Four in ten councils at risk of financial failure over next five years

Four in ten local authorities in England are at risk of going bust over the next five years, according to analysis by Grant Thornton.

Since 2021, six councils have issued section 114 notices, meaning they have declared themselves effectively bankrupt with Grant Thornron suggesting that 40% of councils at risk of financial failure over the next five years.

Grant Thornton’s Financial Foresight tool also predicts that within the next 12 months alone, over one in five councils in England are at risk of financial failure, without additional income or further spending cuts. This increases to 25% by the end of next year, highlighting the extremely precarious financial position of the sector.

This is an increase compared to previous analysis conducted by the firm in October 2022, where one in six councils were deemed to be at risk of running out of money within 12 months.

Metropolitan and Unitary Councils are at the highest risk of financial failure this year, followed by London Boroughs and District Authorities.

The research also finds that, despite the recent local government finance settlement, English councils face a £9billion funding black hole over the next five years. While local authorities in England collectively hold c.£23 billion in reserves, the analysis finds that this financial safety net is not evenly distributed. The councils most at risk of financial failure often have the least access to these reserves, exacerbating the risk of financial collapse and the subsequent impact on local communities.

Phillip Woolley, Head of Public Services Consulting, Grant Thornton UK LLP, said “Local councils face an unprecedented financial crisis. Funding for key services like social care, homelessness and special educational needs has not kept pace with growing demand. This shortfall has seen some councils make risky commercial decisions and many divert funds from other local services, which can in turn create a continuous cycle of service decline and further demand.

“This stark reality poses significant challenges to local governance and the provision of essential services. Although the sector must learn from past failures to mitigate some future risk, without more fundamental reform in local government finance, these efforts may only offer limited relief. There have been calls for councils to use reserves to plug budget gaps but this is not a sustainable solution – reserves can only be used once and are intended to be a safety net, used only in exceptional circumstances.

“The financial crisis in the sector has become increasingly evident over the past few years, with more councils declaring financial distress in this time than over the past 20 years. It is critical that a more comprehensive overhaul of both local government finance and models for social care is undertaken to address local councils’ deep-rooted financial challenges.”