The £140 billion debt crisis threatening UK council budgets

Local councils across the UK are facing a fiscal crisis, with some proposing sharp council tax hikes to tackle mounting debt and budget shortfalls.

Eight of the most indebted councils, including Birmingham, Hampshire, and Bradford, have requested permission from the government to exceed the 5% cap on council tax increases. The unprecedented financial strain is raising fears of further hikes as more councils consider similar measures.

Collectively, the 20 most indebted councils owe more than £31.5 billion. This figure accounts for borrowing alone and excludes additional liabilities such as pension deficits and private finance initiatives (PFIs). When combined, total local authority debt in England surpasses £140 billion, highlighting the depth of the crisis.

A Legacy of Debt and Mismanagement

Birmingham City Council, which declared effective bankruptcy in 2023, is the most indebted local authority, with liabilities estimated at £6.9 billion. This includes £3.4 billion in borrowing and a £2.3 billion pension deficit.

The council’s financial troubles have been compounded by an equal pay claim that could cost up to £760 million and a failed IT project. For Birmingham residents, the debt translates to approximately £8,000 per household.

Other councils, including Leeds (£2.5 billion), Woking (£2.1 billion), and Spelthorne (£1.1 billion), have also accumulated significant debts. Woking’s borrowing stemmed from an ambitious £750 million redevelopment of its town centre, including a Hilton hotel and residential apartments.

However, delays and building issues led to a £500 million downgrade in the site’s value, forcing the council to declare effective bankruptcy.

In Spelthorne, years of aggressive investment in commercial property—including a £40 million shopping centre purchased just before the pandemic—have left the council owing £27,000 per household. The annual interest payments alone consume nearly a quarter of the council’s tax revenue.

Breaking the 5% Cap

Under current rules, councils must hold a referendum to raise council tax by more than 4.99%. However, a loophole allows councils receiving government financial support to bypass this requirement if the secretary of state grants permission.

Angela Rayner, in her role as Secretary of State for Levelling Up, Housing, and Communities, has received multiple such requests, including Windsor and Maidenhead’s proposal for a 25% increase—the largest in the country.

Other councils seeking significant increases include Hampshire (15%), Bradford (15%), and North Somerset. Ministers have agreed to provide financial support to Birmingham (£680 million) and Woking (£95.6 million), but only a handful of the most indebted councils have applied for assistance, suggesting more may follow.

The Impact on Households

For residents, these proposed increases come at a difficult time. Rising inflation has already pushed up living costs, and changes to council tax relief schemes mean thousands of low-income households could see substantial increases in their bills or lose discounts entirely.

Debt charities warn that these pressures may lead to higher arrears, with some households prioritising essential expenses over tax payments.

In Dudley, the council is considering increasing the minimum payment for tax relief recipients to 60%, a move that would disproportionately affect vulnerable families.

Critics argue that the reliance on council tax hikes to resolve financial issues is unsustainable. The Resolution Foundation has called for comprehensive reform of local government funding, emphasising that the current system disproportionately burdens taxpayers in low-income areas.

Elliot Keck, head of campaigns at the TaxPayers’ Alliance, speaking to The Times, questioned the fairness of allowing councils to avoid referenda on steep tax increases.

“If Rayner accepts these proposals, it would make a mockery of the whole system of referendums,” he said. “Councils ought to focus on improving productivity to ensure key services are delivered efficiently.”