Hundreds of Local Authorities Remain on the Brink of Bankruptcy, Despite Government Bailouts

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Hundreds of councils remain on a financial cliff edge and could go bust within the next two years, despite extra relief handed to them by Keir Starmer’s incoming Government, MPs on the influential Public Accounts Committee warn today.

The new Government was accused of creative accounting to mask deficits in last year’s Budget and last weeks Spending Review. However, the full scale of the problem remains unclear, with MPs revealing that 75% of councils have not yet completed up to date audits of their finances.

The MPs are particularly critical of the effect of the hike in employers’ national insurance, which the Treasury imposed without any published assessment on how it would affect local government finances.

The Government did provide £515 million to offset this but it has turned out that it is not enough and also is having an effect on the finances of charities and private providers who supply adult social care to councils.

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Sir Geoffrey Clifton-Brown MP, Conservative Chair of the Committee, said: “Our inquiry heard that the Government is concerned about local authority finances. But 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…

“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.”

Local government spends £72 billion a year. However, the vast majority of the money goes on special education for children and adult social care. Overspending on the special education programme -SEND – where councils seek private provision for children and people with disabilities is expected to reach between £2.9 billion and £3.9 billion by 2027-28. The Government has introduced “a statutory override” which means the overspending is not included in council budgets but this finishes next April. The spending review seems to assume that councils will get most of their money by raising more council tax.

Hampshire County Council, in evidence to MPs, said it had reduced services to a statutory minimum because of the cost of SEND. It said it was spending £26 million a year to support 37 of its most vulnerable children.

The Ministry for Housing, Local Government and Communities has also ignored a request from MPs to reform the system this March and postponed a decision to the autumn.

The report reveals councils have had to cut back on spending on preventative social work to cope with extra workloads on late interventions in social care services.

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The report concludes: “There is significant uncertainty around how the proposed local government finance reforms and reorganisation will be implemented. Long standing plans for funding and service reforms have been delayed several times. The government has now announced a huge reform agenda for local government, including an overhaul of local audit, local finance reform, service reform including for SEND and children’s social care, and extensive local government reorganisation. With these reforms happening simultaneously, there are significant risks.”

Ministers dismissed the committee’s findings.

Local Government and English Devolution Minister, Jim McMahon MP, said: “These claims are not supported by the evidence. From a standing start we have set out a clear plan to fix the foundations of local government and have wasted no time in taking action as part of our Plan for Change.

“We’ve taken action to restore the audit system to a functioning state, recast our approach to council best value and we are laying legislation to bring in a new Local Audit Office.

“The Spending Review provided over £5 billion of new grant funding for local services, and that’s on top of the £69 billion we have already injected this year to boost council finances.

“The results speak for themselves. Over 95% of audited accounts were submitted for the deadline we set, no S114 were issued by councils as a result of financial distress, and claims against Exceptional Financial Support were £1bn less than the previous year.

“We have also brought forward a package of reforms – including to local government funding and key services such as SEND – to ensure the sector is fully supported and empowered to deliver on people’s priorities over the long term.”