Nearly half of councils in England at risk of bankruptcy due to £4.6 billion deficit

A report from the National Audit Office (NAO) has indicated that nearly half of the councils in England are at risk of bankruptcy without immediate action to address an alarming £4.6 billion deficit. This substantial deficit is largely attributed to a series of policies established during the Conservative administration, which have resulted in local authorities facing “unsustainable” financial pressures, according to the independent spending watchdog.

The NAO's findings illuminate significant failures, particularly in the areas of funding for special educational needs and disabilities (SEND). The report noted that costs associated with SEND are increasingly outpacing the resources allocated to support these services, rendering the current financial situation precarious. A previous scheme called “statutory override” had permitted councils to temporarily exclude SEND debts from their balance sheets, essentially masking the scale of the problem. However, this measure is set to be abolished in March 2026, by which time councils are projected to accumulate the fiscal deficit of £4.6 billion.

The government has acknowledged the necessity of reforming the funding structure for local councils, although the NAO has issued a warning that failure to implement reforms by March could enable 43% of local authorities to declare effective bankruptcy. The report highlighted that, while there has been an increase in council funding recently, it has not kept pace with the rising demand and complexity of public service needs.

Statistical analysis by the NAO indicates that, although funding from central government grants, council tax, and business rates rose by 4% from 2015-16 to 2023-24, the funding on a per capita basis actually decreased by 1% during the same timeframe. The report correlates this decline with the increasing prevalence of councils declaring effective bankruptcy—more councils have done so in the last three years than in the previous thirty.

To address these financial issues, the government announced a financial settlement exceeding £69 billion for the upcoming financial year. Additionally, a package aimed at reforming local government structure and a bailout for 30 councils has been approved. Some councils have also received permission to increase council tax beyond the usual 5% cap.

Looking ahead, projections suggest that funding per person may increase by 7% by 2025-26; however, the Local Government Association estimates a potential funding gap of up to £8 billion for councils by the 2028-29 fiscal year.

Gareth Davies, head of the NAO, noted the urgency of the situation, stating, “There have been repeated delays to local government finance reform and government can no longer resort to short-term solutions to support local authorities. Action to address this must resolve the systemic weaknesses in local government financial sustainability through a comprehensive, cross-government approach.”

In response to these findings, a spokesperson for the Ministry of Housing, Communities and Local Government affirmed their awareness of the financial difficulties councils face. They reiterated the government's commitment to reforming the funding system and enhancing public services across the nation.

Source: Noah Wire Services