Rising demands for services are pushing councils towards effective bankruptcy, argues Mike Hedges.

There is a widely held belief by council taxpayers that their Council Tax pays for the services provided by their local council. What has happened in recent years is that Council Tax has increased while services have reduced, and council taxpayers have had a variety of reactions varying between anger and confusion.

This is because Council Tax in, for example, Swansea pays for just over one-quarter of the total cost of Swansea Council services with the rest being funded by the rate support grant and the Council’s share of business rates both provided by the Welsh Government. The business rate payment to a council is not related to the business rates collected in the area but is distributed via a formula. Some council areas are net contributors to the national business rates in Wales, notably Cardiff, while others are net gainers from the system.

Looking at Swansea Council’s income in 2024/25, the Rate Support Grant from Welsh Government provided 60% of income, National nondomestic rates 14% and Council Tax rises the other 26%, with additional funding from reserves.

Education and social services expenditure was approximately two-thirds of the total with education being £214.5 million and social services £157 million.

This means that when councils protect social services, which is a demand-led expenditure, and education expenditure, then any cuts made by local councils will disproportionately affect the other services.

This is what we have seen occur throughout Wales irrespective of either type of area or political control. Libraries, sports facilities and other discretionary or non-statutory services have seen substantial cuts over several years.

This disconnect between the Council Tax bill and the level of service provided is bad for democracy and bad for Local Government. As other areas of council expenditure are cut in order to protect education and social services, the percentage spent on education and social services can only increase.

While Welsh councils have not been well-funded, their funding has been better than English councils.

A survey by the Local Government Association published in July 2025 indicates that 25% of English councils could go bankrupt without government assistance. Councils face a critical funding gap, impacting services like social care and education. The County Councils Network warns major councils may declare bankruptcy by 2027 if current financial practices continue.

Local councils are dealing with a critical funding gap exceeding £2 billion for the upcoming year. Louise Gittins, LGA chair, described it as an “extraordinary funding emergency” that threatens crucial public services. In February, 19 councils were provided government bailout agreements known as exceptional financial support to meet legal financial obligations, granting permission to borrow money and sell assets.

This approach provided temporary financial relief, though it risks increasing future debt for councils. The LGA survey indicated that 10% of councils are already exploring emergency support with the government. We know that 44% of councils with social care duties are likely to seek assistance in the next two years. Rising demands in social care, special educational needs, disabilities services and homelessness are increasing financial pressures. Councils are having to consider service cuts and staff reductions to manage costs.

Many English Councils are substantially in debt, with Birmingham having the highest debt owing £2.9bn, followed by Leeds at £2.2bn, Woking at £1.9bn, Warrington at £1.7bn and the City of Edinburgh at £1.6bn.

Birmingham City Council declared itself effectively bankrupt in 2023. The council’s financial troubles have been compounded by an equal pay claim that could cost up to £760 million and a failed IT project. For Birmingham residents, the debt translates to approximately £8,000 per household.

Other councils, including Leeds with £2.5 billion, Woking with £2.1 billion, and Spelthorne with 1.1 billion, have accumulated significant debts. Woking’s borrowing stemmed from an ambitious £750 million redevelopment of its town centre. However, delays and building issues led to a £500 million downgrade in the site’s value, forcing the council to declare effective bankruptcy.

In Spelthorne, years of aggressive investment in commercial property that includes a £40 million shopping centre purchased just before the pandemic means the council is owing £27,000 per household. The annual interest payments alone cost nearly a quarter of the council’s tax revenue.

In 2018, Northamptonshire County Council issued a section 114 notice, effectively a bankruptcy notice, the first local authority to do so for 20 years. Since then, Slough, Croydon, Thurrock, Woking, Birmingham City and Nottingham City Council have issued notices. Many other local authorities have reported that they may soon be forced to do the same. Once section 114 notices were the result of financial mismanagement, but it is becoming increasingly likely that they will be issued more frequently due to service pressures.

The challenge is to ensure no Welsh councils issue a 114 notice of effective bankruptcy.

Mike Hedges is the Senedd Member for Swansea East and a former Leader of Swansea Council.

Image: Mike Hedges. Author: Steve Cushen, licensed under the Creative Commons Attribution-Share Alike 3.0 Unported license.