The cost-of-living crisis is the latest in a decade-long series of events, including austerity, Brexit, global pandemic and the war in Ukraine that continue to erode the financial sustainability of local public services.
New research from leading business and financial adviser Grant Thornton UK LLP finds that one in six English councils could now run out of money as early as next year, without additional income or substantial further budget reductions.*
According to data from Grant Thornton’s Financial Foresight tool, developed with the Chartered Institute of Public Finance and Accountancy (CIPFA), English councils face a £7.3 billion black hole by 2025/26, an increase of £4.6 billion since the beginning of this year.
Without additional income, councils will need to make savings of over £125 per head of population by 2025/26. This is more than the combined average spend per head on homelessness, sports and leisure facilities, parks and open spaces, libraries, waste collection and disposal, and recycling.
A decade of budget pressures and changing policy demands has meant that much-needed innovation has not been widely adopted across councils. Similarly, lack of investment in support functions such as finance, procurement and digital transformation has diminished local government’s ability to tackle the challenges of the next few years.
While English councils have seen an uptick in total reserves following government support during the pandemic, from £24.7 billion in April 2020 to £30 billion in March 2021. This increase is more likely the result of suppressed demand in areas such as social care, caused by lockdowns, that will continue to unwind through the long tail of COVID-19. This latest forecast suggests that this exceptional increase in reserves will not offer a significant enough financial buffer to stop financial failure on a council-by-council basis.
The traditional narrative when facing such a shortfall - that the sector should simply receive more funding from central government - will fail in the long run to address structural financial sustainability issues given the disparity of economic output, council income and service delivery across the country, both in terms of efficiency and outcomes.
Phillip Woolley, Head of Public Services Consulting, Grant Thornton UK LLP, commented:
“Local government has faced unprecedented demands and pressures over the last decade and without action from both central government and councils, in the face of these inflationary pressures, the list of authorities in need of exceptional support looks set to grow quickly.
“Our research shows, the additional Covid-19 funding - while critical to support immediate challenges - has not addressed underlying systemic issues or the precariousness of councils’ financial sustainability in the face of economic instability. Local authorities are also now facing the risk of interest rate rises increasing debt financing costs and the real risk of reduced funding from central government, in response to the current economic turmoil facing the country.
"We see four key steps to meeting this challenge: clarifying roles and responsibilities of councils, a requirement to develop a financial stability plan that is government backed and locally owned, strengthening local governance; and, critically, resolving the long-awaited fair funding review for local government.
"Without committed intervention from all sides, there is a risk that the sector levels down instead of up.”
* Number of Council’s fully depleting Earmarked Reserves and Unallocated Reserves