London’s councils are warning the government that new funding reforms risk ignoring the true scale of deprivation and housing poverty in the capital.

In their response to the government’s Fair Funding Review 2.0 consultation, which has just closed, London Councils – the cross-party body representing all boroughs – urged ministers to rethink key parts of the plans. At the heart of their concern is that the current formula simply doesn’t capture the realities of deprivation in London, especially the impact of high housing costs.

Flawed deprivation measures

Borough leaders say the proposed approach to measuring deprivation is deeply flawed. Under the government’s draft formula, factors such as the “road distance to a post office” are given the same importance as levels of homelessness. Councils argue this undermines the government’s stated aim of ensuring money goes where it’s needed most.

They are also concerned about:

A new ‘remoteness’ factor – which would shift funding towards rural areas on the assumption that services are more expensive to deliver there, despite previous government research disproving this.

The children’s services formula – which, according to research by the National Children’s Bureau, underestimates the level of need in London and lacks accuracy.

Why housing costs matter

Housing costs are the single biggest pressure on most Londoners’ budgets, shaping disposable income and driving levels of deprivation. Yet the government still plans to rely on the Index of Multiple Deprivation (IMD) – a tool that does not fully reflect housing poverty.

The figures are stark:

1 in 50 Londoners is currently homeless and in temporary accommodation.

1 in 4 households in London lives in poverty once housing costs are taken into account.

This makes housing poverty a defining issue for the capital – one that risks being overlooked in the new funding system.

Councils under pressure

Cllr Claire Holland, Chair of London Councils, warned that the proposed reforms could leave boroughs unable to cope:

 “We have long called for reform to local government funding to ensure money is distributed fairly on the basis of need. However, the current proposals risk failing to achieve this. After more than a decade of structural underfunding, rising demand and skyrocketing costs, the impact on London could be severe.

“It is right to focus resources on areas with the highest levels of deprivation, but we can’t ignore deprivation in the capital – London has the highest rate of poverty in the country once housing costs are factored in. It is difficult to explain how proximity to a post office affects someone’s life as much as homelessness, yet these factors are given equal weighting under the current proposals.

“As the government considers the responses to the consultation, we will continue working with them to ensure we create a funding regime that genuinely matches resources to need and helps restore financial stability to the sector. This is critical to us delivering on our shared priorities, including building homes, creating jobs and driving economic growth.”

A widening funding gap

London already faces the largest funding shortfall of any region. Research by the Institute for Fiscal Studies (IFS) shows a 17% gap between assessed need and actual funding in the capital, and recent IFS analysis warns that “London is the biggest loser” under the current reform plans.

Right now, London boroughs are grappling with at least a £500m funding gap this year alone. Nearly one in four councils (seven) are relying on emergency government loans through the Exceptional Financial Support scheme – the highest rate in the country. Alarmingly, London Councils’ modelling suggests many of these boroughs could lose even more funding under the proposed changes.

What councils want

London Councils is calling on the government to amend its plans so that the funding formula properly reflects need, particularly around housing poverty. Without that, they warn, more boroughs could be pushed into financial crisis – threatening their ability to deliver essential services, from housing and social care to children’s support.

The group stresses that getting the funding model right is critical not just for Londoners, but for the country’s wider ambitions: building more homes, creating jobs, and driving economic growth.