One in five councils at risk of financial failure, research finds

One in five councils in England will be at risk of financial failure in just 12 months, according to latest research from Grant Thornton, without additional income or further spending cuts. 

The firm’s analysis has found that 30% of councils in the north are twice as likely to be “at risk” compared with those in the south (17%) and London (15%). 

According to Grant Thornton, a combination of deprivation, levels of reserves and economic output are exacerbating existing issues within the local government funding system, resulting in a disparity in council resilience across the country. 

Findings also revealed that the number of councils “at risk” are due to increase by 41% in the next five years. By this time, the north still has the highest percentage of councils in trouble (55%), compared with the south (35%) and London (39%).

This is thought to be partly due to the make-up of councils within each region. The north has a much higher number of metropolitan boroughs and unitary authorities, which are five times as likely to be at risk than county councils, which are predominantly located in the south.

The analysis finds that another main contributor to this position is that councils in the south have a much higher proportion of reserves as a percentage of net revenues expenditure, compared to those in the north.

Those in the south average at 152% of net revenues expenditure held as reserves, compared to 49% for councils in the north. This gives southern councils a much greater ability to withstand one-off events or financial shocks, and a longer timeframe to be able to draw on reserves to counteract any income and expenditure deficit.

Phillip Woolley, head of public sector consulting at Grant Thornton, said: “On current trajectories, the number of councils at risk of financial failure is set to double in the next five years. As more councils start to become financially vulnerable, we can see that the challenges already facing local government, from increased demand and service pressures, is being exacerbated by regional disparities across the country.

“While our analysis shows that councils in the north are more likely to become “at risk” of financial failure more quickly, the financial vulnerability of councils is a sector-wide issue. While more funding is one part of the solution, we know from previous analysis that there are also significant efficiency gains to be made in council services.”

He added: “A combination of more fundamental reform to local government finance and funding, alongside a national programme of digital and technology investment to enable service modernisation, could offer a route out of the current crisis.”