Four in ten councils at risk of financial failure over next five years, warns Grant Thornton UK LLP

As we enter a critical election year, new analysis from leading business and financial adviser Grant Thornton UK LLP finds that the current financial outlook for local councils in England is alarming, with 40% of councils at risk of financial failure* over the next five years.

According to data from Grant Thornton’s Financial Foresight tool**, 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.”

The research is shared following a recent survey from the LGA, which found that almost one in five council leaders and chief executives in England think it is likely that they will need to issue a Section 114 notice this year or next due to a lack of funding to keep key services running.

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Lisa Baker is the Editor of Always Finance, and writes about Business, Finance Technology and Healthcare. Lisa is also the owner of Need to See IT Publishing.