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
In a recent analysis, leading business and financial adviser Grant Thornton UK has raised alarm bells over the financial outlook for local councils in England.
The study reveals that 40% of councils are at risk of financial failure over the next five years, highlighting the urgent need for reform in local government finance.
Grant Thornton’s Financial Foresight tool has provided a stark picture of the financial health of local councils. Over the next 12 months, more than one in five councils in England are at risk of financial failure, without additional income or further spending cuts.
This figure increases to 25% by the end of next year, marking a significant increase from the firm’s previous analysis in October 2022.
Metropolitan and Unitary Councils are at the highest risk of financial failure this year, followed by London Boroughs and District Authorities.
“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,” says Phillip Woolley, Head of Public Services Consulting at Grant Thornton UK.
“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.”
Despite the recent local government finance settlement, English councils face a £9 billion funding black hole over the next five years.
While local authorities in England collectively hold approximately £23 billion in reserves, 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.
The ICAEW (Institute of Chartered Accountants in England and Wales) has also voiced concerns over local government finances, calling for urgent action from the government.
The ICAEW has recommended replacing the competitive short-term funding process with long-term funding streams to give councils more certainty over future spending.
The financial crisis in the local government 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 need for fundamental reform in local government finance becomes increasingly urgent.
