40% of councils at risk of financial failure over next five years

Some 40% of councils in England are at risk of financial failure over the next five years, according to a new analysis by business and financial adviser Grant Thornton UK LLP.

According to data from Grant Thornton’s Financial Foresight tool, within the next 12 months alone, over one in five councils in England are at risk of financial failure, without additional income or further spending cuts.

It stated that this increases to 25% by the end of next year, highlighting the “extremely precarious financial position” of the sector.

The analysis suggested that Metropolitan and Unitary Councils are at the highest risk of financial failure this year, followed by London Boroughs and District Authorities.

While local authorities in England hold approximately £23bn in reserves, the research revealed that, despite the recent settlement on local government finance, English councils are facing a £9bn funding gap over the next five years. The analysis found that this financial safety net is not evenly distributed.

It stated that the councils most at risk of financial failure often have the least access to these reserves, exacerbating the risk of financial collapse and the subsequent impact on local communities.

Phillip Woolley, head of Public Services Consulting, Grant Thornton UK LLP, 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. Although the sector must learn from past failures to mitigate some future risk, without more fundamental reform in local government finance, these efforts may only offer limited relief. There have been calls for councils to use reserves to plug budget gaps but this is not a sustainable solution – reserves can only be used once and are intended to be a safety net, used only in exceptional circumstances.

He added: “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. 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.”