Why are local authorities going ‘bankrupt’?

This article is part of the series Research in brief: Quick reads for the 2024 Parliament, produced for new Members of Parliament after the 2024 general election.

In 2023, Birmingham City, Nottingham City and Woking Borough councils were reported ‘bankrupt’. Increasing financial difficulties, including rising populations, higher demand on social care and reduced government grants, as well as limitations on annual council tax increases, are reportedly putting local authorities under pressure.

Local authorities going ‘bankrupt’

In the late 2010s and early 2020s, seven English local authorities issued section 114 notices. They were reported in the press as having ‘gone bankrupt’: for example, Birmingham City Council received widespread media coverage. The councils in England that have issued section 114 notices since 2018 are listed in the table.

In law, UK local authorities cannot go bankrupt. A section 114 notice simply indicates that the council’s forecast income is insufficient to meet its forecast spending for the next year, and that it must take action to address the budget shortfall. The council cannot then make new spending commitments and must meet within 21 days to discuss what to do next.

During 2023 and 2024, commentators have suggested that ongoing pressures on local authorities’ finances meant that further section 114 notices could be expected in coming years. In that time, several authorities have also publicly stated that they were close to having to issue a section 114 notice.

The circumstances leading up to the section 114 notices are varied. In some cases, large-scale borrowing for commercial property or other investments played a role, where the value of some council investments fell considerably below the sum invested.

In other cases, such as Slough and Woking, independent reviews found that councils had not followed proper accounting processes, which require funds to be set aside when money is borrowed. Other instances featured poor financial management and running-down of council reserve funds.

Why have councils been facing spending challenges?

Core spending power for local authorities in England (a government measure of the money councils have available, including grants from central government and council tax) has fallen considerably since 2010. The most significant reductions took place under the coalition government between 2010 and 2015 (see chart 1 – the grey area indicates the full range of local authorities).

Since 2019/20, core spending power has increased, but it remains below its 2010/11 levels for almost all local authorities.

The National Audit Office estimated in 2018 that English local authorities’ spending power fell by 29% in real terms between 2010/11 and 2017/18. Using similar methodology, the Library estimates that it remains 10% below its 2010/11 level in 2024/25.

Cost pressures such as a growing population and rising demand for local government services, particularly adult and children’s social care, are also anticipated to increase through the 2020s.

Can councils raise more funding themselves?

Aside from government grants, councils have few sources of revenue so they have limited ability to raise additional funds locally. Council tax is their main source of locally raised income, and they raised a higher proportion of funding from council tax in 2023/24 than they did in 2015/16 (see chart 2). Plans for future public spending in the March 2024 Budget suggest that unprotected departments, including local government, would face further reductions after 2025.

Since 2012, the government has set national limits on the amount council tax can be raised by annually (without holding a local referendum) – typically by around 2% to 5%. If all councils in England had raised council tax by the maximum permitted in the 2024/25 local government finance Settlement, this would raise approximately £2.1 billion extra in 2024/25.

Within this headline figure, different local authorities would raise different amounts through a council tax increase. In general, areas with lower deprivation have more valuable properties and would raise more council tax than areas with higher deprivation. Councils also retain a proportion of new business rates revenue. This could provide some extra income, but business rate revenue has fluctuated since the covid-19 pandemic and few councils would be able to rely on it.

Since the mid-2010s, the government has provided some additional grants to councils. Most of these have been ring-fenced for social care, in response to financial pressures within the sector. The 2024/25 settlement provided grants for social care in England totalling £8.7 billion.

Further information

• Local authority financial resilience

Author: Mark Sandford and Phil Brien

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