£4bn funding gap puts councils at ‘tipping point’, MPs warn

Committee says well-run authorities are at risk of going bust without extra cash for 2024-25
The Council House in Birmingham Photo: Google Maps

By Jim Dunton

01 Feb 2024

Councils in England are facing a £4bn funding gap for 2024-25 despite finance packages set out by ministers worth hundreds of millions of pounds in recent weeks, watchdog MPs have warned.

A report from members of parliament’s Levelling Up, Housing and Communities Committee says a failure on the part of ministers to fix the situation will put essential services at “severe risk” and raise the prospect of more authorities declaring effective bankruptcy.

The committee’s Financial Distress in Local Authorities report follows eight authorities making so-called Section 114 declarations over the state of their finances, typically indicating they are unable to balance their books. Birmingham City Council and Woking Borough Council are two recent examples.

The report said that while issuing a Section 114 notice under the Local Government Finance Act 1988 was previously seen as a response to a specific local problem, a Local Government Association survey indicated that one in five English councils is bracing for the prospect in the coming months.

MPs said increased cost pressures from children’s and adults’ social care, services for children and young people with special educational needs and disabilities, and services for homeless people were principal drivers for the predicament faced by councils.

They said that local authorities had seen “significant reductions in their spending power” that coincided with increased demand for services and inflationary pressure in the wider economy.

MPs said that recent funding settlements from the government – including a £600m boost set out by ministers last month – had not kept pace with funding pressures faced by councils leading to a “downward spiral”.

“The evidence that we have heard throughout our inquiry indicates that local authorities across the country are facing a tipping-point with a systemic issue of insufficient funding to meet their statutory duties,” they said.

In December the government published its provisional local-government finance settlement for 2024-25, which proposed an increase in core funding of 6.5%. MPs said most of the increase came from the assumption that all authorities would raise council tax by the maximum permitted amount. January’s additional £600m would take the overall increase to 7.5%.

Committee chair Clive Betts said the financial crisis faced by town halls was “out of control”.

“Councils are hit by a double harm of increased demands for services while experiencing a significant hit to their real-terms spending power in recent years,” he said. “Increasing demands on council services such as social care and special educational needs and disabilities provision has resulted in rocketing costs but the levels of funding available to councils has failed to keep track.

“The government must use the local government financial settlement to help bridge the £4bn 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.”

In addition to the immediate funding fix, the committee is calling on the next government to embark on a programme of reform for council finances to put them on a “sustainable footing”, particularly in relation to locally-sourced funding.

The report said council tax was regressive and had a “disproportionately negative impact” on funding levels for local authorities in the most deprived areas of the country. It added that the business rates retention scheme was “increasingly misaligned” with local authorities’ current spending needs.

“Long-term reform is vitally needed,” Betts said. “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.”

The report also raised the alarm over government proposals to grant councils “additional flexibilities” to fund revenue shortfalls with asset sales.

“We recommend that these are limited to extending flexibilities over invest-to-save activity only,” MPs said. “The government must closely monitor local authorities’ uptake of these flexibilities and act quickly to work with local authorities in preventing unintended negative consequences.

“The use of capital funding for revenue expenditure must not become business as usual and is not a sufficient substitute for more fundamental reform of the funding system.”

A Department for Levelling Up, Housing and Communities spokesperson acknowledged the difficulties faced by the local government sector and reiterated recent funding announcements.

“We recognise councils are facing challenges and that is why we recently announced an additional £600m support package for councils across England, increasing their overall proposed funding for next year to £64.7bn – a 7.5% increase in cash terms,” they said.

“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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