants and redistribute this funding elsewhere, which will adversely impact rural councils.”

We are also very disappointed that the government have chosen to repurpose some grants and redistribute this funding elsewhere, which will adversely impact rural councils.

“Whilst deprivation is a key indicator of a councils’ need, it is not the only indicator nor the most important measure of financial distress. The reality is that it is demand and market failure across adult and children’s social care and special educational needs services that are pushing councils to the brink.”

He said the the way funds are to be distributed next year “do not adequately account for councils’ actual and future demands and costs”.

“We would be very concerned if this is the direction of travel moving forward. The Government must ensure that this review is a genuinely fair funding review and based on a robust and independent evidence base,” he added.

District councils also voiced concerns about the settlement.

Jeremy Newmark, finance spokesperson for the District Councils’ Network, said: “District councils, like other types of council, continue to feel the pinch financially.

“Today’s finance statement contains welcome news of an increase to core spending power, but inevitably falls short of guaranteeing the financial stability which will secure the long-term future of essential local services.”

The settlement will provide a real-term increase in core spending power – an estimate of the amount of money available to councils through grants and council tax – of about 3.2%

On average, councils serving rural populations will receive an increase of about 5% in their core spending power.

The Government said extra funding for social care will help councils address long-standing pressures, while the children’s social care prevention grant is intended to “help ensure children stay with their families or in safe loving homes where possible as part of a planned overhaul of the system next year”.

With reference to concerns over private companies running children’s homes imposing high charges, the Government added : “Legislation will be brought forward to crack down on the profiteering of vulnerable children and ensure local government can deliver safe, loving homes for children in care.”

The financial settlement overall will see £1.3 billion distributed to councils, while the Budget set out more than £4 billion of investment to build new homes, invest in special educational needs and disabilities, improve homelessness services and tackle potholes, the Government said.

In a statement on planned funding reform, local government minister Jim McMahon said: “This government is under no illusion about the scale of the issues facing local government.

“We know that the demand for, and cost of, services has increased significantly, and that this has made the job for councils in recent years much harder.

This Government is under no illusion about the scale of the issues facing local government. We know that the demand for, and cost of, services has increased significantly – and that this has made the job for councils in recent years much harder

“After a decade of cuts and fiscal mismanagement inflicted by the last government, compounded by spiralling inflation and a failure to grow our economy, councils of all political stripes are in crisis.

“Our fiscal inheritance means that there will be tough choices on all sides to get us back on the path to recovery, and it will take time.”

Mr McMahon added the Government will “reset” the relationship with local government and ensure it operates “at the highest standards of probity, and provides value for money; all while giving the sector greater autonomy, certainty and flexibility”.

“We will rebuild the system of accountability and oversight in local government, including an overhaul of local audit, scrutiny and standards, and will consult on strengthening the standards and conduct framework for local authorities in England,” he said.