Council finances are becoming unsustainable and whole system overhaul is required, watchdog warns

From bin collections and parks to social care, it's estimated local authorities in England provide more than 800 services for residents, touching on many different aspects of our lives all the way from childhood to elderly care.

A National Audit Office report found spending on services increased by £12.8bn - from £60bn to £72.8bn - between 2015-16 and 2023-24, a 21% increase in real terms.

Most of this increased spending - £10.3bn - has gone to adult and children's social care, which represents councils' biggest spend, increasing as a share of overall spending from 53% to 58% over the period.

Previous central funding cuts and an increasing population mean that spending power per person has largely stagnated, however, and remains 1% lower per person than in 2015/16, the report said.

This is a measure of the funding available to local authorities from central government grants, council tax and business rates. Though grant funding has increased in recent years, it has not yet made up for pre-2020 government cuts.

Complex needs

The population in England has increased by 5% over the period, accounting for some of this increased pressure, but it's not the only driver.

In many areas, demand has outpaced population growth, as external events and the complexity of people's needs has shifted over time.

The rapid increase in costs of temporary accommodation, for example, has been driven by the large increases in people facing homelessness because of inflationary pressures and housing shortages.

At the same time, demand for new adult social care plans has increased by 15%.

As life expectancies have increased, the length of time in people's lives during which they suffer from health problems has also increased.

"We see that in adult social care that people have multiple conditions and need more and more support and often will be appearing as if they're frailer at an earlier age. So that's an important trend," explained Melanie Williams, president of the Association of Directors of Adult Social Services.

"We're constantly focusing on most urgent things at the expense of not doing the preventative work," she added.

"When we're just focusing on getting people home from hospital, we're not doing that piece of work to enable them not to go there in the first place."

Budget cliff edge over SEND spending

Meanwhile, demand for education, health and care (EHC) plans, for children with more complex special educational support needs has more than doubled, increasing by 140% to 576,000.

Budgets for special educational needs and disabilities (SEND) have not kept pace, meaning local authority spending has consistently outstripped government funding, leading to substantial deficits in council budgets.

Most authorities with responsibilities for SEND have overspent their budget as they have been allowed to until March 2026 on a temporary override, but they will need to draw on their own reserves to make these payments in a year.

One in three councils will have deficits that they can't cover when the override ends.

Cuts to services

In the latest figures for 2023/24, the NAO found £3 in every £5 of services spending by English local authorities went towards social care and education, totalling £42.3bn.

This has left little headroom for other services, many of which have experienced real-terms financial cuts over the same time period, with councils forced to identify other services like libraries, parks and the arts to make savings.

But, Williams warned, cultural and environmental services like these can play a vital role in wellbeing and may actually exacerbate demand for social care.

"For us to be able to safeguard both adults and children - so people that need extra support - we do need that wider bit for councils to do," said Williams, who also serves as corporate director of adult social care for Nottingham County Council.

"It's no good me just providing care and support if somebody can't go out and access a park, or go out and access leisure, or go out and have that wider support in the community."

Commenting on the report, Cllr Tim Oliver, chairman of the County Councils Network, said: "As we have warned, councils have little choice but to spend more and more on the most demand-intensive services, at the expense of everything else - leaving them providing little more than care services.

"It is market-specific cost pressures, mainly in adult social care, children's services, and special educational needs, that are driving councils' costs rather than deprivation. Therefore government must recognise and address these pressures in its fair funding review, otherwise it will push many well-run councils to the brink."

Fighting fires

The NAO report describes a vicious cycle where councils' limited budgets have resulted in a focus on reactive care addressing the most urgent needs.

More efficient preventative care that could lower demand in the long term has fallen to the wayside.

In one example cited by the NAO, the Public Health Grant, which funds preventative health services, is expected to fall in real terms by £846m (20.1%) between 2015/16 and 2024/25.

Other areas have seen a switch in funding from prevention to late intervention.

Councils' funding towards homelessness support services increased by £1.57bn between 2015/16 and 2013/24, while money for preventative and other housing services fell by £0.64bn.

Financing overhaul needed

Since 2018, seven councils have issued section 114 notices, which indicate that a council's planned spending will breach the Local Government Finance Act when the local authority believes it's become unable to balance its budget.

And 42 local authorities have received over £5bn of support through the Exceptional Financial Support (EFS) framework since its introduction in 2020.

According to a recent Local Government Association survey referenced in the NAO report, up to 44% of councils believe they'll have to issue a section 114 notice within the next two years should the UK government cease providing exceptional financial support.

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Looking ahead to upcoming funding settlements, and the government's planned reforms of local government, the NAO warns that short-term measures to address acute funding shortfalls have not addressed the systemic weaknesses in the funding model, with a whole system overhaul required.

Sir Geoffrey Clifton-Brown, chair of the Committee of Public Accounts, said: "Short-term support is a sticking plaster to the underlying pressures facing local authorities. Delays in local audits are further undermining public confidence in local government finances.

"There needs to be a cross-government approach to local government finance reform, which must deliver effective accountability and value for money for taxpayers."

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