Financial distress in local authorities – Report Summary

This is a House of Commons Committee report, with recommendations to government. The Government has two months to respond.

Author: Levelling Up, Housing and Communities Committee

Related inquiry: Financial distress in local authorities

Date Published: 1 February 2024

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Local authorities in England deliver key services paid by local taxpayers and which are critical to their everyday lives. However, local authorities are now issuing section 114 notices at an alarming rate which puts them and local taxpayers at risk. In the last six years, eight local authorities have issued a section 114 notice, which notifies of severe financial distress — while none had done so in the preceding eighteen years. Moreover, local authorities are increasingly reporting concerns about their financial positions and their ability to maintain delivery of their services. The Government must act now if local authorities are to survive the severe crisis and financial distress that they face.

It is no surprise that the financial crisis that local authorities are encountering comes after significant reductions in local authorities’ spending power which has itself coincided with increasing demand for their services and inflationary pressures driving up costs. Ultimately, the levels of funding available to local authorities, through council tax, retained business rates, and government grants have not kept pace with these pressures, leading to a funding gap which is already estimated at £4 billion over the next two years.

This has meant that local authorities are increasingly reliant on income from council tax to fund service delivery. However, council tax is regressive, long overdue for reform, and is contributing to a disproportionately negative impact on funding levels of local authorities in the most deprived areas of the country. Furthermore, the business rates retention scheme is increasingly misaligned with local authorities’ current spending needs and the government has not delivered on its earlier commitments to review and reform the scheme. The Government must urgently reform these core funding mechanisms to ensure that the levels of demand and cost pressures faced by local authorities are adequately considered in determining their funding levels.

Children’s and adults’ social care are frequently cited as key pressures on local authorities’ finances. For children’s social care, rising demand for residential care placements, combined with a poorly functioning market for provision of those placements, has driven significant cost increases. For adults’ social care, demand has been driven by a changing population with increasingly complex needs — alongside long-term workforce shortages and inflationary pressures — which has contributed to unmanageable bills for some local authorities. While we welcome the Government’s commitment to implementing fundamental reforms of the systems for delivering social care, a consistent and sustainable increase in funding is required in the long term. In the short term the Government must ensure that local authorities receive sufficient financial support to enable them to continue delivering the services that people need.

Local authorities are also facing significant financial pressures relating to delivery of services for children and young people with special educational needs and disabilities (SEND), including provision of home-to-school transport. The Government’s introduction of Education, Health and Care (EHC) plans in 2014 has contributed to increased demand for specialist services, often requiring delivery through placements in special schools located outside of families’ local areas. The level of funding available to local authorities has not kept pace with demand, and the Government is using temporary measures to enable local authorities to maintain service delivery while building up significant budget deficits. The Government must commit to a full review of the EHC plan system and consider reforms to make SEND provision financially sustainable. The Government must also provide clarity to local authorities on its treatment of budget deficits relating to SEND, and ensure that funding is sufficient to meet demand.

It is also clear that the increasing levels of homelessness have required local authorities to spend more in fulfilling their responsibilities to those requiring support. While ultimately the Government needs to deliver more affordable housing to provide a sustainable alternative to local authorities’ increasing need to use temporary accommodation, a key driver of increased homelessness in the short term has been the Government’s decision to freeze local housing allowance (LHA) rates at April 2020 levels. As the cost of renting in the private sector rental market has increased, the effect of the freeze has been to constrain the available supply of housing by making increasing numbers of properties unaffordable to those receiving benefits. We welcome the Government’s recent announcement that it will increase LHA rates from April 2024, although we urge 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.

The Government elected after the next UK General Election, regardless of their political persuasion, must embark on a fundamental review of the systems of local authority funding, local taxation, and delivery of social care services. In doing so, it must be clear about what local authorities are for and how they can best co-ordinate with delivery of the Government’s wider objectives. The next Government will need to design and implement fundamental reforms to bring the local authority funding system into the 21st Century and should consider options such as land value taxes and wider fiscal devolution in doing so. It must also explore all options for reforming funding and delivery of social care services to address the underlying causes of the acute funding and delivery pressures currently faced by local authorities.