£4bn council funding gap risks more bankruptcies and ‘severe impact’ to services, say MPs

News01.02.2412.00 AM by James Riding

A £4bn hole in council funding for 2024-25 could lead to a “severe impact” to crucial services and more local authorities declaring bankruptcy, MPs have said.

Nottingham City Council issued a Section 114 notice last year (picture: Alamy)

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£4bn council funding gap risks more bankruptcies and ‘severe impact’ to services, say MPs #UKhousing

A £4bn hole in council funding for 2024-25 could lead to a “severe impact” to crucial services and more local authorities declaring bankruptcy, MPs have said #UKhousing

The cross-party Levelling Up, Housing and Communities (LUHC) Committee said that councils are issuing Section 114 notices at “at an alarming rate”.

In the past six years, eight local authorities, including Nottingham and Birmingham, have issued these notices, which indicate they have effectively gone bankrupt.

In a report, the committee noted that the “financial crisis” facing local authorities came after “systemic underfunding” of English councils, alongside increasing demand for services and inflation driving up costs.

Funding available to councils through council tax, retained business rates and government grants “have not kept pace” with these pressures, leading to a funding gap estimated at £4bn over the next two years.

Increased levels of homelessness have required councils to spend more to fulfil their support responsibilities, the report said.

The committee said a “key driver” of rising homelessness has been the government’s decision to freeze Local Housing Allowance (LHA) at April 2020 levels. As the cost of private renting has increased, the freeze has made increasing numbers of properties “unaffordable” for those receiving benefits.

While the LUHC Committee welcomed the government’s recent announcement that it will increase LHA from April 2024, it urged ministers not to then “re-freeze” rates and instead to maintain them “at least at the 30th percentile of local market rents each year”.

Ultimately, however, the MPs concluded that the government “needs to deliver more affordable housing to provide a sustainable alternative” to local authorities’ increasing need to use temporary accommodation. In a previous report from 2020, the committee recommended that a social housebuilding programme should be “top of the government’s agenda”.

Earlier this month, more than 50 local leaders from across the political spectrum met to discuss the “national crisis” of the cost of temporary accommodation at an emergency meeting in Westminster. Eastbourne Borough Council in East Sussex revealed that 49p in every £1 collected by the council is now being spent on temporary accommodation.

The latest government data showed that English councils’ spending on temporary accommodation rose by 9% last year to hit £1.7bn.

The report urged ministers to reform council tax and business rates to ensure councils receive appropriate funding. While councils are “increasingly reliant” on council tax for income, the MPs said, this tax is “regressive” and “long overdue for reform”, and disproportionately affects more deprived areas.

In addition, the government “has not delivered” on its promise to reform the business rates retention scheme.

Growing demand for both children and adult social care was a key pressure on council finances, the report said, and “a consistent and sustainable increase in funding” is required in the long term.

Councils are also facing pressure over services for children and young people with special educational needs and disabilities, including providing home-to-school transport.

Clive Betts, chair of the LUHC Committee, said councils across England were facing an “out of control financial crisis”. They have been “hit by a double harm of increased demands for services while experiencing a significant hit to their real-terms spending power”.

Long-term reform is “vitally needed”, he added.

Mr Betts said ministers must use the local government financial settlement to help bridge the £4bn funding gap for 2024-25, or “well-run councils could face the very real prospect of effectively going bust”.

A Department for Levelling Up, Housing & Communities spokesperson said: “We recognise councils are facing challenges and that is why we recently announced an additional £600m support package for councils across England, increasing their overall proposed funding for next year to £64.7bn – a 7.5% increase in cash terms.

“This additional funding has been welcomed by leading local government organisations, but we remain ready to talk to any concerned council about its financial position.”