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Government must tackle £4bn council funding gap or risk severe impact to services and council finances, say MPs

1 February 2024

The Government must fix the £4bn hole in council funding arrangements for 2024-25 or risk severe impact to council services and the prospect of further councils in England facing effective bankruptcy , says the cross-party Levelling Up, Housing and Communities (LUHC) Committee in a report published today (Thursday).

The Financial Distress in Local Authorities report points to a systemic underfunding of local councils in England and calls on the next Government to reform council tax, and the wider funding system for local authorities, to ensure council finances are put on a sustainable footing.

The report identifies the range of financial pressures currently faced by councils in England, not least the rising demand for children’s and adults’ social care which are contributing to unmanageable bills for some local authorities.

The report highlights the costs involved in the delivery of services for children and young people with special educational needs and disabilities (SEND) and home-to-school transport. The report calls for the Government to commit to a full review of the Education, Health and Care (EHC) plan system and to consider reforms to make SEND provision financially sustainable and ensure that all children and young people with SEND have access to the services that they need.

Chair's comment

Levelling-Up, Housing and Communities Committee Chair, Clive Betts MP, 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. Increasing demands on council services such as social care and special educational needs and disabilities (SEND) provision has resulted in rocketing costs but the levels of funding available to councils has failed to keep track.

“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.”

The report calls for the next Government to embark on a fundamental review of the system of local authority funding and local taxation, exploring all options for removing its current regressive elements and considering options including land value taxes and wider fiscal devolution measures.

On adult social care, the Committee reiterates the call from its July 2022 report on the Long-term Funding of Social Care to urgently allocate more funding to local authorities in the order of several billions each year.

The report draws attention to increasing levels of homelessness which have required local authorities to spend more in fulfilling their responsibilities to those requiring support. The Committee’s report say that a key driver of increased homelessness is the Government’s decision to freeze local housing allowance (LHA) rates at April 2020 levels. The Committee welcomes the Government’s recent announcement that it will increase LHA rates from April 2024, but urges the Government not to subsequently re-freeze LHA rates and instead to maintain them at least at the 30th percentile of local market rents each year. In the Committee’s 2020 Report Building More Social Housing, the Committee recommended that a social housebuilding programme should be top of the Government's agenda.

Further information

Image: UK Parliament