Cash-strapped councils in England will be hit with hundreds of millions of pounds in extra costs after the government delayed tackling the £5bn deficits spent supporting children and young people with special needs and disabilities.
Council leaders and experts said the two-year delay prolongs the financial struggles faced by local authorities as they await the government’s overhaul of special educational needs and disabilities (Send) provision, and warned it could force more councils into sell-offs and insolvency.
Local authorities have been allowed to keep high-needs deficits off their balance sheets, thanks to a special statutory override. This mechanism was due to end next April, creating a “cliff-edge” that threatened to bankrupt scores of councils.
The override will now run until April 2028, the government announced as part of its wider reforms to revitalise local government funding in England.
Iain Murray, director of public financial management at the Chartered Institute of Public Finance and Accountancy, said the changes have not fixed the fundamental pressures facing local governments.
Murray said: “Without urgent solutions to both existing and future Send deficits, those councils grappling with unsustainable high-needs costs and rapidly growing cumulative deficits may, at best, be forced to make further reductions in essential services, and at worst, risk declaring themselves effectively bankrupt.”
The Local Government Association has said more than half of councils risked becoming insolvent if the override ended next April. A Guardian investigation revealed in March that their combined deficits would reach £5.2bn by the end of this year.
The additional borrowing is likely to reach £200m a year in interest payments and associated costs, as well as lost income from investments and assets as councils use up their reserves to cover the deficits and loans.
Tim Oliver, chair of the County Councils Network, said: “Council leaders can breathe a sigh of relief knowing they no longer face a financial cliff edge in nine months’ time.
“We now need to ensure that the government’s commitment to support councils to manage their Send deficits rings true.
“Despite the extension of the statutory override, many councils still face a number of issues, including rising debt outstripping reserves, mounting interest payments and lost investment income. For some, this could mean reducing services elsewhere or running into extreme financial difficulty.
“Therefore, it is critical government sets out a comprehensive solution later this year. This should include writing off deficits and compensating councils … ensuring that the slate is wiped clean.”
Helen Hayes, the Labour MP who chairs the Commons education committee, said the extension was a “temporary fix”, and warned: “The government should not delay a permanent resolution to local authorities’ long-term Send deficits beyond 2028 and it must work to devise a solution that helps councils to achieve long-term financial sustainability and does not damage their finances further.”
Council high-needs budgets have been under pressure from the sharp rise in children with special needs, with the number requiring extra resources detailed in education, health and care plans (EHCPs) rocketing in recent years.
Nearly one in five schoolchildren in England now have recognised special educational needs, according to Department for Education figures, including 482,600 children with EHCPs.
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The government said it will use the two-year delay to reform how the Send system works and is funded. In that time ministers say they intend to deal with the high-needs deficits, despite only raising central funding for local government 1.1% a year on average until 2028-29.
A government spokesperson said: “This government inherited a Send system left on its knees, which is why we are looking at changes through our plan for change to improve support for children and stop parents having to fight for help while bringing about financial sustainability for councils.
“We will set out our full plans for reform in the autumn, including our approach to supporting councils with their deficits, to deliver excellence everywhere for every child.”
Other measures in the consultation will see government grants moved away from wealthier urban centres such as London towards to places with higher deprivation levels, as well as rural authorities and tourist hotspots where funding does not account for surges in visitors.
Officials say the move will not lead to higher council taxes, in part because the government’s financial forecasts assume councils putting council tax up by 4.99% – the maximum increase without holding a referendum.
Jack Shaw of Manchester University, an expert in local government, said: “The longstanding failure to reform council tax has had a more detrimental impact on councils outside London and the south-east, so it’s right that funding is corrected to take that into account. Some authorities will lose out, but there are transitional arrangements to mitigate that.
“Council cuts under the Conservatives mean that it’ll take some time to put them on a more sustainable footing. Funding reform will improve the fortunes of many councils, but they’ll continue to face acute financial challenges.”