Many more councils in England are at risk of bankruptcy, town hall leaders have warned, as unprecedented financial pressures force local authorities to prepare drastic cuts to services to cope with a collective £4bn deficit.
The bleak message, set out in a letter to the chancellor, Jeremy Hunt, said council budgets were “under pressure like never before” because of the rapid deterioration in their finances caused by inflation and soaring demand for social care.
Without an injection of government cash even well-run councils – both Labour and Conservative controlled – were at serious risk of running into financial difficulty over the next 18 months, the Local Government Association (LGA) said.
It said an “inflationary storm” had dramatically widened English councils’ estimated budget gap by an extra £1bn since July alone, with resources outstripped by the soaring costs of child protection, special educational needs and homelessness services
Councils reporting major overspends this autumn are scrambling to meet their legal duty to balance their budgets by next April, typically proposing cuts to “discretionary” spending in areas like bus subsidies, museums, leisure centres, recycling centres and grants to local charities.
Remaining resources are being increasingly focused on coping with huge demand for “core” statutory services such as social care – which accounts on average for 64p in every pound spent by top tier authorities, up from 56p six years ago – and providing temporary accommodation for homeless families.
“Councils remain firmly in the eye of the inflationary storm and severe funding and demand pressures mean that council finances are under pressure like never before,” said councillor Pete Marland, chair of the LGA’s resources board.
He added: “None are immune to the risk of running into financial difficulty and others have already warned of being unable to meet their legal duty to set a balanced budget and are close to also having to issue section 114 [effective bankruptcy] notices.”
The blame for a string of recent bankruptcies at councils including Birmingham, Thurrock and Woking has tended to fall on mismanagement, governance failure and reckless commercial borrowing, but the LGA said the underlying weakness of local authority finance meant the risk of insolvency was now universal.
It stressed the crisis in local authority was not related to council type or political control and said the debate about council funding should not turn into a “political mud-slinging exercise”. It said it was wrong to assume that only “failing” councils would end up in financial difficulty.
Last month Tory-controlled Hampshire council said it faced “financial meltdown” and urged the government to step in to fix what it called the “broken” system of local government finance. Havering council in east London, run by Labour and independents, said it faced bankruptcy in the next six to 12 months.
The letter to the chancellor, co-signed by LGA chair, Shaun Davies, and the leader of the LGA’s Conservative group, Kevin Bentley, urged Hunt to use next month’s autumn statement to take immediate action to address the crisis and set out a more sustainable long-term direction for council funding.
It said: “The ‘easy wins’ and ‘low hanging fruit’ in terms of savings have long since gone. Instead, councils are almost immediately faced with hard decisions about cutting valued services, along with increasing council tax and fees and charges during a cost of living crisis.”
In July the LGA estimated that English councils faced funding gaps of £2bn in 2023-24 and £900m in 2024-25. It has since revised those figures in the light of Bank of England inflation forecasts to £2.4bn and £1.6bn respectively.
A spokesperson for the Department for Levelling Up, Housing and Communities said: “We have made £5.1bn of extra funding available to local authorities through the local government finance settlement, making almost £60bn available for the sector – up 9.4% on cash terms on 2022-23. We continue to monitor pressures on all councils and we stand ready to talk to any council that is concerned about its financial position.
“Councils are ultimately responsible for the management of their own finances, but the government has been clear that they should not take excessive risk with taxpayers’ money. We have established the Office for Local Government to improve the accountability for performance across the sector.”
