Council finances "fast approaching a cliff-edge", says chair of Public Accounts Committee

In a report titled Local Government Financial Sustainability, the committee warned that the Ministry of Housing, Communities and Local Government (MHCLG) had "implemented short-term and unsustainable approaches to keep local government afloat".

According to the report, 42 local authorities have received exceptional financial support from the Government to help manage financial pressures since 2020-21, and councils face further pressures as spending on special educational needs and disabilities (SEND) "has outstripped the money available from the Department for Education to pay for it".

Local authority deficits from these overspends are expected to be between £2.9 billion and £3.9 billion a year by the end of 2027–28, and the mechanism which allows local authorities to keep these deficits off their books is due to run out in March 2026.

Without the mechanism, "many local authorities are at risk of effectively going bankrupt", the committee said.

Other pressures include the costs of adult and children's social care, which amounted to 58% of local authority spending in 2023-24, according to the report.

The committee also warned that increases in national insurance contributions could also have a "significant impact on local service providers".

In the course of its investigation, the committee challenged MHCLG on whether its reforms for local government finances - which include changes to funding, local government reorganisation and local audit - will put councils on a stable footing.

MHCLG "acknowledged that there was not enough money in the system, so the aim of the reforms was to use the money available more efficiently and productively", the report said.

It added: "But MHCLG also recognised the need to manage the demand pressures on local government and referenced planned reforms for children's social care, SEND, homelessness and adult social care (the Casey Commission).

"It asserted that its approach was the right one, but with the caveat that it did not know the outcome of the spending review and international events could affect the overall economic position."

The spending review has since been published and has provided an additional £3.4 billion of grant funding in 2028‑29 compared to 2024‑25.

Sir Geoffrey Clifton-Brown MP, chair of the committee, said: "The lack of urgent action to come forward with a plan to address the fast-approaching cliff edge for under-pressure authorities would seem to suggest it is comfortable with the current state of affairs as normalised background noise.

"Alarmingly, scrutiny of council finances can now provoke a sense of déjà vu, with the same unfixed issues seen over and over. We would urge the government to use the funding announced in this spending review as a starting point for the paradigm shift required."

He added: "However, even with concrete measures to put councils back on a proper long-term sustainable footing, once again the government seems not to have taken a holistic view of the butterfly effect of its other policies.

"To introduce major changes to national insurance without taking into account the likely effect on an already tottering local government sector is a major misstep. Similarly, aspirations for wide-ranging reforms seem to be unengaged with a reality in which local authorities do not have good and strong capacity to fundamentally change the way they work."

Adam Carey