Over half of English councils face insolvency under £5bn deficit, MPs warn

Councils in England face being overwhelmed by billions of pounds in debts and reforms that are divorced from reality, according to an influential committee of MPs.

In its inquiry into local government finances, the public accounts committee (PAC) told the Treasury and other departments to urgently address the estimated £5bn deficit on high needs spending – mainly on special educational needs – that will hit council balance sheets at the end of the financial year, potentially driving many insolvent.

Sir Geoffrey Clifton-Brown, the PAC’s chair, said: “Our inquiry heard that the government is concerned about local authority finances. But the lack of urgent action to come forward with a plan to address the fast-approaching cliff edge for under-pressure authorities would seem to suggest it is comfortable with the current state of affairs as normalised background noise.

“Alarmingly, scrutiny of council finances can now provoke a sense of deja vu, with the same unfixed issues seen over and over.”

Since 2021 councils have been able to keep high needs deficits off their balance sheets through a “statutory override” granted by the previous government. But the accounting manoeuvre expires in March 2026, the end of the current financial year.

The inquiry said that the Ministry of Housing, Communities and Local Government, the Treasury and the Department for Education “should work together to set out their solution for ensuring local authorities can achieve a sustainable financial position when the statutory override ends in March 2026. The solution must include how cumulative deficits will be treated.”

Louise Gittins, chair of the Local Government Association, which represents councils, said: “We expect the government to provide urgent clarity on how it plans to address high needs deficits, which are projected to rise to £5bn next year, as part of its forthcoming special educational needs and disabilities reforms.

“Over half of councils have warned us they will become insolvent next year when the statutory override flexibility ends and we continue to urge the government to write off these deficits.”

The committee also accused the government of creating “significant uncertainty” over a string of promised reforms and reorganisations, including for funding, special needs provision and social care.

Clifton-Brown said: “Aspirations for wide-ranging reforms seem to be unengaged with a reality in which local authorities do not have good and strong capacity to fundamentally change the way they work.”

But Jim McMahon, minister of state for local government, said: “These claims are not supported by the evidence. From a standing start we have set out a clear plan to fix the foundations of local government and have wasted no time in taking action as part of our plan for change.

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“We’ve taken action to restore the audit system to a functioning state, recast our approach to council best value and we are laying legislation to bring in a new local audit office.

“The spending review provided over £5bn of new grant funding for local services, and that’s on top of the £69bn we have already injected this year to boost council finances.”

Last week the Guardian reported that council leaders in England say the multibillion pound high needs deficits have become a “burning platform” that will push scores of councils into bankruptcy within months.

Ministers aim to publish a schools white paper in the autumn, including reforms to education, health and care plans, known as EHCPs. The plans give children and young people up to the age of 25 the legal right to support from local authorities’ high needs budgets, for conditions such as autism spectrum disorder, attention deficit hyperactivity disorder, and speech, language and communication needs.