The 2018 National Audit Office report - The Sustainability of Local Authority Finances - provided an excellent if depressing introduction to this subject. Its key points were:
- Government funding for local authorities has fallen by an estimated 49.1% in real terms from 2010-11 to 2017-18. This equates to a 28.6% real-terms reduction in ‘spending power’ (government funding and council tax).
- Alongside reductions in funding, local authorities have had to deal with growth in demand for key services, as well as absorbing other cost pressures. Demand has increased for homelessness services and adult and children’s social care.
- From 2010-11 to 2016-17 the number of households assessed as homeless and entitled to temporary accommodation under the statutory homeless duty increased by 33.9%; the number of looked-after children grew by 10.9%; and the estimated number of people in need of care aged 65 and over increased by 14.3%. Local authorities have also faced other cost pressures, such as higher national insurance contributions, the apprenticeship levy and the National Living Wage
- Spending on planning and development fell by 52.8% in real terms, with spending on housing services and highways and transport falling by 45.6% and 37.1% respectively. Spending on cultural and related services fell by 34.9% (paragraphs 2.2 to 2.3 and Figure 7).
- Compared with the situation described in our 2014 report, the financial position of the sector has worsened markedly, particularly for authorities with social care responsibilities. We noted in 2014 that the sector had coped well financially with funding reductions, but our current work has identified signs of real financial pressure. A growing number of single-tier and county authorities have not managed within their service budgets and have relied on reserves to balance their books. These trends are not financially sustainable over the medium term .
- The government does not have a long-term funding plan for local authorities.
The problem came into sharp focus during the 2020 COVID-19 pandemic when it became clear that local authorities did not have the resources they needed to respond to so many concurrent challenges. One report noted that "even with a rise of nearly 3.99 per cent every year to individual bills - just below the maximum permitted by central government - Liverpool council has 63 per cent less to spend annually than it did in 2010".
Some local authorities were tempted into making risky investments so as to increase their income.
Others simply got into debt. Here's more detail:
- Both Northamptonshire (in 2018) and Croydon (in 2020) were amongst the first councils to be forced to issue Section 114 notices (in affect announcing their bankruptcy) which in turn forced them into even more severe spending cuts.
- Woking Council, with an annual revenue of around £16m, was allowed to build up debts of £1.8 billion. The Times reported:-
- Woking and Singapore do not, on the face of it, have much in common. One is a sleepy commuter town in England’s stockbroker belt, the other a bustling city state in Asia. But one man’s ambition to turn Woking into the “Singapore of Surrey” sowed the seeds for probably the most spectacular financial collapse ever to hit a local authority. Almost ten years ago, Ray Morgan, then the chief executive of Woking borough council, stood in front of local business leaders holding a picture of Singapore and announced: “We want Woking to become a city. We are looking to be Surrey’s economic hub.” To his somewhat bemused audience, he then compared the waters of the Singapore Strait to the Basingstoke Canal.
The biggest single disaster, amid myriad smaller disasters, was the money the council ploughed into the Victoria Square redevelopment in the town centre. This plan, first conceived under Morgan’s leadership in 2012, was to build a 34-storey complex containing residential apartments, a Hilton Hotel, 125,000 sq ft of commercial space anchored by a Marks & Spencer, a multi-storey car park, medical centre and two public plazas. All of the money Woking used to pay for the project was borrowed — mostly from the central government, which told The Times in 2017 when we raised the alarm about reckless council spending that there were “strong checks and balances” in place to protect taxpayers’ cash. Fast forward to this year, and the value of the Victoria Square site was downgraded by nearly half a billion pounds to just £199 million, with the council still struggling to fill all the retail units. In effect, the Treasury’s huge loans to Woking now have no collateral to back them up and the council cannot afford the interest. - Then, in 2023, "A series of catastrophic business deals ... have left Thurrock Council with [a] funding gap three times the size of its annual budget and the largest ever faced by a local authority". "Over a period of five years the council recklessly gambled with £1bn borrowed from other local authorities, repeatedly ignored warnings about the risks involved and then failed to disclose when investments had lost millions of pounds." "The Council secretly handed £655m to a local businessman. He spent the money on a private jet, a yacht, a 232 acre mansion, a Bugatti, and loads of other stuff. Then he wound up the company." The formal Thurrock report is here.
- The city of Nottingham declared itself bankrupt towards the end of 2023 having lost £38m on an energy company that it had itself set up.
The NAO reported in 2025 that local government finances were becoming unsustainable, due to increasing demand on essential frontline services, the impact of delayed finance reform, and the erosion of investment in preventative programmes.
And this extract from an article by Sam Freedman summarises the problems facing councils in 2026 following the 2025 election of a significant number of Reform councillors:
The reality trap
Even if Reform’s councillors were better equipped for the job, they’d be finding it hard to do much. They are currently discovering that the way their budgets and duties are structured gives them almost no room for financial manoeuvre. In most of their councils between 70-80% of all revenue spending goes on adult social care and children’s services, particularly special educational needs and social work. This is all statutory – councils have to support older people and children who need care according to rules set nationally. They can’t decide not to do it.
And the problem is only going to get worse. Both adult social care and children’s service are under extreme pressure due to rising demand and workforce costs. Last year 81% of councils overspent their adult social care budget, forcing them to either dip into shrinking reserves and/or cut spending in-year, reducing the quality and availability of services. On average they plan to increase budgets by 6.2% in real terms this year, with additional pressure caused by the increases to the minimum wage and employee national insurance. The government has made more money available for social care but not enough to cover the gap.
Children’s social care budgets are under even more pressure – they were overspent by an average of 14.2% over the past two years and are due to rise 7% in real terms this year. Special needs is a particularly area of concern. The cost of providing Education and Health Care Plans has consistently grown faster than funding, leading to substantial debts building up. In 2019 the last government introduced a statutory override allowing these debts to be held off balance sheet to avoid councils going bust. This override has been extended to 2028, at which point councils will be holding around £8 billion of debt just for special needs. More than half of the local authorities in the country would go bankrupt overnight if the override was removed.
Kent’s fiscal crisis is illustrative of the problems this is causing across the country. This year’s budget (set before Reform arrived) is around £2.6 billion, with £200 million of additional spending – nearly all on adult social care and children’s services. This has been offset with £100 million of rather vague sounding efficiency savings which look difficult to achieve. There’s barely any money for anything else. And most of what there is goes on rubbish collection and road maintenance. Discretionary services disappeared long ago.
These budgets are built around an assumption of 5% annual council tax increases. The idea that councils are choosing to do this out of profligacy is a complete misunderstanding of how national government has chosen to manage rising costs in social care. George Osborne deliberately cut grants while allowing council tax to rise above inflation so he could look like he was making savings, and successive Chancellors have followed suit. Of course that’s meant council tax payers being hit with ever higher bills for services almost none of them use, while seeing public amenities disappear or fall into disrepair. It has thoroughly undermined local government. There is no prospect of any councils avoiding 5% increases for the foreseeable future.
Indeed, 30 councils had to apply for what is euphemistically known as “exceptional financial support” this year. Most of these are well run but just cannot manage rising demand in their core services. This doesn’t involve getting any actual money but merely being allowed to borrow to cover the hole in their budgets. Some councils have also been allowed to set council tax levels above 5%. Neither of these routes is sustainable in the long term, it just holds off bankruptcy for a little longer. I would not be surprised if this number was higher next year and included a few more Reform councils.
If you read minutes of budget discussions you can see Reform’s councillors trying to find ways out of this trap and coming up with suggestions (presumably provided by non-elected officers) that get them into trouble. In Lancashire they need to find £100 million savings, £50 million of which are supposed to come from adult social care. So they’re proposing to close five of the few remaining council-run care homes. Which has gone down as well with residents and their families as one might expect. There’s a campaign up and running, and petitions being signed, with one Reform member saying closure would “kill his mother”.
Meanwhile, in Warwickshire, Reform’s 19 year old council leader George Finch got into trouble after writing to the Education Secretary, Bridget Phillipson, asking permission to change the rules on transport for children with special needs. Their costs have risen from £17m to £46m since 2018, and so to manage this he wanted to be able to increase the distance pupils would have to live from their school to get free transport (to five miles). Phillipson replied accusing Finch of “taking our children back to the Victorian era”, adding, “if you want an example of the danger that Reform would pose to our children if they ever got into government, look no further.”
For other parties who been on the receiving end of Reform’s populist attacks there is, no doubt, great satisfaction in being able to return the favour. But the need to explore options like these isn’t really their fault. They were wrong to pretend there were easy answers but there’s some credit in at least trying to find hard ones.
In power there’s no escaping the reality trap of having to deal with things as they are. No council, run by Reform or anyone else, is going to be able to manage over the coming years if the structure of local government remains as it is. Either they will need to be given more autonomy to raise money or cut costs by reducing commitments that are currently statutory, or they will need to be given more cash.
And here is the FT's Jennifer Williams writing some weeks later. (The reference to unaudited accounts refers to the difficulty faced by local authorities in finding an auditor following the abolition of the Audit Commission. Send = Special Educational Needs)
Greetings from freezing cold Manchester, where I am grateful for a break from the Gorton and Denton by-election.
That, and from watching the annual game of financial Rubik’s Cube being played out in town halls across the country. For budget-setting season is upon us.
I have, in particular, been following the entry of Reform UK into this mystifying, unsatisfying world of just-about-managing, in which councillors — and by proxy disillusioned local electorates — have very little practical choice in how money is raised or spent.
Keeping up with Reform’s journey has provided a glimpse of how it has initially converted the poetry of populist election leaflets into the more pedestrian prose of governing.
After the last local elections — when Reform’s rhetoric reached fever pitch — I initially wondered if it might go full 1980s Militant: refuse to put up council tax, fail to make cuts and force its senior finance officers to declare bankruptcy, daring the government to a fist fight on behalf of its voters.
That is what some of its newly elected members hoped. One such councillor, in County Durham, resigned last week in protest at a cut made to a road scheme in his administration’s first budget, arguing bankruptcy would have been the truly radical solution.
In the event, that has not been Reform’s response. It has instead chosen to maintain the populism of its local government rhetoric via the national platform of deputy leader Richard Tice, while putting up taxes locally in the knowledge that otherwise financial collapse beckons.
While Reform wants to keep up the insurgent image, its leaders must also know that any Birmingham council-style meltdown will make it harder to make a serious case at the national level.
One local council official said of Reform’s more pragmatic approach at the local level: “Do what you need to do and let the national guys do the naughty stuff.”
There will be more from me on Reform’s approach to local finance in the coming days, elsewhere in the FT. But following the party’s budgets has also served as a timely reminder of the dire state of local government finances more broadly.
Some uncomfortable truths for Labour
Reform is not wrong to highlight the extraordinary pressures bearing down on local council finance. Even if it got there belatedly, having either implicitly or explicitly conceded that England’s precarious local government is not fertile territory for a British-style Doge. It is also wise to avoid burning down the house, for there could be further political mileage to be had in those who have done so already.
The Office for Budget Responsibility made council finance a central theme of its economic outlook in November. It warned that a forecast £6bn in local authority deficits had become a “significant fiscal risk”.
Those deficits first began racking up when the last Conservative government allowed untrammelled overspends as an emergency solution to out-of-control special educational needs and disabilities costs.
Overspends on Send are, at least, known knowns. Arguably more worrying are the things we don’t know about, piling up in years of unaudited accounts. Or the half-knowns — the crises that were hiding in plain sight, often left unaddressed by ministerial intervention for years.
Such examples could make rich pickings for Reform. Take Labour-run Warrington, whose auditors repeatedly refused to sign off on the authority’s books as the council’s high-risk investments piled up from 2017 onwards. At one point Grant Thornton, Warrington’s auditors, warned officers that they themselves did not have the necessary accounting experience in derivatives to assess the value of its banking investments.
Apparently the officers believed they did. “Last May an inspection ordered by the government, due to concerns over Warrington’s finances, found Labour was happy enough to take the officers at their word, rather than find the painful savings required instead.
This week, now around £1.5bn in debt, Warrington increased its existing request for “exceptional financial support” to £354mn in order to stave off bankruptcy, after finding it had been budgeting too little to cover its debts. So it seeks more debt, via a loan from the government, but will also have to finally make those painful cuts. Currently it is reducing CCTV in the town centre to save money, despite the warnings of the county’s chief constable. A 7.5 per cent council tax rise also looms.
Next door Cheshire East, Labour-led but in no overall control, has also asked for exceptional financial support for the second year in a row, including tax rises of 10 per cent.
Such fragility also poses a risk for Labour’s devolution agenda. The government currently intends to fill the map of England with new mayors, presiding over clusters of new and existing councils. Yet some of those councils are barely solvent.
Councillor Stuart Mann, the independent group leader on Warrington council, who has a background in finance, raised concerns with both the secretary of state, Steve Reed, and Lord James Jamieson, a former chair of the Local Government Association.
Stressing his support for devolution to his area, he noted two of the four authorities that would come under the new Cheshire and Warrington Combined Authority mayoral umbrella are hardly in great shape.
In response, Jamieson raised a specific concern in the Lords about Warrington’s debt.
“Devolution done well can be transformative,” he said in the debate last week, “but devolution done poorly risks creating new layers of governance without the trust, clarity or resources required to make them effective”.
Such worries are not merely theoretical. At Ben Houchen’s Tees Valley mayoralty, itself less than a decade old, a new senior officer team appointed after a government intervention last year is only now getting to grips with some deeply questionable financial decisions. As in Warrington, many alarm bells had been sounded over an extended period. In December it transpired that hundreds of millions of pounds worth of loans had been extended from one public body overseen by the Conservative mayor Houchen to two other local bodies, with no agreements in place, and they were now struggling to repay them.
Again, as in Warrington, the amount put aside to cover debt payments had been set too low. It is just one part of a long-evolving saga that has led to a debate over who will hold the liabilities if something collapses.
Houchen’s Tees Valley combined authority has said that “significant action” has been taken to rectify “past practices”.
Many if not most local authority financial crises are nevertheless borne less of recklessness and more of that steady drip, drip of too much demand and too few resources, sometimes coupled with historic unwillingness to make the severe savings or difficult tax decisions required. It has been a wake-up call for Reform administrations, including in Worcestershire, where the party inherited a council that had long been warned about its finances and will this year have to put up council tax by 9 per cent as part of its own exceptional financial support package. Reform’s language in local power has now shifted from alleging “snouts in the trough” to berating the wild social care overheads confronting its authorities.
Farage will doubtless face allegations of broken promises at the local elections, as all of his authorities look to raise council tax, even if it is by less than their predecessors.
His response may be to point to the financial nightmares overwhelming authorities already run by their opponents.
Even if they govern prosaically once in charge, Nigel Farage’s insurgents may be able to make hay with other parties’ crises for some time yet.