Written evidence submitted by Professor Andy Pike (LGFS0004)

This evidence addresses the committee’s interest in ‘support for financially failing local authorities and action to tackle systemic issues’.

1. The broken funding system and shift from financial pressure to distress

1.1 There is an established consensus that the local government funding system in England is broken and in need of a thorough overhaul. The structural problems and potential solutions are documented in the succession of reports from the National Audit Office and Public Accounts and Housing, Communities and Local Government Committees.[1] The Government has acknowledged the main issues, set out its reform policy to achieve financial sustainability, and opened several consultations.

1.2 Changes in the funding system since 2010 have created generalised and mounting financial pressures felt to differing degrees by all 317 local authorities across England. By 2025, these pressures have intensified and made balancing budgets increasingly difficult, reducing margins for error, and diminishing resources in the system to cope with shocks and unforeseen events. In some cases, the pressures have evolved into more acute, extreme, and higher-level distress comprising financial issues which are of a scale and scope that are unmanageable for local authorities to address on their own.

1.3 This financial distress is now spreading from a minority to a growing group of local authorities. The number of local authorities in receipt of in-principle Exceptional Financial Support (EFS) has now reached 30 (nearly 10% of the total) for 2025-26 to a total value of over £1.3bn.[2]

1.4 While lauded as the ‘Great Survivor’ given its history of enduring historical episodes of financial crisis[3], local authority capacity and capability to cope has been eroded since 2010. The NAO calculate expenditure on central services in local authorities was reduced by £0.8bn or 16.4% between 2010-11 and 2019-20.[4]

1.5 The use of one-off fixes, such as asset sales and reserve utilisation, are unevenly available across local authorities and have been largely exhausted. Non-ringfenced reserves decreased across the sector in real terms from £35.8bn to £24.6bn between 2020-21 and 2024-24 – a more than 30% fall.[5]

1.6 National policy fixes are deferring further reckonings with financial distress for the sector, including short-term and unplanned funding injections into the system and the statutory over-ride on special educational needs and disabilities (SEND) services that is effectively keeping a liability of ~£2.9bn by the end of 2024-25 off local authority balance sheets while it is in operation until March 2026.

1.7 A key issue is understanding the causes of financial distress. Interpretations are currently split between agency or structure-based explanations. The former Secretary of State Michael Gove deployed an agency-based account in which financial distress was the result of local bad decisions, mismanagement, ‘unmerited’ risk-taking, and poor governance. Other sectoral interests emphasised the structures of the funding system that provides insufficient funds to match the legal duties placed upon local authorities and is configured in a way that amplifies pressures in local service delivery responsibilities.

1.8 MHCLG’s Best Value statutory guidance is comprehensive in listing the characteristics of well-functioning and potentially failing authorities under each of its seven principles.[6] However, it is weaker on helping to identify and unravel the agency and/or structural explanations to then inform responses to the causes rather than only the symptoms of financial distress.

1.9 Recent reports have continued to grapple with this agency and/or structure issue. Echoing the LUHC Committee’s (2024) report that acknowledged specific failures in local leadership and decision-making as well as systemic issues generating financial distress, the NAO’s (2025) analysis is clearer on the constrained nature of local authority ability to react and absorb continued increases in service demand and related cost pressures in the current system.[7]

2. The current arrangements for detecting and identifying financial distress

2.1 MHCLG holds overall responsibility for the assurance framework covering the financial condition of local government. Oversight of system-wide risks and individual local authority situations of financial distress are part of MHCLG’s stewardship role supervising the sector.

2.2 Warning signals manifest as system-wide risks and specific individual local authority situations where support is required are currently detected via several main channels:

• MHCLG monitoring of publicly available data including that provided by local authorities and, using the same information, the Chartered Institute of Public Finance and Accountancy’s (CIPFA) Financial Resilience Index. MHCLG also model risks and future funding scenarios, review secondary sources (e.g. local authority financial and performance data, committee papers, and governance reports), and follow up with ‘engagement calls’ and ‘targeted risk visits’.[8] MHCLG compiles an ‘at risk’ list of local authorities in financial distress
• MHCLG conversations with sector bodies including CIPFA finance and governance reviews, Local Government Association (LGA) and its sector improvement work and peer challenges and reviews, inspectorates, and ombudsmen
• External audit – annual audit reports and Public Interest Reports. However, the local audit system is broken – including incomplete and/or late audit reports, auditors exiting the market, and increased audit complexity amidst higher regulatory standards – and is subject to consultation for its reform, and the establishment of the new Local Audit Office
• Reports from inspectorates, including Ofsted and the Care Quality Commission, and ombudsmen, such as the Local Government and Social Care Ombudsmen
• Individual local authorities contacting MHCLG directly for informal and private discussions
• MPs and local residents’ communications.

2.3 Reflecting the increasing incidence of financial distress across the sector, MHCLG has reportedly “strengthened its approach to identifying local authorities who may be at risk of failing due to weaknesses in governance, service delivery or financial management” and this has improved the departments’ understanding of sectoral risk and mitigated local audit system delays.[9] In addition, MHCLG has demonstrated learning from its operation of EFS and identification of emergent risks, for example strengthening its oversight of borrowing and commercial investment.[10] Overall, the system appears to operate in a broadly functional manner in that local authorities in financial distress are being identified and engaged by MHCLG.

2.4 The key questions are whether the arrangements are as widely understood and as effective as they need to be as financial distress becomes steadily more widespread across more local authorities?[11] Is financial distress detected early enough and in a sufficiently timely fashion for anticipatory and preventative actions to support the local authority to lead on resolving its own issues and not having to resort to external intervention? Do all local authorities know what to do and when in situations of financial distress?

2.5 To mitigate and manage the risk that the current arrangements for detecting warning signals are too ad hoc, informal, and opaque, MHCLG can act to clarify and make more transparent the early warning system. This change can set out the range of indicators and thresholds of concern to help local authorities detect, identify, and recognise financial distress and, crucially, support the Section 151 finance and other statutory officers to work with their political leaderships and members for their timely resolution. The risk monitoring reports and risk modelling MHCLG undertakes could also be published, appropriately aggregated and anonymised by sector to avoid the sensitivities of identifying specific local authorities and making public their financial difficulties.[12] Greater awareness of the channels MHCLG use to gather information would also enable interested parties to feed in relevant evidence.

2.6 Such a more transparent approach has already been taken in the Levelling Up and Regeneration Act 2023. In which there is clear and public identification of capital risk metrics (including debt levels relative to resources and proportions borrowed from non-national or local government institutions, proportion of capital assets held for financial return, and Minimum Revenue Provision), thresholds and ‘trigger events’, and their relation to further powers and mitigation actions – including requesting information, imposing borrowing limits, requiring asset disposals, and duty to co-operate with an independent expert.

2.7 A second key action is clearly to establish the new Local Audit Office’s role in independent monitoring of system-wide and individual financial issues especially their acute forms as distress and where local authorities are at risk of failure but have not yet engaged MHCLG. This assumes that the role outlined in the specification for the now abolished Office for Local Government (Oflog) will be retained and learning will be distilled from the historical experiences of the Audit Commission.[13] This additional support is increasingly critical as financial distress spreads and increases the pressure on MHCLG’s capacity continuously to cover all 317 local authorities with sufficient timeliness and detail.

3. The current arrangements and measures for responding to financial distress

3.1 The Local Government Act 1999 covers financial distress where it impacts on the local authority’s ability to meet its Best Value duty.[14] The aim of using this framework being to prevent the financial distress issues from worsening and enable the local authority to restore the capacity and capability to address them and meet the Best Value duty continuously to improve without external support.

3.2 Following the detection of warning signals and early engagement to assess whether the authority is able and willing to manage its challenges, the 1999 Act provides powers to intervene by identifying evidence of failure and using several ‘models’ at the discretion of the Secretary of State:[15]

• Non-statutory Best Value notices stating government concerns and expectations of actions needed to fulfil the local authority’s Best Value duty
• Statutory Best Value inspection – which can focus on specific service areas and is not only about financial distress
• In response to independent reports – for example external audit and Public Interest Reports or from inspectorates and ombudsmen
• MHCLG reviews commissioned from external organisations such as CIPFA governance and/or finance reviews
• Non-statutory interventions – including Improvement Boards with an advisory role appointed by the Secretary of State and others requested by Ministers, and sector-led intervention by peer local authorities
• Statutory interventions – preceded by announcement that the Secretary of State is ‘minded to intervene’ and allowing representations from the authority and interested parties. These interventions comprise either with directions to the authority only or with directions and commissioner-led selected, appointed, tasked by, and reporting to the Secretary of State with powers to exercise specified functions, Improvement Boards with powers to direct actions, and Local Inquiries led by an inspector.

3.3 The Levelling Up and Regeneration Act 2023 provided additional powers to investigate and address extreme risk, including borrowing deemed by the Secretary of State as ‘excessive’ and investments seen as ‘inappropriate’.

3.4 The key question is whether there is sufficient clarity, coherence, and legibility of the responses as a ‘regime’ or systematic, ordered way of doing things that all participants understand rather than a series of ‘emergency responses’[16]? Do local authorities know what to do and when in emerging financial distress situations?

3.5 The arrangements are designed to be complementary to the existing accountability framework in which local authorities are responsible for their own financial management and performance within current legislation and regulations.

3.6 The usual legislation to statutory guidance path in local authority governance in England saw the Best Value guidance published to provide more clarity on the use of the powers in May 2024 – twenty five years after the 1999 Act. The relatively recent publication of this guidance is an indication that MHCLG felt it was needed as such financial pressures and distress spread across the sector and challenged local authorities to meet their Best Value duty and Government to respond where they were at risking of failing to comply.

3.7 The 2024 statutory guidance presents the responses in a systematic way using a pyramid framework to set out the overall goals, process, and its four stages:

• Assurance and early engagement
• Evidencing failure (inspections/other sources)
• Intervention (statutory/non-statutory)
• Exit

3.8 It also notes how escalation works to address issues of growing urgency and seriousness and exit whereby local authorities can demonstrate their capacity and capability to lead and manage their own improvement and recovery towards financial sustainability in the medium to longer-term. The guidance is complemented by the NAO’s (2025: 56) overview diagram of the system.

3.9 Echoing the NAO’s call for a whole-system and cross-government approach[17], a missing or under-developed element is more clearly relating MHCLG’s approach to where other government departments are involved and/or it intersects with service-specific inspections and interventions by the Department for Education and Department of Health and Social Care.

3.10 A further useful next step is for MHCLG to set out an even more accessible and user-friendly version of the system drawing together the currently separate elements into a single guide or road map for council members, officers and other staff, and the wider public to better understand. The department has experience in producing such ‘plain English’ guides.[18]

3.11 While further assessment and reflection would be valuable, how effective are the current arrangements? Evidence is mixed with the concern that responses are addressing symptoms with a short-term approach, rather than the underlying causes, and creating medium to longer-term risks.[19] The new Government’s reform policy is focused upon addressing these systemic causes of financial distress.

3.12 Positives in the current system include:

• enabling bespoke responses tailored to the varying manifestations of financial distress in specific local authorities in particular places and their recovery pathways towards financial sustainability
• EFS has enabled specific local authorities to balance their annual budget and avoid having to issue a Section 114 notice.

3.13 Negatives include:

• Financial distress has tipped over into failure as nine local authorities since 2018 have had to issue Section 114 notices under the Local Government Finance Act 1988 (~3% of the total in England): Barnet, Birmingham, Croydon (3 notices), Northamptonshire (2), Northumberland, Nottingham (2), Slough, Thurrock, and Woking

• These were the first Section 114 notices issued since Hackney, Hillingdon, and Milton Keynes nearly two decades ago in the early 2000s
• Thirteen notices were issued in total. Three under Section 114(2) for unlawful expenditure (Barnet, Northumberland, Nottingham) and the remaining ten under Section 114(3) for their inability to set or maintain a balanced annual budget
• Numerous other local authorities also raised the potential of having to issue a S114 notice including Bournemouth, Christchurch and Poole, Leicester, and Middlesbrough
• Demonstrating the difficulties involved in stabilisation and the ongoing, compounding nature of financial distress, three of the nine Section 114 local authorities have had to issue multiple S114 notices – Croydon (3), Northamptonshire (2), and Nottingham (2)
• Six of the seven Section 114 authorities under statutory intervention have had it extended (Birmingham, Croydon, Nottingham, Slough, Thurrock, and Woking). Northamptonshire was under intervention until its abolition in 2019
• Several of the Section 114 authorities have been in receipt of several rounds of EFS – totalling nearly £2.5bn – Birmingham (4 rounds), Croydon (6), Nottingham (3), Slough (7), Thurrock (3), and Woking (2)
• Northamptonshire County Council issued a Section 114 and the response involved reorganisation into two new unitary authorities North and West Northamptonshire both of which have had to request EFS
• EFS and its use as in-principle agreement for capital flexibilities and, following investigation, a formal capitalisation direction has been criticised as coming late in the budget setting process, breaking municipal finance principles in allowing capital to be used for revenue and covering day-to-day expenditure, incentivising the over-estimate of savings from transformation measures, encouraging the one-off fixes of asset disposals, and, where borrowing is involved, further adding to the stock of local authority debt and its service and redemption costs. Sector officers and commentators now consider this measure as neither ‘exceptional’ nor much of a ‘support’
• Concerns have also been expressed by the Section 114 authorities that measures ‘over and above’ the EFS are required given the magnitude and scale of their continuing financial distress (e.g. Croydon, Slough, Woking). For example, debt write-offs have been raised, including in relation to local government reorganisation, generating concerns in MHCLG and HM Treasury about perverse incentives, moral hazard, and shifting the debt burden from local to national taxpayers[20]
• Temporary council tax increases above the national capped limits are short-term fixes, often addressing the lasting impacts of historical local political decisions to freeze council tax levels encouraged by previous national governments, and generate negative impacts upon local residents as taxpayers as well as the added complexity and costs of designing and operating reliefs
• The range of interventions has not been reviewed since 2020[21], and warrants an assessment under the more recent and extensive conditions of financial distress. While it is a complex, slow, and highly challenging process of stabilisation and building the pathway to recovery for the Section 114 authorities given their particular situations, six of the nine remain in various states of financial distress even after several years of support.[22]

March 2025