Urban councils outside London warn Angela Rayner of financial failure

In a letter to the Deputy Prime Minister ahead of Labour’s autumn conference, cities including Liverpool, Manchester and Nottingham call for clarity.

Deputy Prime Minister Angela Rayner has promised councils clarity over funding (Chris Furlong/PA) (PA Wire)

Councils in some of the poorest urban areas of the country have warned Angela Rayner that the vast majority do not expect to meet their budget targets in the next financial year.

The 48 councils outside London, which serve 14 million people across southern ports, the Midlands and the North, have raised the alarm over a dramatic drop in confidence in their financial sustainability, with vital services under threat and reserves dwindling.

In a letter to the Deputy Prime Minister ahead of the Labour Party conference this weekend, the Labour chairman of the Special Interest Group of Municipal Authorities (Sigoma), Sir Stephen Houghton, called for urgent Government action to stabilise council finances and clarity on the timing of promised reforms.

A survey of finance directors at member councils found just 3% are now very confident they can balance the books in 2025-26, while just over one in five (21%) are not very confident this will be the case.

The figures represent a significant fall in confidence about the next financial year after 25% of member councils said they would meet their budgets in 2024-25.

When asked about particular services, 71% said they believe children’s social care services will fall below required delivery standards, including 24% who said service failure was likely.

Confidence in adult social care delivery is also low, with 65% of councils saying required standards could not be maintained and 18% warning of service failure.

The high cost of placements, the vast majority of which are provided by private companies, was identified by finance directors as causing the most acute pressure on social care budgets.

The rise in the number of children requiring education, health and care plans due to their special educational needs, alongside the costs of their school transport, were also highlighted – as were the increasing complexity of social care needs and workforce challenges.

Three other services – housing, environment and planning – were also flagged as being at risk of not meeting statutory requirements.

Currently, there is a fundamental mismatch between what local authorities are expected to do and the resources they have to do it

Sir Stephen Houghton, Sigoma chairman

In the letter, Sir Stephen said: “Currently, there is a fundamental mismatch between what local authorities are expected to do and the resources they have to do it.

“This is pushing local authorities closer to [declaring effective bankruptcy] and resulting in significant cuts to local services.”

Sir Stephen later added: “There is a desperation for council tax equalisation in the local government finance settlement and the need for longer term certainty to enable councils to plan better.”

The Government has pledged to provide councils with multi-year funding settlements in order to provide clarity and encourage medium-term planning.

Sigoma, whose members include Manchester, Liverpool and Nottingham, has repeatedly called for reform to the way local government funding is distributed to compensate poorer areas which are able to generate less revenue from council tax.

The issue has become particularly pressing as local authorities have become increasingly reliant on the levy as annual central government funding has reduced.

Of the 33 councils which responded to the question, 97% said the 2025-26 local government financial settlement and spending review were causing uncertainty for the sector.

Sigoma said this is mainly due to forecasters predicting a real-terms cut to local government funding based on existing departmental spending plans and the state of the public finances.

Without clarity, more than three-quarters of councils said they will be deferring projects, while almost a third will be offering reduced activities to limit costs.

Sir Stephen called for a 7% increase in core spending power in the 2025-26 financial settlement to address the immediate funding gap and a commitment by the Government to increase this each year in line with inflation.

Sharing their thoughts on the survey, one finance director said: “Despite providing significant budget growth for 2024-25 to overspending areas, it appears likely demand and costs will still result in significant overspending.

“We are rapidly running out of usable reserves to fund significant overspends.”

A total of seven councils have issued section 114 notices declaring effective bankruptcy since 2020, with Croydon issuing three and Nottingham two.

In February, the previous government agreed to provide exceptional financial assistance to 19 councils for 2024-25.

A Ministry of Housing, Communities and Local Government spokesperson said: “We will fix the foundations of local government and work closely with the sector to do so.

“Councils will get back on their feet by doing the basics right, and we will provide more stability through multi-year funding settlements, ending competitive bidding for pots of money and reforming the local audit system.”