Local authority infrastructure financing

A complex system of local government has developed across the UK as a result of reorganisations and changes to funding regimes.

This section explores the various ways local authorities finance infrastructure projects, detailing the sources of funding available as well as the difficulties and potential pitfalls of the system.

It begins with an overview of local government and infrastructure before moving on to explore the different funding options available to local authorities. It then turns to the subject of credit risk and debt before concluding with issues of localisation, devolution and pension funds. 

This section is maintained by Robert Robinson of Bridgecourt and Company.

• General inflation and government restrictions on generating commercial revenue are putting additional pressure on local authority budgets.
• Pay demands and demand pressure, particularly in social care and special educational needs, is forecast to result in a funding gap of around £1.9bn in the local authority budget in England in 2025/26, rising to £8.4bn in 2028/29, according to the Local Government Association.
• Local authorities are being encouraged to bring forward proposals to introduce single unitary authorities in areas where two tiers of local government currently exist.
• In June 2025, the new Labour government started consultation on the Fair Funding Review 2.0, which will determine funding allocations and agree a long-term approach to business rate retention.
•  The local government finance settlement for England 2025/26 increased funding for local authorities by £5bn to £69bn.
• The UK Shared Prosperity Fund was launched in 2022 to replace the loss of EU grants received by UK local authorities. The first phase was extended by the new Labour government to 2026 with a new set of funding priorities.
• The £4.8bn Levelling Up Fund announced by the previous government has been scaled back by the new Labour government with projects cancelled and funding reprioritised.
• Borrowing by UK local authorities decreased by £0.6bn to £11bn in 2024/25. Capital grants provided by central government, the largest source of funding for capital expenditure, decreased by £0.4bn to £13bn in 2024/25.
• The UK government increased the total lending limit of the Public Works Loan Board (PWLB) from £95bn to £120bn. However, the cost of borrowing from the PWLB has increased significantly in line with the increase in gilts, and borrowing levels are forecast to decline further.
• The UK Infrastructure Bank (UKIB) has been incorporated into the new National Wealth Fund (NWF). It has a mandate to lend up to £4bn to UK local authorities. In September 2023, it reduced its lending rate to local authorities to gilts + 40bps (40bps lower than the PWLB).
• The funding model for local authorities has undergone significant change in recent years, with a switch away from central grant provision towards keeping a higher proportion of locally generated revenue. The government has delayed any move to 75% business rate retention and then to 100% retention.
• Some local authorities have seen their levels of reserves fall, and have also seen pressure from inflationary costs and the high cost of debt as interest rates increase in the face of high inflation. This has increased the risk of financial failure and the issuing of section 114 notices. Twelve local authorities have issued section 114 notices since 2018, and around 20% of all councils are potentially at risk of issuing a notice over the next couple of years.
• There remains uncertainty around the financial sustainability of many local authorities. However, given the strong framework of central government support in which they operate, local authorities remain highly creditworthy and attractive borrowers for most lenders.

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isurv section: Infrastructure financing

isurv section: Infrastructure planning and development