Third of councils at risk of financial failure

New analysis of local government finances has found that a third of all councils in England are at risk of financial failure in the next ten years, and almost one in five are set to be at risk of financial failure by 2021.

Financial adviser Grant Thornton UK LLP has used a new Financial Foresight tool which analyses councils’ long-term baseline financial forecast. Under the process, a council is defined as ‘at risk’ if their reserve levels are at, or below, five per cent of total expenditure. As such, 78 per cent of London boroughs are forecast to be at risk of financial failure over the next decade. Unitary authorities and metropolitan councils are the two next most vulnerable authority types, with half of these expected to hit financial failure by 2028 respectively.

Furthermore, 12 county councils are forecast to be at risk over the next decade, with a number also facing an uncertain future in the more immediate term. Three are likely to be at risk in the next three years – a number that rises to seven if the ‘at risk’ level is increased to reserves at, or below, 10 per cent of total expenditure. Conversely, only 43 district councils (21 per cent) are set to become at risk over the next decade.

Paul Dossett, head of local government, Grant Thornton UK LLP, said: “The local government sector is facing unprecedented demand and financial pressures, and the risk of financial failure has never been more acute. The very public struggles of Northamptonshire and Somerset County Council’s this year demonstrate the intense distress many councils, and in turn their citizens, are facing.

“Our analysis shows that it won’t be long before others also reach breaking point, with almost a third of all councils found to be at risk of depleting their reserves in the next ten years, if not sooner. Council reserves should only be used to cover the cost of unexpected events and are an unsustainable method of long-term funding. With future funding levels an ongoing uncertainty, ensuring their financial sustainability is now the number one issue facing councils.

“We have seen an inexorable rise in the number of councils dipping into their reserves, as they struggle to balance the twin challenges of continued reductions in Revenue Support Grant and rising demand in areas such as adult social care, children’s services and homelessness. The pressure on these essential services has been widely publicised but now even those universally used services such as parks and pot hole filling are visibly declining in quality. These issues combined mean financial sustainability will continue to be the biggest challenge for local government for the foreseeable future.”