Almost half of councils in England risk falling into bankruptcy without action to address a £4.6bn deficit amassed under a Conservative-era policy, the government’s spending watchdog has warned.
In a damning report, the National Audit Office said that rising pressure on public services and repeated delays to reform the funding of local government meant town halls were in an “unsustainable” financial position.
It highlighted failure to reform the funding of special educational needs and disabilities (Send) as one of the most worrying areas where the resources were being outstripped by spiralling costs.
The previous government had introduced a scheme known as the “statutory override” which allowed councils to temporarily keep Send debts off their balance sheets – in effect papering over the problem.
However, the override was planned to end in March 2026, by which point the accumulated deficit for all councils in England is expected to have reached £4.6bn amid ballooning pressures on local authorities.
The government says it is in the process of developing a long-term solution. However, the NAO warned failure to address the problem by next March could leave 43% of local authorities at risk of declaring effective bankruptcy.
The independent spending watchdog said council funding in recent years had increased but not kept up with demand or complexity of needs. After years of austerity under the Conservatives, more councils in England have declared effective bankruptcy in the past three years than the preceding three decades.
While funding from central government grants, council tax and business rates had increased by 4% between 2015-16 and 2023-24 to almost £56bn, funding per person had fallen during the same period by 1%.
Over that time councils also made deep cuts to discretionary services such as road maintenance – and to some statutory provision, including libraries – while raising spending on adult and children’s social care, which now accounts for 58% of total spending.
Earlier this month ministers announced a financial settlement worth more than £69bn for the coming financial year, alongside a sweeping devolution package to reorganise the structure of local government. A form of bailout was also approved for 30 councils, and six were granted permission to raise council tax by more than the usual 5% cap.
The NAO said projections show that funding per person is set to increase by 7% by 2025-26. However, the Local Government Association estimates that councils will still face a funding gap of up to £8bn by 2028-29.
Gareth Davies, the head of the spending watchdog, said: “There have been repeated delays to local government finance reform and government can no longer resort to short-term solutions to support local authorities. Action to address this must resolve the systemic weaknesses in local government financial sustainability through a comprehensive, cross-government approach.”
A spokesperson for the Ministry of Housing, Communities and Local Government said: “This government is under no illusions about the financial issues facing councils. That’s why we’re reforming the funding system and delivering improved public services across the country.”
• This article was amended on 3 March 2025 to describe the provision of libraries by local councils as a statutory, rather than discretionary, service.
