Could Local Councils In England Really Go Bankrupt? Here's What You Need To Know

MPs are worried Sunak has not given enough money to councils
MPs are worried Sunak has not given enough money to councils Ian Forsyth via Getty Images

MPs have warned that severe government underfunding poses a severe risk to local councils in England.

A cross-party committee estimates that there is a £4bn funding gap for the 2024-25 – and suggested councils could go “bust” as a result.

Here’s what you need to know.

What did MPs say?

In a report from the Levelling Up, Housing and Communities Committee (LUHC) released on Thursday, MPs from across the House warned that councils in England face widespread bankruptcy.

Local councils are funded through council tax, retained business rates and government grants – but over the next two years, these MPs estimated they will fall £4bn short of the funding needed.

In the last six years, eight local authorities have officially issued section 114 notices – four in just the last year.

This notice is seen as a formal acknowledgment that they are facing severe financial problems, and cannot make any new spending commitments.

Before 2018, no local authorities had issued section 114 notices for 18 years.

The committee said this was happening “at an alarming rate”, showing underfunding was putting councils and local taxpayers “at risk”.

Committee chair Clive Betts said it was “out-of-control financial crisis in local councils across England” and that “long-term reform is vitally needed”.

He added: “If the government fails to plug this gap, well-run councils could face the very real prospect of effectively going bust.”

Why are councils struggling?

The committee said there were several factors impacting councils’ funding.

Demand for their services such as social care and special educational needs and disabilities has increased and their spending power has not been keeping up – all while inflation has been driving up costs.

The committee also pointed to the cost of adult and children’s social care. This takes up 70% of the top-tier council funding, meaning there is less available for parks, recycling and economic development.

The MPs pointed to a £3.6bn deficit for special educational needs and disabilities, too, which needs to be repaid by March 2026.

Rising homelessness is a growing concern for the councils as well, because they have to find expensive temporary housing.

Local authorities have seen reductions in government grants since 2010, too.

The Institute for Government estimates this fall is akin to 31% between 2009-10 and 2021-22 while the National Audit Office estimated in 2018 that their spending power dropped by 29% in real terms between 2010-11, and 2017-18.

Additional pressures include growing population, and inflation, too, is causing budget problems – with growing pay demands and energy price rises only worsening the situation.

Can a council actually go bust?

No, not according to the parliament website.

“A section 114 notice simply indicates that the council’s forecast income is insufficient to meet its forecast expenditure for the next year,” it claims, and  councils can usually reduce spending on services, too.

Sometimes councils hike up the council tax, but that cannot be done mid-year.

But more recently, councils have been asking for “capitalisation directions” from the government.

That means they can sell assets or property to top up their service spendings.

The government can intervene and offer additional grants to help the council stay afloat, but that’s not particularly common.

Birmingham city council, which issued a 114 notice in September
Birmingham city council, which issued a 114 notice in September Mike Kemp via Getty Images

What do MPs suggest to fix this?

The committee called for an overhaul of “outdated and increasingly regressive” council tax.

The report said: “Councils being forced to hike up council tax, in a forlorn attempt to plug increasingly large holes in their budgets, is unsustainable and unfair to local people who are, year on year, seeing less services while paying more.”

It also suggested the next UK government conduct an urgent review of what councils do and how the local services are paid for.

It added that the government could use the local government financial settlement to bridge the gap – or it would “risk already strained council services becoming stretched to breaking point”.

It also calls for a revaluation of domestic property values which have not been assessed since 1991, too.

What does the government say?

An official government response to the report is not due until April 1.

But the government did declare a £600m boost for councils after pushback among Tory backbenchers that council tax was rising while services were being cut.

According to the Guardian, a spokesperson for the department for levelling up, housing and communities 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% 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.”