London Councils has warned that London borough finances will be “stuck in survival mode” next year, as ministers unveiled the provisional Local Government Finance Settlement for 2025-26.

While welcoming the additional investment in frontline services and steps being taken to reform the broken local government funding system [1], London Councils anticipates that boroughs will still be left with a £500m funding shortfall amid immense service pressures and spiralling costs.

With homelessness at a record high in the capital and posing the fastest-growing risk to boroughs’ financial stability, London Councils describes the government’s increase to Homelessness Prevention Grant as a “step in the right direction”. London boroughs are set to receive an extra £80m in Homelessness Prevention Grant, as well as an estimated 5.7% uplift in their overall Core Spending Power.

The government has also announced that at least 49% of the Homelessness Prevention Grant must now be spent on homelessness prevention. While London boroughs support a greater focus on prevention, they rely on Homelessness Prevention Grant to help cover their temporary accommodation costs. London boroughs currently spend around 80% of their Homelessness Prevention Grant on temporary accommodation and there are concerns about resources for this provision being squeezed. The new restriction will force boroughs to meet even more temporary accommodation costs from their already stretched general funds.

London Councils has warned of a homelessness emergency in the capital, with more than one in 50 Londoners currently living in temporary accommodation arranged by their local borough [2]. Boroughs collectively spend around £4m each day on temporary accommodation, and this spending has jumped by a dramatic 68% in just a year. Boroughs are forecast to overspend on their homelessness budgets by £270m in 2024-25.

Across all service areas, London Councils says a funding shortfall of at least £500m will remain in place in 2025-26 due to costs rising at a faster pace than boroughs’ funding levels, including new pressures such as the impact of the employers’ National Insurance increase on supply chains.

The cross-party group highlights that the continuing strain on borough budgets makes it harder to maintain financial stability and to protect services from cutbacks. Two London boroughs are currently reliant on Exceptional Financial Support arrangements with the government, but London Councils’ analysis suggests several more may require this support to balance their budgets in 2025-26.

Cllr Claire Holland, Chair of London Councils, said:

“Borough finances look set to be stuck in survival mode.

“After fourteen years of structural underfunding, spiralling costs, and fast-rising demand for services from residents in need, the strain on borough budgets is enormous. We welcome the additional support being provided by the government and the increase to homelessness funding is a step in the right direction. However, we are concerned about resources for temporary accommodation being squeezed, and this is a key funding pressure in the capital. Overall, boroughs are still grappling with significant shortfalls, making it harder to protect local services.

“The government has rightly committed to reforming the broken council funding system. We will continue to work with ministers on restoring stability to borough finances and ensuring next year’s Spending Review brings the long-term investment we need. This is crucial so that boroughs can keep delivering local services for Londoners, putting prevention at the heart of our work, and driving inclusive growth across the capital.”

London boroughs are set to overspend on their original budget plans for this year (2024-25) by more than £700m. Homelessness represents the largest single driver of London boroughs’ current finance pressures, accounting for £270m of their forecast overspend. Adult and children’s social care together account for more than £300m of additional budget overspend this year.

London Councils’ analysis shows that boroughs’ funding per Londoner fell by 28% since 2010, even though there has been an 11% growth in London’s population and rising demand for services.

Last year the Institute for Fiscal Studies published a report suggesting London local government funding is 17% lower than its estimated relative need – the largest gap of any region in England [3].