More than one in five councils in England are at risk of financial failure within the next 12 months without additional income or further spending cuts, new analysis has shown.
That figure rises to 25% by the end of next year, with an “alarming” 40% of councils in danger of financial failure over the next five years.
That’s according to analysis from business and financial adviser Grant Thornton UK, whose ‘Financial Foresight’ tool, which projects the income and expenditure profile for every local authority in England, provided the data.
Financial failure is defined in this case as when a council’s reserves fall below 5% of its net revenue expenditure.
Grant Thornton said its analysis highlighted the “extremely precarious financial position of the sector”. By comparison, previous analysis conducted by the adviser in October 2022 suggested one in six councils were at risk of running out of money within 12 months.
The latest analysis also showed that English councils face a £9bn “funding black hole” over the next five years. Local authorities collectively hold c.£23bn in reserves, Grant Thornton said, but its data shows that “this financial safety net is not evenly distributed”.
The councils most at risk of financial failure often have the “least access” to these reserves, Grant Thornton said, “exacerbating the risk of financial collapse and the subsequent impact on local communities”.
Over the next 12 months, metropolitan and unitary councils were found to be at the highest risk of financial failure, followed by London boroughs and district authorities.
Phillip Woolley, head of public services consulting at Grant Thornton UK, said: “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.
“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.
“This stark reality poses significant challenges to local governance and the provision of essential services.”
Woolley added that while the sector “must learn” from past failures to mitigate some future risk, such efforts might only offer limited relief without more fundamental reform in local government finance.
He also noted that using reserves to plug budget gaps is “not a sustainable solution” as they can only be used once and are intended to be a safety net, used only in exceptional circumstances.
“The financial crisis in the 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,” Woolley commented.
“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.”
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