‘Hundreds of councils’ at risk of financial failure if local government is not taken seriously

21 Jun 24

Political parties have been told to wake up to a looming crisis in local government that could see a swathe of councils face financial collapse over the next five years.

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Analysis by the Local Government Information Unit, based on an anonymous survey of councils carried out earlier this year, revealed that almost one in ten respondents – 14 local authorities – expected to go bust this year, while 51% said that without reform of local government funding they were likely to face bankruptcy in the next parliament.

The fact no party had addressed the issue in its manifesto showed they had underestimated the extent of the crisis, the LGIU said, warning urgent action was needed to avoid “hundreds of councils” plunging into effective bankruptcy.

The call came as the Institute for Fiscal Studies predicted that councils who had already cut discretionary services to the bone would be at risk of “severe financial distress” if required to make further savings. 

Deprived areas, which are more reliant on central government funding relative to council tax, face the biggest squeeze in response to rising demand and above-inflation cost pressures, the IFS said in a new report.

Councils could be forced to cut back services even if government funding is frozen in real terms and council tax increases by 5% a year, it said.  

Existing overall spending plans implied that unprotected services could be cut by 1.9 to 3.5% a year in real terms between now and 2028-29.  

Yet despite the pending crisis, the main parties’ manifestos were almost silent on the question of local government funding, which meant “significant uncertainty” over how funding for councils would change over the next parliament.

Jonathan Carr-West, chief executive of the LGIU, said that without additional funding or the ability to raise their own funds, councils would plunge further into debt, irrespective of who was in Downing Street after 4 July. 

The next government needed functioning local authorities to deliver its national mandate, he said.

“However, with half of all councils expected to go bankrupt within the next government’s first term, none of the parties’ manifestos adequately address the urgent financial crisis in local government,” he said.

He called for local authorities to be given the autonomy to shape policy decisions to local circumstances and to be supported by a funding mechanism which allowed those decisions to be financed effectively and sustainably.

Senior IFS research economist Kate Ogden said many councils were under “clear financial strain”, struggling to meet surging demand and cost for services such as social care residential placements, special educational needs support and temporary accommodation for the homeless.

“Unless these pressures slow down significantly and quickly, or the next government gives a big injection of funding to local government, councils will likely need to make cutbacks to some areas of provision,” she said. 

Given that discretionary services in some areas had seen cuts of over 40% since 2010, this represented a significant challenge for local authorities. 

“More could be pushed to the financial brink, like Birmingham, Thurrock and Woking,” she said.

Kevin Bentley, senior vice chairman of the Local Government Association, said that cash-strapped councils would find it increasingly difficult to deliver essential services.

“A funding gap of more than £6bn facing local services over the next two years – fuelled by rising cost and demand pressures – means a chasm will continue to grow between what people and their communities need and want from their councils and what councils can deliver,” he said.

“The LGA is calling on all political parties to commit to a significant and sustained increase in funding for councils in the next Spending Review, alongside multi-year funding settlements and plans to reform the local government finance system.”

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