LGA Survey: Almost 1 in 5 Councils in England at Risk of Effective Bankruptcy

In this photo illustration, £1 coins are seen with a £10 note in Bath, England, on Oct. 13, 2017. Matt Cardy/Getty Images

Almost one in five local government leaders believes their council is likely to effectively go bankrupt this year or next year, the Local Government Association (LGA) said on Wednesday.

Another body representing councils in England, the County Councils Network (CCN), said seven in ten local authorities are not confident they can balance the book in the coming year.

The CCN said more than 30 leaders have written to Levelling up Secretary Michael Gove, urging him to provide extra funding in the Local Government Finance Settlement that is due to be delivered this month.

It comes as Mr. Gove is scheduled to give evidence to the Levelling Up, Housing and Communities Committee later on Wednesday on the financial distress in local authorities.

According to the LGA, almost one in five council leaders and chief executives who responded to its survey believes it’s “very or fairly likely that their chief finance officer will need to issue a Section 114 notice this year or next due to a lack of funding to keep key services running.”

A Section 114 notice halts all expenditure except essential spending, such as salaries and pensions for existing staff and fundings for delivering a minimum level of statutory services or protecting vulnerable people.

Half of the leaders are not confident they will have enough funding to fulfil their legal duties in the financial year 2024/2025, the LGA said.

According to the LGA, councils face an estimated £4 billion funding gap over the next two years “just to keep services standing still,” and the government’s Autumn Statement last month “failed to provide the additional funding” despite growing demand and cost pressures on councils.

Councils “continue to face the tough choice about whether to increase council tax bills to bring in desperately-needed funding to provide services when they are acutely aware of the significant burden that could place on some households,” the LGA said.

LGA chair, Labour councillor Shaun Davies, said: “While councils have worked hard to reduce costs, find efficiencies and transform services, the easy savings have long since gone. The government urgently needs to act to address the acute financial challenges faced by councils.”

One-third (114) of council chief executives and over a-fifth (71) of council leaders had responded to the LGA’s online survey.

£230 Million National Living Wage Increase

The CCN said the increases in the national minimum wage and the national living wage have pounded new pressure on already-struggling councils.

Before the Autumn Statement, CCN members were already set to overspend by almost £650 million this year “due to spiralling costs, particularly in children’s social care and home to school transport, which was contributing to a £4 [billion] funding deficit for those authorities over the next three years,” the CCN said.

Now, CCN members are considering service reductions and/or higher council tax to cope with the wage increase, which the CCN said would cost an average £6.3 million per county local authority, or a total £230 million.

“When asked how they would fund the minimum wage increase, eight in ten councils said service reductions and four in ten said higher council tax rises. Before the Autumn Statement, seven in ten councils said they planned to levy the maximum 4.99 [percent] council tax rise, with this now rising to nine in ten,” the CCN said.

The CCN said nine in ten councils said their situations have worsened following the autumn statement, and  the extent to the financial stress mean “even well managed local authorities” could effectively go bust in the coming years.

The CCN’s finance spokesperson, Conservative councillor Barry Lewis, said: “We understand that public finances are tight but the Autumn Statement provided no further funding to help ease the existing financial pressures for councils—pressures which are largely outside of our control.

“In fact, those have been added to with the increase in the National Living Wage, adding hundreds of millions to our budgets.”

The councillor said the government “must address those pressures with additional funding focused on children’s social care and school transport services” not be able to fulfil their legal duties.

In a written statement on Tuesday, Mr. Gove said the total finance settlement for next year of £64 billion would provide an above-inflation increase in funding for local government, with the average council seeing a real-term increase in their core spending power.

He also asked councils to “consider how they can use their reserves to maintain services over this and the next financial year.”

Mr. Gove added: “The Exceptional Financial Support framework is available to provide support where a council has a specific and evidenced concern about its ability to set or maintain a balanced budget, including where there has been local financial failure.

“Where councils need additional support from government, they should take every possible step to minimise the need for that support to be funded by national taxpayers, while also recognising the cost-of-living pressures on families.”

A Department for Levelling Up, Housing and Communities spokesperson said: “We have made an extra £5.1 billion of funding available to local authorities in the last financial year worth an additional 9.4 [percent] in cash terms to budgets.

“Councils are ultimately responsible for the management of their own finances, but we stand ready to talk to any council that is concerned about its financial position.”

A total of nine councils have issued at least one section 114 notice since 2018.

Nottingham City Council was the most recent of three councils that took the step this year after Woking Borough Council and Birmingham City Council.

PA Media contributed to this report.