Why Local Councils Are Going BANKRUPT

21st April 2025

Economist Tejvan Pettinger looks at why many local councils are getting close to bankruptcy in England.

Scottish councils are facing significant financial challenges, though the situation differs somewhat from England. A report by the Chartered Institute of Public Finance and Accountancy (CIPFA) highlights that Scottish councils are struggling with inflation, wage pressures, and rising demand for services, leading to concerns about their ability to maintain balanced budgets.

Unlike England, where some councils have declared effective bankruptcy, Scottish councils have not yet reached that point. However, watchdogs warn that budget gaps are growing, with the total shortfall rising to £725 million for the next financial year—almost double the previous year.

Efforts are being made to address these issues, including agreements between the Scottish Government and local authorities to improve long-term financial planning. But many councils are still struggling with restricted revenue-raising powers and increasing service demands, making financial sustainability a major concern.

Scottish and English councils face similar financial pressures, but their strategies differ due to funding models, legal frameworks, and revenue-raising powers.

Key Differences:
Funding Sources
Scottish councils rely heavily on Scottish Government grants, which account for a larger share of their budgets compared to English councils.

English councils have more autonomy in raising revenue, including business rates retention and council tax flexibility.

Legal Frameworks
In England, councils can issue a Section 114 notice, effectively declaring bankruptcy if they cannot balance their budgets.

Scottish councils do not have an equivalent mechanism, but they must still balance their budgets through cuts, borrowing, or reserve use.

Community Involvement
Scottish councils are increasingly engaging communities in financial decisions to shape service delivery.

English councils often resort to service reductions and asset sales to manage deficits.

Borrowing & Investment
Scottish councils have increased borrowing to fund infrastructure projects like schools and housing.

English councils have sold assets or used capital budgets to support day-to-day spending.

The financial strategies of councils in Scotland and England have a direct impact on local services, shaping everything from education and social care to transport and infrastructure.

Effects on Local Services:

Service Cuts & Reductions
Many councils in England are scaling back services due to budget constraints, with some even closing libraries, leisure centres, and community programs.

Scottish councils, while facing similar pressures, are prioritizing essential services but still reducing non-statutory programs.

Social Care & Public Health
In England, funding gaps have led to longer waiting times for social care and reduced support for vulnerable groups.

Scottish councils are working with the Scottish Government to maintain social care funding, but rising costs are making it difficult to sustain services.

Infrastructure & Transport
English councils have delayed or cancelled infrastructure projects due to financial pressures.

Scottish councils are borrowing more to fund infrastructure, but this increases long-term financial risks.

Education & Community Programs
In England, some councils have cut school funding, leading to larger class sizes and fewer extracurricular activities.

Scottish councils are trying to protect education budgets, but teacher shortages and funding constraints remain challenges.

Financial Sustainability
Scottish councils are pushing for long-term financial agreements with the Scottish Government to ensure stability.

English councils are relying on short-term fixes, such as selling assets or raising council tax, which may not be sustainable