Ministers must fix the £4bn hole in council funding or risk more going bankrupt, MPs warn

The government must fix a £4bn hole in council funding or risk severe impact to services and more local authorities going bankrupt, MPs have warned.

In the last six years, eight local authorities have issued a section 114 notice, which notifies ministers that councils can’t balance their budgets properly. None had done so in the preceding 18 years.

Cross-party MPs on the levelling up, housing and communities committee have called on the government to “act now” to avert “the severe crisis and financial distress” faced by councils. They pointed to social care, children’s services and homelessness as growing areas that are adding millions to councils’ bills.

As many as one in five councils in England are on the brink of effective bankruptcy, the Local Government Association has previously warned, with half of council leaders not confident they have enough money to fund legally required services – such as providing emergency housing for homeless people.

In a report published on Thursday, parliamentarians wrote: “The levels of funding available to local authorities, through council tax, retained business rates, and government grants have not kept pace with these pressures, leading to a funding gap which is already estimated at £4bn over the next two years”.

Chair of the committee, MP Clive Betts, said the financial crisis facing English councils was “out of control”. He added: “Increasing demands on council services such as social care and special educational needs and disabilities (Send) provision has resulted in rocketing costs but the levels of funding available to councils has failed to keep track.”

He said that without emergency funding from government “well-run councils could face the very real prospect of effectively going bust”.

The report calls on the next government to overhaul how councils in England are funded and to consider land value taxes.

It comes after more than 40 Tory backbenchers signed a letter to Rishi Sunak warning that without emergency cash, many councils will be forced to cut basic services and hike council tax in an election year.

In December, the government proposed an increase of core council funding of 6.5 per cent in cash terms for the year 2024-5, compared to 2023-4. However, MPs warned that this increase came from the assumption that all local authorities would raise council tax by the maximum permitted amounts. MPs also said that the extra cash would not affect the £4bn funding hole.

MPs pointed to the government’s decision to freeze local housing allowance rates at 2020 levels as a factor in driving homelessness rates. The report explained that the “effect of the freeze has been to constrain the available supply of housing by making increasing numbers of properties unaffordable to those receiving benefits”.

Councillors told the committee that funding basic services, such as children’s social care provisions, was becoming unsustainable.

Leader of Bradford council, Susan Hinchcliffe, said: “Nearly 50 per cent of the council’s entire budget is now spent on children’s social care through [the children and families] trust, yet the trust is telling us this is not enough to cope with the current pressures.”

She added: “It is grappling with high agency costs, high placement costs and dizzying levels of demand.”

The trust, which is run independently of the council by the Department for Education but depends on council funding, is forecasting spending £242m this year. Bradford council only collects £233m in council tax annually, Ms Hinchcliffe explained.

Councils have also seen an increase in special needs children needing transport from home to school, a service that local authorities have a statutory duty to provide. Gary Fielding, corporate resources director at Yorkshire Council, explained: “Five years ago, in North Yorkshire, we spent £5m a year on Send school transport; we now spend £21m.”

Rising homelessness is also stripping councils of their funding. Lambeth councillor Clair Holland said that London boroughs were forecast to overspend more than £90m on temporary accommodation this year, with an estimated one in 50 Londoners being homeless.

Cllr Peter Marland, of the Local Government Association, said the report showed there were “significant challenges” ahead this year. “Councils have led the way at finding ways to save money and reduce costs, but they will still need to raise council tax this year and many will need to make further savings to local services.”

Liberal Democrat Leader Ed Davey said that that youth services are being “torn away from children” and “the elderly are not getting the care they deserve” because this Conservative government has left a blackhole in council finances.

He added: “Instead of ensuring that councils have the resources they need, Rishi Sunak has turned a blind eye to disappearing breakfast clubs, tennis courts, and bus routes.

“The Conservatives have decimated council finances and it is local people up and down the country who are paying the price. Without proper funding for local services, it is communities and local people who will continue to suffer.”

A Department for Levelling Up, Housing and Communities spokesperson said: “We recognise councils are facing challenges and that is why we recently announced an additional £600m support package for councils across England, increasing their overall proposed funding for next year to £64.7bn – a 7.5 per cent increase in cash terms.

“This additional funding has been welcomed by leading local government organisations, but we remain ready to talk to any concerned council about its financial position.”