Well, the ability to declare functions within function bodies is inherited from C so, by definition, there is a reason involving historical and backward-compatibility reasons. When there is likely to be real-world code which uses a feature, the argument to remove that feature from the language is weakened.
People - particularly those who only use the latest version of the language, and are not required to maintain legacy code - do tend to under-estimate how strong an argument backward compatibility is in C++. The original C++ standard was specifically required to maintain backward compatibility with C. As a rough rule, standards discourage removing old features if doing so is likely to break existing code. It can be done, however, if the only possible usage causes a danger that cannot be prevented (which is reason for removal of gets()
, for example).
When maintaining legacy code there are often significant costs with updating a code base to replace all instances of an old construct with some modern replacement. A coding change that may be insignificant for a hobbyist programmer may be extremely costly when maintaining large-scale code bases in regulatory environments, where it is necessary to provide formal evidence and audit trail that the change of code does not affect ability to meet its original requirement.
There are certain programming styles where it is useful to be able to limit the scope of any declarations. Not everyone uses such programming styles, but the reason such features are in the language is to allow the programmer the choice of programming technique. And, whether advocates of removing such features like it or not, there is a certain amount of code which uses such constructs usefully. That significantly weakens the case for removing the feature from the language.
These sorts of arguments will tend to come up for languages that are used in large-scale development, to develop systems in regulatory environments, etc etc. C and C++ (and a number of other languages) are used in such settings, so will tend to accumulate some set of features for "historical" or "backward compatibility" reasons. It is possible to make a case for removing such features by providing evidence that the feature is not in real-world use. But, since the argument is about justifying a negative claim, that is difficult (all it needs is someone to provide ONE example of continuing real-world beneficial usage and suddenly a counter-example exists which supports the case for keeping the feature).