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A rising demand for social care is among the factors contributing to financial pressures on councils

The financial crisis facing England’s councils is “out of control” with even well-run local authorities at risk of going bust, MPs have warned.

A cross-party committee said the government must plug a £4bn funding gap to avoid a “severe impact” on services.

They also called for council tax to be reformed, describing the current system as “outdated” and “regressive”.

The government said it recognised the challenges facing councils and had announced an extra £600m in support.

In a new report, the Commons Levelling Up, Housing and Communities Committee said councils were being hit by “systemic underfunding”, as well as increased costs and demands for services.

The Local Government Association estimates councils in England are facing a funding gap of £4bn over the next two years.

Labour MP Clive Betts, who chairs the committee, said: “If the government fails to plug this gap, well-run councils could face the very real prospect of effectively going bust.”

In November, Nottingham became the eighth council to issue a Section 114 notice in the past six years, which means it is effectively bankrupt.

In the previous 18 years no councils had done so.

Earlier this month the government announced an £600m funding boost for councils in England, following pressure from local authorities and MPs.

The figure is on top of a £64bn funding package for 2024-25, which was announced in December.

The committee said the additional money was welcome but that it believed further funding increases were needed.

The report highlights how councils are particularly struggling with increased demand and costs for services including social care, transport for children with special educational needs and disabilities, as well as homelessness support and temporary accommodation.

Susan Hinchcliffe, the Labour leader of Bradford City Council, told the committee nearly 50% of the council’s entire budget was now being spent on children’s social care but this was still not enough to cope with current pressures.

She said services were “grappling with high agency costs, high placement costs and dizzying levels of demand”.

Councils are also seeing increased costs and demand for transport to special schools outside of their local area.

An officer at North Yorkshire Council told the committee spending on school transport for children with special educational needs and disabilities had increased from £5m to £21m over the past five years.

In the longer-term, the report calls for a fundamental review of council funding, local taxation and the delivery of social care services.

Mr Betts said: “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 committee said the increasing reliance on council tax to fund services had a disproportionate negative impact on funding levels for authorities in more deprived areas.

It highlighted that council tax charges were based on property valuations from 1991 and because house prices had risen considerably since then, people living in the most valuable homes were paying less in council tax as a proportion of their property’s value than those in the least valuable properties.

It urged the government to undertake a revaluation of properties, consider wider reform of the system and introduce additional council tax bands.

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.”

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