Growing demand on essential frontline services, delayed finance reform and shrinking investment in preventative programmes is pushing local government finances to the brink and towards unsustainability, a report from the National Audit Office (NAO) published today is warning.

Despite a 4% increase in funding to local authorities through the Local Government Finance Settlement between 2015/16 and 2023/24 to £55.7bn, funding per person during the same period fell by 1%, against a backdrop of growing demand and increased complexity of needs.

As of last week, 42 councils have received ‘exceptional financial support’, with 30 receiving support to balance their budgets in 2025/26. Although this provides short-term support, it can create longer-term risks. More needs to be done to address the underlying financial pressures, the NAO urges. 

Additional financial support

Between them the councils have received more than £5bn through the Exceptional Financial Support framework, allowing councils to use capital resources to support revenue spending. At the same time, local authorities have been given several cash injections to help balance their budgets, including £880m extra for social care; a £1bn uplift for special educational needs and disabilities (SEND) and £233m for homelessness services. 

Councils have also been able to use a ‘statutory override’ to prevent overspend of their Department for Education-funded high-needs budget from affecting their financial positions. However, the current arrangement will end in March 2026, leaving 43% of local authorities at risk of issuing a section 114 report, effectively declaring bankruptcy, if no action is taken.

While these additional funds and arrangements help support services in the short term, the lack of certainty for local authorities has limited their ability to plan for the long term and often delivers poor value for money, the NAO warns. 

Difficulty accessing public services

The NAO report, Local Government Financial Sustainability, published in anticipation of planned reforms by the Ministry of Housing, Communities and Local Government (MHCLG), warns that it is increasingly hard for people to access public services. 

Nearly 3,800 families are being housed in bed and breakfast accommodation for longer than the six-week legal limit, up from 860 in 2018/19. Meanwhile, requests for adult social care from 2015/16 to 2023/24 went up by 15%, but only 2% more were able to access support.

Public complaints to the Local Government and Social Care Ombudsman have also been rising steadily over the past three years, with 80% of investigations into adult social care upheld.

Despite widespread recognition of their importance, immediate finance pressures are limiting local authorities’ ability to invest in preventative services. Just this month, the government confirmed £270m of new funding for the Children’s Social Care Prevention Grant. However, spending on late intervention services for children’s social care increased from £8.5bn to £12.1bn between 2015/16 and 2023/24, while spending on prevention fell from £3.2bn to £2.8bn over the same period. 

Cross-government approach

As part of MHCLG’s funding and service reforms, the NAO report recommends that the Ministry takes the lead in building a cross-government approach to local government financial sustainability, and devises a funding and service reform plan that focuses on long-term value for money and clear cross-departmental priorities. 

The NAO also says that MHCLG, together with HM Treasury, should explore how the impact of preventative services can be evaluated and incentivised to deliver better outcomes and improved value for money.

Gareth Davies, head of the NAO, said: “There have been repeated delays to local government finance reform and government can no longer resort to short-term solutions to support local authorities. Action to address this must resolve the systemic weaknesses in local government financial sustainability through a comprehensive, cross-government approach.”

Focus on preventative services

Sir Geoffrey Clifton-Brown, Chair of the Committee of Public Accounts, said unsustainable financial pressure facing local authorities is leaving little headroom for preventative services that could reduce demand. 

“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.”

Alison Ring OBE, ICAEW Director, Public Sector and Taxation, said: “Local councils continue to be caught between a rock and a hard place with their finances. They face a difficult choice between cutting essential public services that residents rely on and looking for alternative ways of raising revenue, including entering into commercial activities, which have the potential to expose councils to greater financial risk should they go wrong. We absolutely support long-term reform to local government finances.”