One in every four councils may find themselves in financial ruin
Between 2022 and 2026, a rise in UK local authorities declaring bankruptcy and seeking emergency support has been observed. This trend is attributed to a complex mix of financial pressures and systemic challenges.
Over the past decade, funding cuts and austerity measures have eroded the core budgets of local authorities, reducing their financial resilience. Additionally, rising costs in social care, housing, and inflation have increased expenditure demands beyond available revenues. Insufficient revenue streams, including council tax limitations and reductions in government grants, further constrain authorities’ abilities to balance budgets. Economic shocks and increased service demand, related to factors like the COVID-19 pandemic aftermath, have further strained financial sustainability. In some cases, financial mismanagement or failure to adapt to changing economic conditions also plays a role.
The consequences of declaring bankruptcy or "section 114" notices (similar to bankruptcy declarations for UK councils) lead to service cuts and delays, affecting vulnerable populations. Emergency government support and external financial oversight may be required, reducing local autonomy. Negative effects on public trust and staff morale can occur due to austerity and uncertainty. Long-term consequences may include reduced investment, deteriorated infrastructure, and challenges to local economic development.
To address these challenges, sustainable funding reforms are proposed, such as revisiting the council tax system, increasing government grants, or allowing greater local fiscal independence. Improved financial management and transparency within local authorities, including better risk assessment and contingency planning, is also essential. Enhanced collaboration between local and central government to share resources, expertise, and coordinate service delivery is another potential solution. Exploring innovative financing mechanisms, like partnerships or local bonds, may support capital investment needs.
Recent data from the Local Government Association (LGA) shows a worsening crisis in local authorities in England, with a funding gap of more than £2bn next year. The LGA warns that the temporary financial relief provided by EFS could overload struggling councils with further debt and costs in the future. Cllr Louise Gittins, LGA chair, stated that councils are the backbone of communities and are struggling to protect vulnerable children and families, support the elderly, keep streets clean, and build affordable homes.
The survey reveals that social care for children (93%) and adults (90%) is among the top pressures faced by councils. School transport is identified as a pressure by 65% of councils, while homelessness is a pressure for 64% of councils. Two thirds of councils claim parks and green spaces will be affected alongside sport services (62%). One in ten local authorities have already discussed receiving emergency support with the Ministry of Housing, Communities and Local Government. The LGA is now calling on Chancellor Rachael Reeves to stabilise council finances in the upcoming Autumn Budget.
The LGA is requesting a multi-year settlement and a review into changing the local government funding system in the Autumn Budget. Cllr Gittins states that the Autumn Budget must provide councils with the financial stability needed to protect essential services. The unprecedented emergency support given to councils this year reveals the extraordinary funding emergency facing local government. If the government does not provide sufficient support, the trend of local authorities declaring bankruptcy could continue into 2026.
[1] OECD (2021). Local government finance in the UK: an overview. Retrieved from https://www.oecd.org/gov/local-government/local-government-finance-in-the-uk-an-overview-2021.pdf
- The trend of UK local authorities declaring bankruptcy from 2022 to 2026 has been partly attributed to inadequate revenue streams in the face of increasing expenditures, as highlighted by the OECD report on local government finance in the UK.
- Amidst financial pressures, challenges, and systemic issues, the local government confronts rising costs in areas like housing, social care, and inflation, which are beyond the scope of available revenues, including council tax and reduced government grants.
- As businesses and politics grapple with the consequences of bankrupt local authorities, the LGA advocates for sustainable funding reforms, better financial management within local authorities, and collaboration between central and local government to avert further financial crises in the general-news sphere.
