government policy is NOT to eliminate spare places but to create them. Part of what the government wants to see from free schools is most (preferably all) areas of the country having an oversupply of places so that parents have a genuine choice
Prh I didn't say it was Government policy. I said it was systematically happening, because of reduced funds. In boroughs that are trying to cut costs (i.e. all of them), a reduction in surplus places is one way they can do that for maintained schools.
Of course new schools are funded directly from Government, but if they lead to surplus places in local maintained schools councils will (and do) object, making the process of opening schools much more difficult for the groups concerned.
Also, government funds for the new schools are limited. The number of places being funded will meet the overall demand, not exceed it, so no surplus places will be created overall - even if some appear in local pockets, they are likely to be temporary.
The "reasons" groups can give for setting up free schools have varied over the years. Originally it was enough to show you were providing something "different" and satisfying parental demand. Then there was a big fuss about surplus places being created in some areas, so the rules were changed, and groups then has to demonstrate a "need". Now they have been changed again, with the number of eligible reasons expanding.
Of course there is nothing to stop free school groups applying to set up community schools in areas where there are too many faith places - but it is an extremely difficult process, not for the faint hearted, and without heavy involvement from people already experienced in setting up and running new schools there is no guarantee of success.