By 2028, The Fair Funding Review will introduce a shift in local authority funding, which will be aligned with need and deprivation and properly account for an area's ability to raise resources locally. Authorities that continue to anchor decisions to historic funding profiles risk misjudging affordability, liquidity needs and exposure to short-term borrowing pressures.
Funding resets can create uncertainty around the revenue base used to support borrowing. The Capital Financing Requirement can no longer be assessed against a single central forecast. Instead, it must be stress tested against adverse funding scenarios where core resources are reduced or redirected.
This reduces borrowing headroom and increases the risk that previously affordable borrowing becomes marginal or totally unaffordable. Authorities with ambitious capital programmes or limited budget flexibility are particularly exposed.
Changes to funding allocations and timing will increase intra-year cashflow volatility. Periods of surplus cash are likely to be shorter and less predictable, while deficits may become more acute.
This raises the likelihood of more frequent use of short-term borrowing, increasing exposure to refinancing risk and interest rate volatility. Authorities that have historically avoided external borrowing may find themselves accessing markets more often and at less favourable terms. Understanding the impact of any potential changes to funding early is critical.
Liquidity buffers based on historic volatility may no longer be sufficient. Authorities should reassess whether current reserves and cash holdings are adequate to withstand delayed funding, adverse settlements and expenditure pressures.
Holding higher liquidity will carry an opportunity cost, but the balance between yield and resilience has shifted. Running liquidity too tightly is now a clear risk.
A single central forecast is no longer adequate. Authorities should model a range of funding outcomes and explicitly link these to treasury decisions, including borrowing plans, liquidity levels and investment strategy.
Critically, scenario outputs must translate into defined management actions, ensuring that modelling informs real decision-making rather than remaining theoretical.
Greater funding uncertainty requires a reassessment of investment strategy. The trade-off between yield and liquidity becomes more acute, and flexibility is likely to take precedence over incremental return.
Risk appetite may also tighten, with increased emphasis on capital preservation and access to funds under stress conditions.
This is precisely where Arlingclose supports local authority clients in preparing a more integrated and data-driven approach to treasury management.
Arlingclose works with clients to embed funding uncertainty directly into treasury strategy through:
Crucially, this is supported by Arlingclose’s proprietary online tools, which allow authorities to:
This enables treasury strategy to move from static planning to active scenario-based decision-making, ensuring that funding reform is fully reflected in day-to-day treasury activity and longer-term planning.
Authorities that proactively adapt their strategies, supported by robust modelling and the right tools, will be better placed to manage risk and maintain financial resilience. Those that do not risk reacting to funding changes rather than managing them.
Please contact us at info@arlingclose.com if you wish to discuss these issues in more detail.
12/05/2026
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