One in five councils in England will be at risk of financial failure within the next 12 months without fresh income or more spending cuts, new research shows. It highlights the financial difficulties facing English councils, underlined last week when Birmingham City Council, the largest local authority in Europe, declared itself effectively bankrupt and facing swingeing cuts of up to £300m.

The number of councils at risk of financial failure is set to double in the next five years, as more councils become financially vulnerable, according to the study by Grant Thornton. But the analysis found that, due to regional financial inequalities, councils in the North of England are 30% more likely to fail compared to those in the South, at 17%, and London at 15%. (Financial failure is defined as a council’s reserves falling below 5% of their net revenue expenditure.)

A combination of deprivation, levels of reserves and economic output were exacerbating existing issues within the local government funding system and resulting in a disparity in council resilience across the country, Grant Thornton found.

The outlook appears to continue to be bleak for northern English councils. The research found that the number of councils at risk of failure increases to 41% in five years’ time and that, by this time, the North still has the highest percentage of councils in trouble (55%), compared with the South (35%) and London (39%).

Grant Thornton says this is partly due to the composition of councils within each region. The North has a much higher number of metropolitan boroughs and unitary authorities, which are five times as likely to be at risk than county councils, which are predominantly located in the South.

Councils in the South also have a much higher proportion of reserves as a percentage of net revenue expenditure, compared with those in the North, Grant Thornton says. Those in the South average at 152% of net revenue expenditure held as reserves, compared to 49% for councils in the North. This gives Southern councils a much greater ability to withstand one-off events or financial shocks, and a longer timeframe to be able to draw on reserves to counteract any income and expenditure deficit. 

Alison Ring OBE FCA, ICAEW Director for Public Sector and Taxation, says: “The significant financial challenges facing English local authorities identified by Grant Thornton’s research are extremely concerning, especially where understrength balance sheets make councils much more vulnerable to the risk of financial failure.” 

That most councils in England are more than two years overdue on their audited financial statements was “undermining effective governance and the ability of councillors and residents to hold cabinets and officers accountable for how they are managing local authority finances,” Ring adds.

Phillip Woolley, Head of Public Sector Consulting at Grant Thornton, says: “We can see that the challenges already facing local government, from increased demand and service pressures, are being exacerbated by regional disparities across the country. Factors such as local deprivation and economic output, combined with councils’ reserves levels, have a significant impact on how resilient the local council may be to financial pressures in the future.”

Deprivation levels in local communities in the North far exceed those in the South. One in five people in the North live within one of the 10% most deprived areas in England, compared with one in 49 in London, and one in 27 in the South.

The economy in the North also has the second lowest GVA(B) output, behind the Midlands (15%), making up just 22% of the national economic output across all industries, whereas London and the South account for almost two-thirds (63%).

Grant Thornton also notes that consumer spending is normally significantly higher in areas of stronger economic performance, allowing councils to collect much higher levels of fees and charges for elements such as car parking, leisure, tourism and cultural activities.

Although councils in the North are more likely to be more at risk of financial failure more quickly, the financial vulnerability of councils is a sector-wide issue, Woolley says, adding that although more funding is part of the solution, “we know from previous analysis that there are also significant efficiency gains to be made in council services”. 

Grant Thornton estimates that effective investment in digital and technology could unlock an estimated £2bn across councils. However, councils don’t have the funds to invest in new technologies. “A combination of more fundamental reform to local government finance and funding, alongside a national programme of digital and technology investment to enable service modernisation, could offer a route out of the current crisis,” Woolley says. 

Ring says strengthening financial resilience should be a priority, “including recapitalising balance sheets where necessary, investing in financial management capabilities, and providing medium-term funding certainty to enable councils to plan ahead effectively. A fire sale of publicly owned assets should not be seen as a substitute for a sustainable system of local government funding.”