Whole government response essential to financial sustainability across local government: National Audit Office

The National Audit Office (NAO) has recommended a whole-system, cross-government approach to ensure local authorities' financial sustainability amid planned local government funding and service reforms and the upcoming spending review.

In a report published today (28 February), the spending watchdog said local government finances are "becoming unsustainable" due to increasing demand on essential frontline services, the impact of delayed finance reform and the erosion of investment in preventative programmes.

Its analysis found that while real terms funding has grown by 4% between 2015-16 and 2023-24, it has not kept pace with population growth or the demand for services, the complexity of need, or the cost of delivering services to people most in need of support.

Some services are showing the strain, and more local authorities are requesting financial support, some due to the increasing costs of delivering essential frontline services such as homelessness and social care.

Despite short-term measures to address acute funding shortfalls, including exceptional financial support and several cash injections, "there has been insufficient action to address the systemic weaknesses in local government financial sustainability", the report said.

It added: "As the Government turns its attention to local government reforms, it is essential that this is part of a whole-system, cross-government approach to ensure local authorities are financially sustainable and can continue to provide essential services.

"This approach needs to ensure effective local accountability for the service and financial performance of each local authority, including robust independent assurance."

In addition, the NAO noted that most local authorities with responsibilities for pupils and young people with special educational needs and disabilities have overspent their Department for Education (DfE) Dedicated Schools Grant (DSG) budget.

MHCLG has put in place a statutory override that allows local authorities, until March 2026, to ignore this overspend when they set their annual budget.

But the NAO said the statutory override “does not address the underlying financial pressure” and warned that some 43% of local authorities may be at risk of needing to issue a Section 114 report if the statutory override ends as planned in March 2026.

The NAO issued several recommendations to help inform MHCLG's funding and service reforms, including:

• take the lead in building a cross-government approach to local government financial sustainability.
• develop a funding and service reform plan, as part of the spending review, that addresses the financial and demand pressures on local authorities, focusing on long-term value for money and clear cross-departmental priorities.
• alongside HM Treasury, explore how the impact of preventative services can be evaluated and incentivised to deliver better outcomes and improved value for money. 

Responding to the report, Cllr Pete Marland, Chair of the Local Government Association's Economy and Resources Board, said: "The NAO rightly highlights that funding pressures are being exacerbated by a lack of reform which has weakened the financial sustainability of councils and left them with a complex, outdated funding system.

"Creating an improved and a more sustainable funding system for local government is also critical to strengthen the value for money of local spending and, most importantly, improve services for communities."

Cllr Tim Oliver, Chairman of the County Councils Network (CCN), meanwhile said the NAO's report "reveals how unsustainable local authority finances are" and followed the CCN's own analysis, which found that councils face major funding shortfalls over the next five years.

He added: "As this NAO report shows, it is market-specific cost pressures, mainly in adult social care, children's services, and special educational needs, that are driving councils' costs rather than deprivation.

"Therefore government must recognise and address these pressures in its fair funding review, otherwise it will push many well-run councils to the brink."

He also supported the NAO's call for the Government to address the "unmanageable" deficits built up by councils in their special educational needs budgets, noting that "councils need clarity and urgently" ahead of the override expiring in March next year.

Cllr Claire Holland, Chair of London Councils, also commented on the report, warning that council budgets in London are "taken up by skyrocketing levels of demand for homelessness support and adult and children's social care – where we have a legal duty to provide services".

She added: "As the NAO's analysis demonstrates, this makes it incredibly difficult to find money for the prevention services that deliver the most value over the long term.

"The Spending Review is a crucial opportunity to restore sustainability to local government funding. This would put us in a much better position to invest in priorities such as prevention, housebuilding, and driving the economic growth we all want to see."

Adam Carey