THE Government “must fix” a £4 billion hole in local councils’ budgets amid an “out-of-control financial crisis”.

That is the verdict of a Parliamentary committee which has reported on the perilous state of council cash.

Members of the cross-party Levelling-Up, Housing and Communities Committee said the rising costs of adult and child social care, SEND provision in schools and home-to-school transport were among the chief pressures on authorities.

It comes as Somerset Council looks to plug a £100m hole in the budget – blaming spiralling costs of social care – in a bid to avoid issuing a section 114 notice, effectively declaring the authority bankrupt.

If no action is taken to tackle the funding crisis, the committee’s report said there was a risk of a “severe impact to council services and the prospect of further councils in England facing effective bankruptcy”.

The Financial Distress in Local Authorities document said councils in England had endured “systemic underfunding” and called on the next Government to “reform council tax, and the wider funding system for local authorities”.

Clive Betts MP, chair of the Levelling-Up, Housing and Communities Committee. Picture: House of Commons

Chair of the Levelling-Up, Housing and Communities Committee, Clive Betts MP (Lab, Sheffield South East), said: “There is an out-of-control financial crisis in local councils across England.

“Councils are hit by a double harm of increased demands for services while experiencing a significant hit to their real-terms spending power in recent years.

“Increasing demands on council services such as social care and special educational needs and disabilities (SEND) provision has resulted in rocketing costs but the levels of funding available to councils has failed to keep track.

“The Government must use the local government financial settlement to help bridge the £4bn funding gap for 2024-25 or risk already strained council services becoming stretched to breaking point.

“If the Government fails to plug this gap, well-run councils could face the very real prospect of effectively going bust.”

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He said long-term reform of the funding system was “vitally needed”.

“The funding model for local councils is broken,” Mr Betts added. “The business rates system is overly complex and in need of reform. Council tax is outdated and increasingly regressive.

“Councils being forced to hike up council tax in a forlorn attempt to plug increasingly large holes in their budgets is unsustainable and unfair to local people who are, year on year, seeing less services while paying more.”

The report calls for the next Government to embark on a fundamental review of the system of local authority funding and local taxation, exploring all options for removing its current regressive elements and considering options such as land value taxes and wider fiscal devolution measures.

On adult social care, the committee repeated a call from its July 2022 report on the long-term funding arrangements to urgently allocate more funding to local authorities in the order of several billions each year.

It also highlighted increasing levels of homelessness which have required seen councils spend more in fulfilling their responsibilities to those requiring support.

The report said that a key driver of increased homelessness was the Government’s decision to freeze local housing allowance (LHA) rates at April 2020 levels – and welcomed the recent announcement it will increase LHA rates from April 2024.

A Department for Levelling Up, Housing and Communities spokesperson said: “We recognise councils are facing challenges and that is why we recently announced an additional £600m support package for councils across England, increasing their overall proposed funding for next year to £64.7bn – a 7.5% increase in cash terms.

“This additional funding has been welcomed by leading local government organisations, but we remain ready to talk to any concerned council about its financial position.”

However, Somerset Council leader Bill Revans said the extra money – £5m for the county – would not plug the funding gap.