Talks of a £22bn black hole in central government finances have been overshadowed by claims made by the County Council Network (CCN), suggesting that for local government the deficit is closer to £54bn.

Here’s what a council failure means and how it could impact those doing business with them.

Extent of the issue

Last year, it was reported that 1 in 4 councils might declare bankruptcy. The CCN pre-budget forecasted that 6 out of 10 councils could fail this year, and a recent report identified 16 potential council failures by 2026/27. While we haven’t reached these levels yet (8 councils have issued notices since 2021), the financial pressure continues to build. Past failures were often driven by specific issues, like Birmingham’s equal pay claims, but now councils face the broader challenge of balancing budgets.

The root of the problem is twofold: declining revenue and rising costs. Central government funding was cut by 31% in real terms between 2009 and 2021. Rising costs, particularly for adult social care, children’s services, and home-to-school transport, are projected to increase by up to £22bn per year between 2022 and 2030.

Has the budget made this headline go away?

While the Budget has offered some relief, it falls short of a complete solution. The proposed 3.2% increase in local government funding is weighted toward social care and includes £1bn for the Household Support Fund and Discretionary Housing Payments in 2025-26. This will help address immediate hardship, alongside funding for SEND (special education needs) and a new fostering initiative.

However, councils are permitted to raise Council Tax by up to 5%, which, while helpful, does not address the underlying funding gap. The Budget language of “trajectory” and “in advance of wider funding reforms” signals that deeper, more systemic changes are not yet in place. Councils are likely to continue facing stress and spending restrictions. Also, Councils may merge to form wider Unitary Authorities to share cost.

If a council does fail, what does it mean?

A council going bankrupt isn’t the same as a business going into administration.

Here’s what happens:

• Section 114 Notice: A council’s Chief Financial Officer (CFO) must issue a formal notice if they can’t balance the budget. This notice is not insolvency but signals significant spending cuts.
• Spending Restrictions: Non-statutory services are halted, and even core services may be cut back (e.g., reducing bin collections to monthly or closing libraries).
• Council Decisions: The council must meet within 21 days to discuss the notice and decide on actions, though there’s no legal mandate for specific steps.
• Government Intervention: If needed, commissioners or an intervention board with local government experience can be appointed to direct council decisions.

How does this affect business with a council?

1. No Sudden Liquidations: You won’t be left unpaid for work already provided.
2. Re-negotiation Risks: Councils may merge into larger Unitary Authorities, which could mean renegotiating contracts in the face of increasing competition and hard negotiation on price.
3. Revenue Planning: Businesses reliant on council work, even for non-core services, should anticipate potential revenue impacts and consider contingency plans.

Understanding the risks involved and preparing for potential changes can help your business stay resilient during council financial upheavals.

If you’re concerned about how council financial challenges could impact your business or need advice on navigating contract renegotiations, we’re here to help—get in touch with Richard Fergusson at RichardFergusson@schofieldsweeney.co.uk