Northern councils twice as likely to be at risk of financial failure than southern councils, research says

New research has revealed a North-South divide in council finances, suggesting that local authorities in the North of England are twice as likely to be at risk of financial failure than those in the South.

The analysis from external auditor Grant Thornton UK (GT) claims that one in five councils will be at risk of 'financial failure' within a year, without additional income or further spending cuts.

The report, which defines 'financial failure' as when a council’s reserves fall below 5% of their net revenue expenditure, also highlighted that 30% of councils in the North are at risk, compared to 17% of those in the South and 15% in London.

According to the report, the financial discrepancy is partly due to the higher number of metropolitan and unitary authorities in the North, which are five times as likely to be at risk than county councils.

Another contributor is that councils in the South have a much higher proportion of reserves as a percentage of net revenue expenditure, compared to those in the North, Grant Thornton said.

"Those in the South average at 152% of net revenue expenditure held as reserves, compared to 49% for councils in the North," the report said. "This gives Southern councils a much greater ability to withstand one-off events or financial shocks, and a longer timeframe to be able to draw on reserves to counteract any income and expenditure deficit."

There are also considerably higher deprivation levels in local communities in the North than in the South.

This is coupled with lower economic output in the North compared with the South, which impacts the amount councils can raise from council tax and business rates.

Phillip Woolley, Head of Public Sector Consulting, Grant Thornton UK LLP, said: "As more councils start to become financially vulnerable, we can see that the challenges already facing local government from increased demand and service pressures, are being exacerbated by regional disparities across the country.

“But while our analysis shows that councils in the North are more likely to become ‘at risk’ of financial failure more quickly, the financial vulnerability of councils is a sector-wide issue. While more funding is one part of the solution, we know from previous analysis that there are also significant efficiency gains to be made in council services."

Woolley said councils could unlock an estimated £2bn across the sector through investment in digital and technology – but councils "don’t currently have the financial headroom available to invest in and unlock these opportunities".

He added: “A combination of more fundamental reform to local government finance and funding, alongside a national programme of digital and technology investment to enable service modernisation, could offer a route out of the current crisis.”

A similar call was made last week by the Auditor General for Wales, who said new technology, addressing workforce issues and reducing governance failures could future-proof Welsh councils facing financial problems.

Grant Thornton's report also comes the same week the LGiU warned that half of councils in England could issue a section 114 notice in next five years and just 4% of councils were confident in the sustainability of local government finance.

Adam Carey