Northern towns 'shafted' in new funding formula that favours London, MPs say

Northern towns could be in line for a funding boost after complaints from MPs that a new system for allocating cash to councils favours London.

Ministers have been holding talks with northwest MPs about making tweaks to the fair funding formula - which some MPs claim left them "absolutely shafted".

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The formula is aimed at giving areas with the highest need the most money from central government.

Northern towns were initially expected to be the big winners. However ministers have used a measure of deprivation that heavily factors in housing costs, which northwest MPs say weights the formula in favour of London.

"It's completely skew-whiffed the figures …. we've been absolutely shafted", one northern MP told Sky News.

London and the southeast have the highest housing costs in the country and London councils had argued this should be factored into how the money is allocated.

However, northern MPs argue deprivation in their areas is driven by other significant factors including low incomes and lack of opportunity.

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One MP said while they were sympathetic to London's housing crisis, London "also has better state schools, transport links, job opportunities and cultural opportunities we just don't have".

Another said this wasn't about the north-south divide but about "social justice".

They said poverty in their town had increased by "horrendous" levels, adding: "It's there to be seen but it's being ignored. The formula is anything but fair."

The provisional settlement announced in December means all authorities in the Liverpool City Region (LCR) are getting less than the national average, as well as nearby areas like Blackpool, Wigan and Warrington.

These areas were expecting to be among the biggest winners, based on modelling from the summer seen by Sky News. However, the government said in November that it would update its measure of deprivation to better consider housing costs.

The government has used the English Indices of Deprivation 2025, which they say offers an "accurate and robust" measure of relative deprivation.

Analysis by SIGOMA, which represents areas outside London, found the change caused a shift towards the capital with outer London areas seeing the highest increases. Places like Newham and Brent are now getting millions more than expected while Blackpool and Knowsley are getting millions less.

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The formula is the first overhaul of government finance in a decade and means money allocated across England will rise from £83.2bn in 2026/27 to £90.3bn in 2028/29, with most areas seeing an increase overall.

Northern towns have generally fared better than rural areas and parts of inner London.

However, MPs who spoke to Sky News said their areas need visible and significant investment if they are to fend off the challenge from Reform UK. One said while this deal is better than under the Conservatives, it "barely touches the sides" if they are to reverse a decade of cuts and stop the electorate "rolling the dice" on Nigel Farage's party.

The provisional settlement still needs to be finalised, before being put to a vote in the House of Commons. Ministers will want to avoid even a small rebellion given the febrile mood within the Parliamentary Labour Party (PLP) currently.

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Steve Reed, the cabinet minister for housing and communities, is said to have held "constructive talks" with those lobbying for change. Steve Rotheram, the Metro Mayor for the Liverpool region, is among the senior figures to have raised the issue.

One suggestion is the government could increase the Recovery Grant, a £600m pot launched last year to give immediate financial support to councils hit hardest by a decade of funding cuts.

The grant - based on the previous measure of deprivation - will continue to be allocated as part of the fair funding settlement and there have been calls for it to increase by £400m per year to offset perceived losses from the fair funding formula.

The grant comes with a guarantee that upper-tier authorities in receipt of it will get a year-on-year increase across the multi-settlement period, starting with 5%. This guarantee could also increase.

Those involved in the talks have been told to expect good news, multiple sources said, though nothing has been confirmed.

A government spokesperson said: "We are repairing local government after years of decline and will shortly set out our consultation response confirming the final Local Government Finance Settlement for 2026-27."

(c) Sky News 2026: Northern towns 'shafted' in new funding formula that favours London, MPs say