1 February 2024

English councils are facing an “out-of-control” financial crisis

A new report calls on the government to close the £4bn funding gap, or face a fresh wave of bankruptcies.

In 2018, Northamptonshire Council was the first local authority to issue a section 114 notice in 20 years. Photo by Jevanto Productions / Shutterstock

The collapse of Northamptonshire Council in 2018 shocked the local government sector. The first local authority to issue a section 114 notice for almost 20 years, Northamptonshire’s problems were predominantly down to poor financial management. A section 114 notice is a report issued by a council’s chief financial officer which effectively freezes all non-essential spending at the local authority. At the time, in issuing this notice, Northamptonshire Council was in a relatively unique predicament.

But roll forward to 2024, and one in five council leaders are worried their council may be about to find itself in the same position. The difference now is that the rocky financial position of the UK’s local authorities has emerged after decades of chronic under-funding rather than individual poor management.

To fix this, the government must act quickly to close the £4bn gap faced by English councils; this is the assessment of a new report by the Levelling Up, Housing and Communities select committee.

The committee’s chair, Clive Betts, described the current situation as “an out-of-control financial crisis in local councils across England”. The report points out that “systemic underfunding” of local government in England has left councils in dire straits. It highlights that the funding streams on offer to councils – which include central government grants, council tax and retained business rates – “have not kept pace with these pressures”. This has led to a funding gap which is estimated to reach £4bn over the next two years.

Cuts to central government grant funding have left councils more reliant on locally raised revenue through council tax and business rates, which the report points out, has not provided them with adequate income to run services.

The current council tax system is based on property valuations in 1990, and numerous governments have kicked the can down the road after promising the system’s reform. The National Audit Office (NAO) estimates this led to an overall reduction in councils’ core spending power of more than a quarter (26 per cent) over the decade between 2010-11 and 2020-21.

During the committee’s inquiry into this issue, Abdool Kara, executive director at the NAO, told MPs that since 2010, “income raised through council tax has increased by around 20 percentage points, whereas there has been a reduction of around 50 percentage points in the income from government grant money”. He went on to point out that this hits more deprived areas the hardest – due to councils’ increased reliance on locally-generated income, they are unable to raise as much as councils covering more affluent locations.

The committee says this drop in core spending power has been accompanied by a rapid rise in demand for services. This is particularly apparent in crucial council service areas such as adult social care, children’s social care, special educational needs provision (SEND) and homelessness support.

The report states Susan Hinchcliffe, the leader of Bradford Council, wrote to the committee to highlight the unsustainable pressures faced by the Bradford Children and Families Trust. She said: “Nearly 50 per cent of the Council’s entire budget is now spent on children’s social care through the Trust, yet the Trust is telling us this is not enough to cope with current pressures.” Hinchcliffe added the Trust has forecast it will spend £242m on children’s social care this year. Bradford Council has predicted it will collect £233m in council tax from residents this year.

Betts said the government “must use the local government financial settlement to help bridge the funding gap for 2024-24”. He added “if the government fails to plug this gap, well-run councils could face the very real prospect of effectively going bust”. Betts also called for change. “Long-term reform is vitally needed. The funding model for councils is broken,” he said. “Councils being forced to hike up council tax…is unsustainable and unfair to local people who are, year on year, seeing less services while paying more.”

Last week the government announced an additional £600m to be added to the local government finance settlement for 2024-25, with £500m going to councils with social care responsibilities. But it remains to be seen as to whether any further funding will be forthcoming.