Councils facing bankruptcy due to £4 billion black hole urge government to help

An 'out of control' crisis in local government funding can only be ended by the government providing billions of pounds more to councils, MPs have said.

Councils have repeatedly warned that more than a decade of financial pressures exacerbated by rising demand and inflation are putting vital public services under severe strain.

Applying pressure on ministers, a report by the Levelling Up, Housing and Communities Committee said additional council funding announced earlier this month was insufficient to address the scale of the problems.

A failure to increase allocations in the local government finance settlement to cover the shortfall would push services including social care and support for children with special educational needs to “breaking point”, and could lead to well-run councils going effectively bust, the committee said.

Earlier this month, Communities Secretary Michael Gove increased the local government financial settlement for 2024/25 with measures worth an additional £600 million, including £500 million for adult and children’s social care.

This increased available core funding by 7.5% compared to 2023/24, but the committee concluded this would not come close to addressing financial pressures across the sector, with the Local Government Association estimating councils face a funding gap of £4 billion over the next two years to continue services at current levels.

Clive Betts, Labour chair of the committee, said: “There is an out-of-control financial crisis in local councils across England.

“The government must use the local government financial settlement to help bridge the £4 billion funding gap for 2024-25 or risk already strained council services becoming stretched to breaking point.

"If the government fails to plug this gap, well-run councils could face the very real prospect of effectively going bust.”

The committee reiterated it would take “billions of pounds a year” to put adult social care on a long-term secure footing and called for wholesale reform of the way councils are financed.

It said councils’ core spending power, which is a combination of government grants and the maximum that can be raised through council tax and business rates, has not kept pace with growing pressures.

However, reductions in the funding provided directly by the government has led to councils relying increasingly on revenue generated locally.

The committee said council tax is “regressive”, in need of reform and has a “disproportionately negative impact on funding levels of local authorities in the most deprived areas of the country”.

The report highlighted that council tax charges are based on property valuations from 1991.

With prices rising considerably since then, this means people occupying the most valuable homes are paying less in council tax as a proportion of their property’s value than those living in the least valuable properties, the committee said. There are also significant variations in the profile of properties in different areas.

This means authorities in wealthier parts of the country can generate significantly more revenue than those in less well-off places with higher levels of demand for expensive services, the report said.

The government also controls annual rises in council tax. In the last two years authorities must hold a local referendum if they wish to increase council tax beyond 5%. The committee said this approach is “restricting local authorities’ abilities to raise sufficient funding to fulfil their statutory responsibilities”.

The committee called for the revaluation of properties and the introduction of additional council tax bands.

It also said council tax thresholds should be increased in line with inflation. The committee described the business rates system as “overly complex, outdated, and in need of reform”.

As there is variation in the amount different councils can generate through business rates, a formula is used to ensure some money is redistributed.

However, this process uses a baseline funding level calculated in 2013. Therefore, the committee concludes, the current process “does not account for changes in population size, demographics, and associated demand for services in specific local authorities”.

Mr Betts said: “Long-term reform is vitally needed. The funding model for local councils is broken.

“The business rates system is overly complex and in need of reform. Council tax is outdated and increasingly regressive.

“Councils being forced to hike up council tax, in a forlorn attempt to plug increasingly large holes in their budgets, is unsustainable and unfair to local people who are, year on year, seeing less services while paying more.”

A total of eight councils have issued a section 114 notice declaring effective bankruptcy in the last six years. No councils had done so in the proceeding eighteen years.

Responding to the report, Pete Marland, Labour chair of the LGA’s Resources Board, said: “The amount of funding available to councils is out of line with the requirements placed upon them.

“As well as needing to address this, any incoming government needs to give urgent attention to the entire system of funding local government to deliver vital local services, including reform and legislative change.”

A Department for Levelling Up, Housing & Communities spokesperson said: “We recognise councils are facing challenges and that is why we recently announced an additional £600 million support package for councils across England, increasing their overall proposed funding for next year to £64.7 billion – a 7.5% increase in cash terms.

“This additional funding has been welcomed by leading local government organisations, but we remain ready to talk to any concerned council about its financial position.”

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