MPs raise alarm on council finances, warn of a “cliff-edge” of potential section 114 notices

There is an "out of control financial crisis" in local councils across England and the Government must act before well-run councils face the prospect of issuing a section 114 notice, the Levelling Up, Housing and Communities committee has warned.

In a report, Financial distress in local authorities, published Thursday (1 February), the cross-party committee also called on the Government to review Education, Health and Care (EHC) plans and consider reforms regarding special educational needs and disabilities provision.

It noted that eight local authorities had issued a section 114 notice in the last six years, while none had done so in the preceding 18 years.

The report added that councils are increasingly reporting concerns about their financial positions and their ability to maintain service delivery.

It said the level of funding available to councils had not kept pace with the pressures and had led to an estimated £4bn funding gap over the next two years.

The report described council tax, which many councils are increasing to fund service delivery, as "regressive" and "long overdue for reform". It also labelled the business rates retention scheme as "increasingly misaligned" with local authorities' current spending needs.

"The Government must urgently reform these core funding mechanisms to ensure that the levels of demand and cost pressures faced by local authorities are adequately considered in determining their funding levels," the report said.

The committee also highlighted the pressure that the rising demand and costs of children's and adults' social care services are placing on council budgets.

It said that, while the committee welcomes the Government's plan to implementing fundamental reforms of the systems for delivering social care, "a consistent and sustainable increase in funding is required in the long term".

The committee added: "In the short term the Government must ensure that local authorities receive sufficient financial support to enable them to continue delivering the services that people need."

Delivery of services for young people with SEND, including provision of home-to-school transport, is also putting pressure on council finances, according to the report.

Local authorities receive funding for delivery of most SEND-related services from the Department for Education (DfE), through the high-needs funding block of the Dedicated Schools Grant (DSG).

Any deficit associated with the DSG is kept off councils' balance sheets thanks to a temporary statutory override set out in The Local Authorities Capital Finance and Accounting (England) Regulations.

However, some councils face massive deficits, and it is "not realistic" to expect them to be paid off before the statutory override expires in March 2026, according to the report.   

The committee said that: "Without significant additional funding via the DSG to match service demand and costs, or a further extension to the statutory override - which would, at most, offer a further period of temporary respite - the sector faces a cliff-edge of section 114 notices."

The call comes two weeks after BCP Council warned it is likely to issue a section 114 notice if the DSG statutory override is not extended.  

According to the report, the Government's introduction of Education, Health and Care (EHC) plans in 2014 has also contributed to increased demand for specialist services, "often requiring delivery through placements in special schools located outside of families' local areas".

It called on the Government to commit to a full review of the EHC plan system and consider reforms to make SEND provision financially sustainable.

"The Government must also provide clarity to local authorities on its treatment of budget deficits relating to SEND, and ensure that funding is sufficient to meet demand," the report added.

The committee urged the Government to maintain local housing allowance rates at least at the 30th percentile of local market rents each year.

It welcomed the Government's recent decision to increase LHA rates from April 2024 but recommended the Government not to subsequently re-freeze them as before.

Additionally, the committee called for a fundamental review of the systems of local authority funding, local taxation, and delivery of social care services.

"The next Government will need to design and implement fundamental reforms to bring the local authority funding system into the 21st Century and should consider options such as land value taxes and wider fiscal devolution in doing so", the report said.

Clive Betts MP, Chair of the Levelling Up, Housing and Communities (LUHC) Committee, said: "There is an out-of-control financial crisis in local councils across England. Councils are hit by a double harm of increased demands for services while experiencing a significant hit to their real-terms spending power in recent years."

He added: "The Government must use the local government financial settlement to help bridge the £4bn funding gap for 2024-25 or risk already strained council services becoming stretched to breaking point. If the Government fails to plug this gap, well-run councils could face the very real prospect of effectively going bust."

"Long-term reform is vitally needed. The funding model for local councils is broken. The business rates system is overly complex and in need of reform. Council tax is outdated and increasingly regressive. Councils being forced to hike up council tax, in a forlorn attempt to plug increasingly large holes in their budgets, is unsustainable and unfair to local people who are, year on year, seeing less services while paying more."

Responding to the committee's report, Cllr Pete Marland, Chair of the Local Government Association’s Resources Board, said: “The extra government funding recently announced is positive will help councils meet some of the pressures they face this year, particularly in adult and children’s social care. However, as this report sets out, significant challenges remain going into 2024/25 and beyond.

“Councils have led the way at finding ways to save money and reduce costs and this work will continue, but they will still need to raise council tax this year and many will need to make further savings to local services in order to plug remaining funding gaps. As the committee rightly highlights, cost and demand pressures will continue to stretch council budgets to the limit. Without further funding, some councils will find themselves struggling to set balanced budgets in 2024/25 and potentially unable to do so as they look forward to 2025/26.”

Cllr Marland added: “The amount of funding available to councils is out of line with the requirements placed upon them. As well as needing to address this, any incoming Government needs to give urgent attention to the entire system of funding local government to deliver vital local services, including reform and legislative change.

"With fair, sustainable funding and multi-year settlements councils can plan ahead and help to deliver against national priorities such as economic growth, housing, net zero  support for families and children and improved health.”

Cllr Claire Holland, Deputy Chair of London Councils, said: “The LUHC Committee’s report provides a thorough assessment of why local authorities are facing financial distress, and what must be done to prevent more councils falling over and protect vital local services.

“London boroughs have had to deal with over a decade of funding cuts, rising need and complexity of need of residents and new duties and expectations from central government. Yet despite the latest funding settlement, and some additional funding announced last week, we still collectively face a £400 million funding gap in 2024/25. This is roughly what boroughs spend on homelessness in a single year.

"The government must take the committee’s recommendations seriously. Now is the time to urgently work with councils to reform local government funding to ensure it is sufficient to meet the growing scale of demand, is more fairly distributed, more certain and less centrally controlled."

Adam Carey