More than 20% of councils in England face the risk of financial failure in 2024.

Analysis by Grant Thornton UK LLP reveals that more than 20% of councils in England face the risk of financial failure within the next 12 months if they don’t secure additional income or implement further spending cuts. This concerning statistic escalates to 25% by the end of the following year, underscoring the precarious financial state of the sector.

Alarming future for UK Councils

As we approach a pivotal election year, Grant Thornton UK characterises the current financial outlook for English local councils as “alarming,” with 40% of councils potentially facing financial failure over the next five years.

This analysis relies on data from Grant Thornton’s Financial Foresight tool, developed in collaboration with the Chartered Institute of Public Finance and Accountancy (CIPFA).

The precarious condition of local authority finances has worsened since Grant Thornton’s previous assessment in October 2022, which identified one in six councils as at risk of running out of funds within 12 months.

Metropolitan boroughs and unitary authorities face the highest risk of financial failure this year, followed by London boroughs and district councils. Despite the recent local government finance settlement for 2024/25, English councils collectively confront a £9 billion funding deficit over the next five years.

Local Authorities in England hold £23billion in Reserves

While local authorities in England hold approximately £23 billion in reserves, the analysis indicates that this reserve distribution is uneven. Councils most susceptible to financial failure often have limited access to usable reserves, heightening the risk of financial collapse and its subsequent impact on local communities.

Phillip Woolley, Head of Public Services Consulting at Grant Thornton UK LLP, warns, “Local councils face an unprecedented financial crisis.” Funding for essential services such as social care, homelessness, and special educational needs has not kept pace with growing demand, prompting some councils to make risky commercial decisions and divert funds from other local services.

Woolley emphasises the need for a comprehensive overhaul of both local government finance and social care models to address the deep-rooted financial challenges faced by local councils.

A recent survey from the Local Government Association reveals that nearly one in five council leaders and chief executives in England believe issuing a Section 114 ‘bankruptcy’ notice within the next year or two is likely due to insufficient funding to sustain key services. A Section 114 notice indicates that a local authority’s projected income cannot cover its anticipated expenditure, leading to restrictions on discretionary spending by elected councilors.

Martin Wheatcroft FCA, an external adviser on public finances, notes that it’s not just poorly managed councils facing the risk of financial failure, but even ‘normal’ local authorities grappling with budget balancing amid rising demand, increased costs and limited funding.

Wheatcroft highlights adult social care as a significant challenge, with the ageing population contributing to escalating demand each year. The upcoming 9.8% minimum wage increase from April adds further challenges for councils in the next financial year.

“With local authority core funding rising only by 6.5% in the upcoming financial year, councils are compelled to seek further cuts in already ‘cut to the bone’ public services to maintain budget equilibrium,” Wheatcroft adds.

Last month, the Department for Levelling Up, Housing and Communities sought opinions on greater capital flexibilities, aiming to allow councils to use capital receipts for operational expenditure or treat some operational costs as if they were capital, without government approval.

The objective is to encourage local authorities to invest in ways that reduce service delivery costs and provide more local control over financial resources. However, Wheatcroft cautions that while greater capital flexibilities may temporarily alleviate some issues, they could also weaken local authority balance sheets in the long run.

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