Local authorities have seen their net worth fall by £80bn since interest rates began to rise in late 2021, according to a report by the National Institute of Economic Social Research (NIESR). The Bank of England base rate rose from 0.1% in 2021 to 5.25% at May 2024, creating an ever-growing cost for local authorities to service their estimated £100bn of government loans, many of which were taken out to finance big investments in commercial projects.

The result of this is that “authorities are spending a record amount” of their core spending power to service this debt, with the current estimate being 15% or £3.2bn each year. With interest rates unlikely to fall again to the levels seen in 2021, local authorities can only expect to continue having to use a large portion of their budgets to service their debt in the coming years, with the NIESR report stating that rising interest rates “will be pushing many local authorities into a debt crisis”.

The fall in local authority net worth and the growing costs to service debt at local authorities, comes at a time of increasing service demands and a reduction in funding received from central government. The report analyses that all local authorities have seen a reduction in spending power since 2010 and a reduction in the level of core funding they receive, with government grants “being cut by 60 per cent in real terms on average” between 2010 and 2019.

The NIESR report goes on to highlight that many local authorities “have identified that the funding allocated is not sufficient to cover the increase in service demand,” with the increase in the number of Special Education Needs and Disability children on an Education and Health Care plan being a key driver – this rose by 64% in the UK between 2015 and 2023.

The precarious state of local authority finances has been well documented for some time, with seven local authorities issuing s114 bankruptcy notices since 2020 and councils such as Warrington and Spelthorne being subject to Best Value inspections recently. Most local authorities are also at least two years behind on publishing audited financial statements, leading to a concerning lack of accountability when the accounts should be a cornerstone of local democracy.

A recent survey of local authorities by the Local Government Information Unit paints a worsening picture, with 9% of respondents stating they were likely to issue an s114 notice in 2024/25. Furthermore, 51% of respondents believed they were likely to issue such a notice in the next five years. This is despite the final local government finance settlement for 2024-25 providing £64.7bn to local authorities – an increase of 7.5% from the previous financial year, including an additional £600m to bolster council budgets.

Jack Bower, ICAEW Public Sector Audit and Assurance Manager, comments: “Local authorities are facing a plethora of challenges over the coming years and changes in the system are needed to bring the local government sector on to a more sustainable footing. ICAEW’s manifesto calls for the adoption of our vision for local audit – this makes the case for better financial reporting, high quality and timely audits, stronger financial management and governance and encouraging the growth of a local government finance and audit profession which is highly valued by all stakeholders.

Our manifesto also calls for stable long-term funding streams, to enable authorities to focus on the delivery of public services and incorporate more efficient financial planning, as well as to provide a clear basis to recapitalise struggling local authorities. We believe that these measures are vital if local authorities are to survive without resorting to s114 notices, which can devastate local services and hinder local economic growth.”