One in six English councils could run out of money as early as next year with a lack of investment in finance, procurement and digital transformation
According to data from Grant Thornton’s Financial Foresight tool, councils face a £7.3bn black hole by 2025/26, an increase of £4.6bn since the beginning of this year.
Following the cost of living crisis, including the war in Ukraine and a global pandemic, the financial sustainability of local public services continue to erode.
Without additional income, councils will need to save over £125 per head of population by 2025/26.
This is more than the combined average spending per head on areas such as homelessness, sports and leisure facilities, parks and open spaces, alongside libraries, waste collection and disposal, and recycling (£121.19).
Philip Woolley, head of public services consulting, Grant Thornton UK LLP, said: ‘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.
‘The additional Covid-19 funding – while critical to support immediate challenges – has not addressed underlying systematic 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.’
Through a decade of budget pressures and changing policy demands, much-needed innovation has not been adopted across councils.
In addition, the lack of investment in support functions such as finance, procurement and digital transformation has diminished the local government’s ability to tackle the challenges of the next few years.
While English councils have seen small increases in total reserves following government support during the pandemic, from £24.7bn in April 2020 to £30bn in March 2021, this increase is more likely the result of suppressed demand in areas such as social care, caused by lockdowns.
This latest forecast suggests that the increase in reserves will not offer a significant enough financial buffer to stop financial failure at councils.
Woolley added: ‘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.’
The forecast tool has been modelled using a range of evidence-based assumptions including the ongoing impacts of Covid-19 and inflation.