Chancellor urged to fix ‘broken system’ as council bailouts ‘normalised’

Emergency bailouts of councils on the brink of financial failure have become normalised in a broken system of funding, Rachel Reeves has been warned.

Ahead of the Autumn budget, the Local Government Association (LGA) stressed that councils are “at the heart of every national priority” but said they cannot help deliver growth and reform to public services, or improve life chances, without sustainable resources.

The LGA’s letter to the Chancellor highlights that 29 councils, including nearly one in six of all authorities with responsibility for social care, required the Government to approve exceptional financial support agreements this year.

This was an increase on the 18 councils which required support through the relaxation of financial frameworks last year – a rise the LGA said is “a clear warning sign of systemic failure”.

The support process enables struggling councils to borrow, sell assets or increase council tax above national limits to keep essential services running.

Overall, 42 councils have accessed more than £5 billion through exceptional support since its introduction in 2020/21, with many using it for multiple years.

The letter said: “Arguably this arrangement is no longer exceptional. Instead, the use of borrowing or the application of capital receipts have become normalised as a means for funding councils’ day-to-day spend on vital services such as children’s social care.

“This is clearly not a sustainable financial model.”

The LGA said the current financial support arrangements should be reviewed to ascertain whether they are achieving the objective of supporting councils in returning to financial sustainability.

LGA chairwoman Louise Gittins said: “Council costs and demand for services are soaring – especially in children’s and adult social care, homelessness, and Send home-to-school transport – leaving significant potential overspends this year.

“The consequences are visible everywhere. Fewer neighbourhood services, reduced investment in prevention, and growing pressure on those who rely most on local support.

“When a system relies on emergency bailouts to function, it is fundamentally broken.

“The country’s success depends on places like Barnsley, Buckinghamshire, Cambridge, and Cumberland being able to thrive. Councils have the legitimacy, local knowledge and ambition to make that happen. But they need a fair financial foundation to stand on.

“If the Government is serious about growth, public service reform and opportunity for all, it must start with councils – because when councils succeed, the country succeeds.”

The letter detailed how public service reform with a focus on prevention and “genuine” devolution, and utilising technology to drive productivity and efficiency, are critical to reducing demand for acute services.

But LGA analysis shows financial pressure facing many councils in England remain “stark and worsening”, with risk of substantial budget overspends in 2025/26 across adult social care, children’s social care and homelessness services.

It found that despite increased budgets, between 2022/23 and 2024/25, councils overspent annually on average by 5% on adult social care, 14% on children’s social care, 25% on home-to-school transport for children with special educational needs and disability (Send) and 52% on homelessness.

In 2025/26, there were steep rises in planned budgets with increases of 9% for adult social care, 10% for children’s social care and 39% for homelessness.

Data for councils’ spending across these three services indicates that 2025/26 budgets are already under pressure, with clear potential for overspends in line with the previous three years, the LGA said.

This would lead to councils being forced into emergency measures such as in-year cuts to other services and drawing on depleting reserves to balance their books, it added.

The LGA welcomed the Government’s plans to reform local government finance, including a guarantee of multi-year settlements, a move away from ring-fenced grants and reducing reliance on competitive bidding.

It also said the Chancellor should ensure the implementation of fair funding reforms, which are expected to adjust formulas used to allocate government grants and prioritise deprived areas, and that they must include “robust transitional arrangements” to protect the sustainability of all councils.

The LGA also highlighted the need to address an estimated £5 billion deficit in Send budgets.

While councils are legally required to set a balanced budget each year, these cumulative overspends are permitted under a special arrangement.

The LGA welcomed an announcement that councils can continue to keep these deficits off their main balance sheets until 2028/29 as “helpful”.

But it warned that in the absence of a long-term solution, these deficits are still an “existential threat for a number of councils”.

This is because these deficits are financed by cash, meaning councils incur substantial cash flow costs, primarily due to lost interest.

In addition, councils that are forced to supplement their cash flow with borrowing incur an additional interest burden.

The LGA estimates that the forecast deficit of £5 billion in 2025/26 will result in councils losing £200 million in unearned income alone.

Writing this accumulated burden off as part of the wider Send reforms would give councils and schools the chance to focus on improving provision rather than firefighting finances, the LGA said.

It also called on the Chancellor to ensure the Government covers the cost of local government reorganisation, which will see two-tier areas replaced by single unitary authorities.

Commons Public Account Committee chairman Sir Geoffrey Clifton-Brown has said the wholesale reorganisation of local government at a time of financial strain on councils “risks turning existing financial problems into far larger ones”.

Liberal Democrats local government spokeswoman Zoe Franklin said: “Many councils are being crippled with spiralling costs from Send to adult social care….

“The sticking plaster effect simply won’t do, and to truly help local government they (the Government) should urgently get on with reforming social care, and work on a cross-party basis to ensure the broken Send system works better for children and their families.”

A Ministry of Housing, Communities and Local Government spokesperson said: “We’re turning the tide on decades of underfunding in councils in England so we can give people the high-quality public services they deserve.

“We’ve made £69 billion available this year for councils – a 6.8% increase in cash terms – and will go further by fixing an outdated funding system so that money goes to places that need it most, and introducing multi-year finance settlements to give councils stability.”