This week, after the customary two months of respite, the first of ten Council Tax instalments will once again be debited from household bank accounts. For most, they will have risen sharply, as the financial crisis that has left many local authorities close to bust appears to be deeper. Now a new insolvency threat, from years of overspending on Special Educational Needs and Disability (SEND) support, looms for councils only avoiding bankruptcy by the skin of their teeth.
The SEND deficit for councils in England is estimated to grow from £3.4bn to £5.2bn in the next 12 months. The Chartered Institute of Public Finance and Accountancy thinks up to 75 authorities may be at risk of declaring effective insolvency via a Section 114 notice, cutting all but the most basic services.
Hampshire County Council has the country’s largest forecast deficit at £312m, up from £200m last year. Such debts were historically kept off councils’ books by a local authority accounting treatment known “statutory override”, but this approach may no longer be used after March 2026, when council balance sheets will have to bear the debt. Government is faced with the choice of stepping in to clear it, or extend the override until cuts eventually cover the deficits.
SEND is the icing on a very large cake of misery. The latest estimate from councils is that their total budget shortfalls will reach £9.3bn by the 2026-27 financial year. Nottingham City Council alone faces a gap of £69 million for the year beginning in April, rising to a combined £172 million over the next three years. In Surrey, a review into Spelthorne Borough Council’s £1bn debt has been extended. It’s the second most indebted borough council in the country, after nearby Woking.
Nationwide, councils face freezing all non-statutory spending – many for the second time. Only 14 of 303 authorities expect to deliver balanced budgets in 2025-26. The narrative has moved on from examples of over-ambitious development schemes, failed IT investment and general financial mismanagement. The inescapable fact is that the income and expenditure profile of councils has changed dramatically in recent years.
Central government grant funding for councils dropped by 40 per cent in real terms between the years 2009-10 and 2019-20. Councils have become more reliant on income generated locally, through services and facilities provided. In terms of money out, a major cost has been soaring post-Covid demand for statutory services, notably social care for adults and children, as well the provision of temporary accommodation and homelessness support.
It is worrying that Whitehall may still have little understanding of the scale of the financial crisis facing councils, but it is very clear to those familiar with rescuing organisations: councils are having to do more with less, a trend exacerbated by inflation in recent years; the inefficiency of high volumes of staff used to relatively good job security and benefits; lack of experience in key areas such as growing resilience, establishing parameters of appropriate risk management and building revenue development pipelines with specialist partners across a variety of sectors.
The time for injecting some restructuring acumen with the expectation of overdue financial surgery is long overdue. Councils are connected to the world of commerce more than ever before; probably more than they would like to be. Government’s priority in supporting them through the SEND crisis and beyond should be to help them make a sustainable transition, in turn helped by hands-on advisers from the private sector who are needed to accelerate migration to a new model of partnership that will dramatically lower risk to the council purse.
Written by Bea Vakharia, analyst at Buchler Phillips, a UK based independent boutique firm with an impeccable Mayfair heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.