National Audit Office: Whole government response essential to local authorities’ financial sustainability

Local government finances are becoming unsustainable, due to increasing demand on essential frontline services; the impact of delayed finance reform and the erosion of investment in preventative programmes, says a report from the National Audit Office(NAO).   

While funding to local authorities', available through the Local Government Finance Settlement ¹ (from council tax, central government grants and business rates), increased by 4% between 2015-16 and 2023-24 to £55.7 billion, it was not reflected in funding per person during the same period, which fell by 1%.

Nor has the funding kept pace with the demand for services to people most in need of support, mainly adult and children's social care, temporary accommodation and the special educational needs and disabilities (SEND) system, which has increased over and above population growth. Over half (58%) of the £72.8 billion spent by local government in 2023-24 was on adult and children's social care.

The independent public spending watchdog's latest report, ‘Local Government Financial Sustainability', examines the current finance system to help inform the Ministry of Housing, Communities & Local Government's (MHCLG) planned reforms.

The report also found it can be increasingly hard for people to access public services, as demand outstrips resources:

• Only half of Education, Health and Care (EHC) plans for special educational needs were issued within the 20-week deadline in 2023.
• Nearly 3,800 families are being housed in Bed & Breakfast accommodation for longer than the six-week legal limit ². This is an increase from the 860 in 2018-19.
• Requests for adult social care from 2015-16 to 2023-24 went up by 15%, but only 2% more were able to access support. At the same time waiting lists grew, including nearly 79,000 waiting over six months. 

Evidence suggests that when people access services their needs are not being well met. Public complaints to the Local Government and Social Care Ombudsman have been rising steadily over the last three years, with 80% of investigations into adult social care upheld.

MHCLG recognises the importance of preventative services, but the immediate finance pressures are limiting local authorities' ability to invest in prevention with local authorities spending less on these services which will help manage demand.

Spending on late intervention services for children's social care increased from £8.5 billion to £12.1 billion between 2015-16 and 2023-24, whilst spending on prevention fell from £3.2 billion to £2.8 billion over the same period. However, to help shift spending towards prevention, in February 2025, the government confirmed £270 million of new funding for the Children's Social Care Prevention Grant.

Local authorities have been given several cash injections to help balance their budgets, for example, £880 million additional funds for social care; £1 billion uplift for SEND and £233 million for homelessness services.

Councils who have overspent their Department for Education-funded high needs budget have been able to use a 'statutory override' to prevent this overspend from affecting their financial positions. Government is developing a long-term solution, but 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 highlights.

Forty-two local authorities in England have received ‘exceptional financial support', with 30 receiving support to balance their budgets in 2025-26 ³. NAO warns this provides short term support but does not address the underlying financial pressures and can create longer-term risks. Between them the councils have received over £5 billion through the Exceptional Financial Support framework, allowing councils to use capital resources to support revenue spending.

The government committed to a return to multi-year finance settlements in 2026-27 and launched three consultations in December 2024 alongside the provisional local government finance settlement 2025 -26 to start to help stabilise and rebuild the financial sustainability of local government. Projections show that funding per person is set to increase by 7% by 2025-26 ^4.

The NAO has several recommendations to help inform MHCLG's funding and service reforms, including:

• Take the lead in building a cross-government approach to local government financial sustainability.

• Develop a funding and service reform plan, as part of the spending review, that addresses the financial and demand pressures on local authorities, focusing on long-term value for money and clear cross-departmental priorities.   

• Alongside HM Treasury, 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.”
Notes to editors

Press notices and reports are available from the date of publication on the NAO website. Hard copies can be obtained by using the relevant links on our website. 

The report, Local Government Financial Sustainability, focuses on five types of English local authority – London boroughs (including City of London), metropolitan district councils, unitary authorities, county councils and district councils. It does not include town and parish councils, combined authorities, or stand-alone police and fire authorities.

1. The money made available to local authorities through the Local Government Finance Settlement is called Core Spending Power. This is a measure of funding available from certain government grants, council tax, and locally retained business rates. In 2023-24 this was £55.7 billion for the local authorities in scope of our report. Local authorities can draw on other resources such as other government grants, their reserves and sales, fees and charges to meet their revenue expenditure of £72.8 billion in 2023-24. 
2. In Quarter 1, 2024-25, some 3,770 households with children had been resident in bed and breakfast accommodation for more than the maximum of six weeks, set out in the Homelessness Code of Guidance. This is an increase from the 860 in Quarter 1, 2018-19.
3. Further details of support granted to local authorities that have requested Exceptional Financial Support are on the government website.
4. Over the period of 2015-16 to 2023-24, Core Spending Power (CSP) per person (in real terms which considers both population growth and inflation) fell by 1%. CSP per person is forecast to rise by 7% between 2023-24 and 2025-26. (1.18, Figure 2)