Could Local Councils in England Really Go Bankrupt?

MPs have warned that severe government funding shortfalls pose major risks to local councils in England.

A cross-party committee estimates there is a funding gap of £4 billion for 2024-2025 – and says councils could “go bankrupt” as a result.

Here’s what you need to know.

What do MPs say?

In a report from the Leveling Up, Housing and Communities Committee (LUHC) released on Thursday, MPs from across the House warned that councils in England were facing widespread insolvency.

Local councils are funded through council tax, business interest and government grants – but over the next two years, these MPs predict they will be underfunded by £4 billion.

In the last six years, eight local governments have officially issued section 114 notices – four of them in the last year alone.

This notice is seen as a formal acknowledgment that they are facing severe financial problems, and are unable to make new spending commitments.

Prior to 2018, no local government had issued a section 114 notice for 18 years.

The committee said this was happening “at an alarming rate”, pointing out that funding shortfalls were putting city councils and local taxpayers “at risk”.

Committee chairman Clive Betts said the financial crisis unfolding in local councils across England was out of control and that long-term reform was urgently needed.

He added: “If the government fails to close this gap, well-run councils will face the possibility of bankruptcy.”

Why is the board having difficulty?

The committee said there were several factors influencing council funding.

Demand for services such as social services and special educational needs and disabilities has increased and purchasing power has not kept pace – while inflation has increased costs.

The committee also highlighted the costs of adult and children’s social care. This takes up 70% of top tier council funding, meaning there is less money available for parks, recycling and economic development.

MPs also pointed to a £3.6 billion deficit for special educational needs and disabilities, which must be paid by March 2026.

The rise in homelessness is also a concern for the council, as they have to find expensive temporary accommodation.

Regional governments have also experienced a decline in government grant funding since 2010.

The Institute for Government estimates this decline to be equivalent to 31% between 2009-10 and 2021-22, while the National Audit Office estimated in 2018 that their purchasing power fell by 29% in real terms between 2010-11 and 2017-18.

Additional pressures including population growth, and inflation are also causing budget problems – with increasing wage demands and rising energy prices only exacerbating the situation.

Can a council really go bankrupt?

No, not according to the parliament’s website.

“The section 114 notice simply shows that the council’s estimated income is insufficient to meet its estimated expenditure for next year,” he claimed, and the council can usually also reduce spending on the services sector.

Sometimes councils increase council tax, but this cannot be done mid-year.

But recently, the boards asked for “capitalization direction” from the government.

This means they can sell assets or properties to increase their service expenses.

The government can intervene and offer additional funding to help councils stay afloat, but this rarely happens.

Birmingham city council, which issued notice 114 in SeptemberBirmingham city council, which issued notice 114 in September

Mike Kemp via Getty Images

What do lawmakers suggest to improve it?

The committee called for an overhaul of the “outdated and increasingly regressive” council tax.

The report said: “Councils being forced to increase council tax, in a futile attempt to plug a growing hole in their budgets, is unsustainable and unfair to local communities who, year on year, receive more services little but pay more.”

The report also recommends that the next UK government urgently undertake a review of what councils do and how local services are paid for.

He added that the government could use a local government financial settlement to bridge the gap – or it would “risk overwhelming already strained council services”.

It also calls for a revaluation of domestic property values ​​which have not been assessed since 1991.

What does the government say?

The government’s official response to the report will not be announced until April 1.

But the government announced a £600 million boost to councils after objections from Tory supporters that council tax was rising while services were being cut.

According to the Guardian, a spokesperson for the department of levelling, housing and communities said: “We recognize councils face challenges and that is why we recently announced an additional £600m support package for councils across England, increasing their overall funding proposals for next year to £64.7 billion – a cash increase of 7.5%.

“This additional funding is welcomed by leading local government organisations, but we remain ready to speak to the relevant councils about their financial position.”

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