London’s local authorities are navigating the most severe financial crisis in modern history, with borough councils spending £5.5 million daily on homelessness alone and facing cumulative deficits that threaten the stability of essential public services across the capital. The scale of the challenge is unprecedented: London boroughs are projected to overspend their homelessness budgets by £330 million in 2024-25, while Special Educational Needs and Disabilities deficits approach £500 million, and council debt collectively exceeds £122 billion nationwide. As central government funding reforms create big winners and losers among councils, with inner London boroughs facing potential cuts of up to 12% in government allocations, the question of survival has become existential for many local authorities.
The Homelessness Catastrophe
Temporary Accommodation Crisis
London boroughs currently house approximately 73,000 households in temporary accommodation, a figure that has risen steadily since 2011 and represents the highest level ever recorded. Research commissioned by London Councils, the London Housing Directors’ Group, and the Society of London Treasurers reveals that eight London boroughs alone spent a combined £543 million on temporary accommodation in 2024/25. When extrapolated across all boroughs, this suggests a citywide annual shortfall exceeding £740 million between what councils spend on temporary housing and what central government reimburses through housing benefit subsidies and dedicated funding streams.
This £740 million deficit represents approximately £202 per household in London and equates to 11% of every household’s council tax bill being spent solely on temporary accommodation. The proportion translates to one pound in every nine collected through council tax being diverted to emergency housing provision, leaving significantly reduced resources for other essential services including road repairs, youth provision, and community services.
Statutory Obligations and Funding Gaps
Local authorities operate under a legal duty to provide temporary accommodation to homeless households qualifying for support under housing law, making it impossible for councils to place strict limits on their homelessness expenditure. This statutory obligation has created an uncontrollable cost pressure as the amount national government reimburses for temporary accommodation spending has remained frozen for 14 years, failing to keep pace with the escalating costs in London’s private rented sector where the majority of temporary accommodation must be sourced.
The funding shortfall has widened dramatically in recent years. In fiscal year 2023-24, the gap between central government support and actual costs was approximately £96 million, but London Councils estimates this deficit expanded to £140 million in 2024-25, representing a 45% increase in just one year. Net current expenditure on homelessness in London has risen by 42% since last year, compared to just 16% across the rest of England, underscoring the unique intensity of the capital’s housing crisis.
Bankruptcy Warnings
London Councils, the cross-party organization representing all 32 boroughs plus the City of London, has identified homelessness as the single largest threat to municipal finances, potentially leading to effective bankruptcy declarations. The organization warns that if current expenditure patterns persist, more boroughs will require emergency financial assistance from central government, creating an imminent risk of Section 114 notices—the local government equivalent of bankruptcy.
These warnings are not theoretical. Multiple London boroughs have already approached or crossed critical financial thresholds. Newham borough, for instance, has been identified as overspending by £40 million annually on temporary accommodation alone, driving the authority toward potential insolvency. The borough received special permission from central government to raise council tax by 8.99% for the 2025-26 period, nearly double the standard referendum threshold, specifically to address pressures from temporary housing costs.
The SEND Deficit Time Bomb
Escalating Costs and Deficits
Special Educational Needs and Disabilities provision represents another existential threat to London council finances. London Councils estimates that SEND deficits across the capital are on course to reach £500 million by the end of financial year 2026-27, with inadequate government funding through the Dedicated Schools Grant failing to keep pace with rising need. The organization warns that up to 16 London boroughs would already be unable to meet their projected deficit were it not for a government statutory override provision allowing them to defer accounting for these deficits, which has been extended until March 2028.
Nationally, the SEND crisis is even more severe. A survey from the Association of Local Authority Treasurers reveals that the nationwide SEND deficit currently exceeds £3 billion across English councils and is projected to rise to £8 billion by 2026/27. These deficits are not accounted for in the government’s £22 billion budget gap calculations, yet they are driving councils toward financial collapse by forcing local authorities to borrow to cover day-to-day spending—an inherently unsustainable practice.
The Catch-22 Situation
The Chartered Institute of Public Finance and Accountancy and the Association of Local Authority Treasurers describe councils as facing a catch-22 situation with SEND finances. If the statutory override protecting balance sheets from SEND deficits expires, almost half of all councils responsible for SEND provision will issue Section 114 notices either immediately or in the medium term. However, even if the statutory override continues to be extended, councils still face potential bankruptcy due to the unsustainable borrowing required to maintain cash flow for essential services while carrying massive SEND deficits.
The number of London schoolchildren identified as having special educational needs has risen by 9% in a single year, from 85,601 in 2023 to 93,487 in 2024, according to government figures. Each of these children requires an Education, Health and Care Plan with additional resources, creating legally mandated spending obligations. Ian Edwards, London Councils’ executive member for children and young people, stated that the sums don’t add up and that government funding has failed to keep pace with rising levels of SEND support need, leading to major deficits.
Soaring Transport Costs
One particularly expensive aspect of SEND provision is home-to-school transport. Reports indicate that some councils are spending as much as £950 per day to transport a single special needs child to school, highlighting the spiralling costs of supporting pupils with complex requirements. The government’s 2025 funding reform consultation acknowledges this pressure by proposing to introduce a bespoke formula to recognize home-to-school transport costs, but the impact of this change remains uncertain.
Spending Pattern Changes
Nearly two-thirds of the increase in SEND spending has been driven by increased expenditure on pupils in special schools, with £900 million increases in both top-up funding for state-funded special schools and spending on fees for independent special schools between 2015-16 and 2022-23. Placements in independent special schools are extremely high-cost at £61,500 per year compared with £23,900 in the state-funded sector, but local authorities have been forced to rely on such provision due to capacity constraints in state-funded special schools and inadequate mainstream school provision.
Social Care Pressures
Adult Social Care Demands
Adult social care represents another major cost pressure for London councils. Budgets for adult social care services across England have required local authorities to increase spending by 9.0% in 2025/26 to meet growing demand from an ageing population and individuals with complex care needs. Much of the newly announced additional funding for adult social care relies on local authorities raising council tax by 5% annually, with 2% specifically designated as an adult social care precept.
Rising inflation and energy costs, combined with growing demand for both adult and children’s social care, are pushing fragile council budgets to breaking point. The social care system is experiencing record vacancy rates and unsustainable funding models, with care providers reporting that carers are leaving the workforce faster than they can be replaced and care homes struggling to keep their doors open.
Children’s Social Care
Children’s social care budgets face similar pressures. Local authorities are legally obligated to provide support for vulnerable children, including those in care, at risk of harm, or requiring early intervention services. The number of children in need of protection has increased significantly in recent years, driven by factors including rising poverty, housing instability, and mental health challenges exacerbated by the pandemic and cost-of-living crisis.
These statutory responsibilities for both adult and children’s social care create unavoidable spending commitments that councils cannot reduce without breaching their legal duties. As demand continues to rise faster than funding allocations, social care budgets increasingly crowd out spending on discretionary services such as libraries, parks, cultural programs, and economic development initiatives.
Government Funding Reforms
The Fair Funding Review
The government announced in June 2025 that it would implement major reforms to council funding formulas, marking the first comprehensive review in over a decade. The reforms aim to redistribute resources more fairly across England, taking into account factors such as deprivation levels, population demographics, and the cost of delivering services in different areas. However, the redistribution creates significant winners and losers among local authorities.
Analysis from the Institute for Fiscal Studies indicates that inner London boroughs face particularly severe cuts under the proposed formulas. Some inner London authorities could see reductions in government grant funding of up to 12% over the three-year implementation period, while county councils in less densely populated areas stand to gain significant increases. The government argues that London has historically received disproportionately high funding relative to needs in other regions, but London local government leaders contend that the capital faces unique cost pressures including higher wages, property prices, and homelessness rates.
Settlement Uncertainty
The autumn budget 2025, expected to be announced in the coming days, represents a critical moment for council finances. The Local Government Association has submitted representations calling for multi-year funding settlements that provide certainty for planning purposes, adequate resources to meet rising demand for statutory services, and flexibility to raise additional revenue locally. However, councils remain deeply concerned about the likely outcome.
A survey conducted by the County Councils Network in June 2025 found that six in ten local authorities were not confident of being able to set a balanced budget for the 2026-27 financial year without either substantial increases in government funding or permission to raise council tax beyond current referendum limits. The survey characterized the spending review as make or break for county authority budgets, with many councils warning they would have no option but to issue Section 114 notices if adequate funding was not forthcoming.
Referendum Limits on Council Tax
Current rules require councils to hold local referendums if they wish to raise council tax by more than a specified percentage, typically 3% for most authorities plus an additional 2% adult social care precept. These referendum limits significantly constrain councils’ ability to raise revenue to match expenditure growth. Holding referendums is expensive, and voters have historically rejected proposed tax increases, making the prospect politically risky for council leaders.
Some councils facing extreme financial pressure have successfully negotiated exemptions from these limits. Newham’s 8.99% increase for 2025-26 and similar dispensations granted to other authorities in financial distress demonstrate that the government recognizes current funding levels are insufficient. However, these exemptions are granted only on a case-by-case basis to councils on the brink of bankruptcy, rather than as a systematic solution to the funding crisis.
Boroughs on the Brink
Croydon’s Continuing Crisis
Croydon Council has become emblematic of London local government’s financial difficulties. The south London borough has issued three Section 114 notices since 2020, more than any other English local authority. In October 2025, government-appointed commissioners warned that the council must act urgently to save money and address a projected £58 million budget gap for 2025-26.
Despite implementing severe cuts to services and selling assets to raise cash, Croydon continues to struggle with fundamental financial sustainability. The commissioners’ report highlighted ongoing problems with financial management, governance weaknesses, and a failure to adequately grip the scale of the challenge. Local MP Sarah Jones has called for a complete reset of the council’s approach, acknowledging that residents have lost confidence in the authority’s ability to manage public finances responsibly.
Hillingdon’s Warning Signs
In September 2025, reports emerged that Hillingdon Council in west London was facing potential bankruptcy, with sources warning that the authority had the lowest financial reserves of any London borough. Financial documents revealed that Hillingdon’s reserves had been depleted to dangerously low levels, leaving the council with minimal cushion to absorb unexpected costs or revenue shortfalls.
Hillingdon’s situation illustrates how quickly apparently stable councils can be pushed toward insolvency. The borough had not previously been identified as being in acute financial distress, suggesting that the crisis may be more widespread than publicly acknowledged. The depletion of reserves across multiple London boroughs means that many authorities now lack the financial resilience to cope with shocks such as unexpected demand spikes, legal claims, or infrastructure failures.
Havering’s Housing Crisis
Havering Council in east London has highlighted how the housing and homelessness crisis is driving boroughs toward bankruptcy. The council has warned repeatedly that escalating temporary accommodation costs are unsustainable and threaten its ability to continue functioning. In October 2025, Havering announced new measures intended to tackle the housing crisis, including increased investment in building council homes and initiatives to prevent homelessness before households reach crisis point.
However, the council acknowledged that without substantial additional funding from central government, these measures would be insufficient to close the budget gap. Havering’s experience demonstrates the paradox facing London councils: investing in preventative measures and permanent housing would reduce long-term costs, but councils lack the upfront capital and revenue budgets to make these investments while simultaneously managing existing service demands and debt obligations.
Impact on Council Services
Service Cuts and Closures
As councils struggle to balance budgets, residents across London are experiencing the consequences through diminished services. Libraries have reduced opening hours or closed entirely, youth centers have been shuttered, road maintenance has been deferred, and community programs have been eliminated. These cuts disproportionately affect disadvantaged communities that rely most heavily on public services and have fewest alternatives.
UNISON, the public service union, has warned that the council funding crisis hits the most vulnerable hardest. Analysis published in October 2025 highlighted that low-income families, elderly residents, people with disabilities, and children in need of protection bear the brunt of service reductions. The union called for substantial increases in council funding to protect essential services and maintain the social safety net.
Workforce Reductions
Councils have been forced to reduce staffing levels significantly to cut costs. This workforce reduction creates a vicious cycle: fewer staff must handle increasing demand for services, leading to declining service quality, increased stress and burnout, and higher staff turnover. Vacancies go unfilled as councils implement hiring freezes, while experienced staff leave for better-paid positions in the private sector or other public agencies.
The loss of institutional knowledge and expertise hampers councils’ ability to manage complex challenges effectively. Financial management, procurement, planning, and service delivery all suffer when experienced professionals depart and are not replaced. This organizational degradation makes it even harder for councils to navigate the financial crisis and develop innovative solutions.
Degradation of Public Assets
Deferred maintenance of buildings, parks, roads, and other infrastructure represents a false economy that will cost more in the long run. Councils lacking funds for routine maintenance are watching assets deteriorate, creating safety hazards and higher repair bills when problems can no longer be ignored. Roads develop potholes that damage vehicles, buildings develop leaks and structural problems, and parks become overgrown and unusable.
This degradation of the public realm affects quality of life for all residents and undermines London’s competitiveness as a place to live, work, and do business. Poor infrastructure raises costs for businesses and residents, creates inequality as affluent areas can sometimes self-fund improvements while poorer neighborhoods deteriorate, and reduces civic pride and social cohesion.
Potential Solutions and Reforms
Increased Central Government Funding
The most direct solution to the council funding crisis would be substantial increases in central government grants to local authorities. The Local Government Association has calculated that councils in England face a funding gap of approximately £4 billion annually to maintain existing service levels, before accounting for any service improvements or new initiatives. For London specifically, borough leaders argue that at least £1 billion in additional annual funding would be required to stabilize finances and begin addressing accumulated deficits.
However, the national fiscal situation makes large funding increases politically difficult. The government faces pressure to control public spending, reduce borrowing, and fund competing priorities including the NHS, education, defense, and debt interest. Chancellor of the Exchequer Rachel Reeves has indicated that the October 2025 budget will involve difficult choices and that not all spending demands can be met.
Council Tax Reform
Reform of the council tax system could give local authorities greater revenue-raising capacity. Options include removing or substantially raising referendum limits to give councils more autonomy, allowing councils to add new bands for high-value properties, conducting a revaluation of properties to reflect current values rather than 1991 levels, or introducing supplementary taxes on tourist accommodation, vacant properties, or commercial developments.
Each of these options faces political obstacles. Voters strongly resist tax increases, particularly during a cost-of-living crisis. Property owners in high-value areas would mobilize against reforms that increase their bills substantially. The government fears that giving councils unlimited tax-raising powers would lead to postcode lotteries with vastly different tax levels in neighboring areas, and that it would be blamed for local tax rises even if councils make the decisions.
SEND System Reform
Fundamentally reforming the SEND system is essential to achieving financial sustainability. The current system creates perverse incentives for families to pursue expensive Education, Health and Care Plans because mainstream schools lack resources to meet needs adequately. Investing in mainstream school capacity, early intervention, and alternative provision could reduce reliance on costly independent special schools.
The government has acknowledged the need for SEND reform and launched consultations, but implementation has been repeatedly delayed. Meaningful reform requires upfront investment before savings materialize, making it challenging in the current fiscal environment. Additionally, any reforms must balance cost control with the rights and needs of disabled children and their families, creating complex political and ethical considerations.
Homelessness Prevention
Preventing homelessness is substantially cheaper than providing temporary accommodation, but requires different policy approaches. Increasing the supply of genuinely affordable housing, strengthening tenants’ rights in the private rented sector, providing early intervention support for households at risk of eviction, and investing in housing advice services could all reduce the flow of households into temporary accommodation.
However, London’s housing crisis has deep structural causes including insufficient housebuilding over decades, high land costs, planning constraints, and limited social housing stock. While councils can take actions to mitigate homelessness, they cannot solve the underlying housing supply shortage without national policy changes and substantial capital investment. The government’s October 2025 announcement of measures to increase housebuilding in London, including relaxed targets for affordable housing provision, acknowledges the scale of the challenge but some housing advocates warn that weakening affordability requirements may worsen rather than improve access for low-income households.
Devolution and Structural Reform
Some analysts argue that London needs greater fiscal devolution, with more taxes raised and spent locally rather than redistributed through national government. This could include devolving business rates entirely to local control, allowing London authorities to levy new taxes such as tourist levies or congestion charges, or implementing a regional sales tax. Greater local control could enable policies better tailored to London’s specific circumstances and create stronger accountability between tax payments and service delivery.
Structural reform of London local government itself is another option. Proposals have included merging smaller boroughs to create larger authorities with greater capacity and efficiency, establishing sub-regional authorities to handle functions requiring larger economies of scale, or shifting more responsibilities to the Greater London Authority to provide city-wide coordination. However, any structural reorganization would face resistance from existing councils reluctant to lose autonomy and would involve significant transition costs and disruption.
The National Context
Local Government Crisis Beyond London
While this article focuses on London, the financial crisis affects councils across England. Rural county councils face different but equally severe challenges, including sparse populations that make service delivery expensive, aging demographics that drive social care demand, and limited revenue bases as property values and business rates are often lower than in urban areas. Coastal and post-industrial areas face economic decline, population outmigration, and high levels of deprivation that increase demand for services while eroding the tax base.
The National Audit Office published a report in February 2025 stating that a whole government response is essential to local authorities’ financial sustainability. The report warned that the current trajectory is unsustainable and that without systemic reforms encompassing funding, service responsibilities, and governance, more councils will issue Section 114 notices with severe consequences for residents and communities.
Political Dynamics
The council funding crisis has become highly politicized. Conservative-controlled councils argue that years of austerity under previous governments hollowed out local government finances and that the current Labour government must provide adequate funding. Labour-controlled councils face criticism from opposition parties for financial mismanagement and poor prioritization, even as they argue they are managing impossible budgets with inadequate resources.
Central government, regardless of party, faces the challenge of allocating limited resources among competing priorities while managing public expectations. Politicians must balance the demands of local government for more funding against pressures to limit tax increases, reduce national debt, and fund other public services. This creates an inherent tension that has persisted across multiple governments and seems likely to continue.
Looking Ahead
The October 2025 Budget
The autumn budget expected in late October 2025 will provide crucial clarity on the government’s intentions for local government funding. Councils, residents, and service providers are anxiously awaiting announcements on the local government finance settlement for 2026-27, multi-year funding commitments, specific allocations for homelessness and SEND, and any changes to council tax referendum rules.
Early indications suggest the budget will provide some additional funding for local government but not on the scale councils argue is necessary. The government appears likely to prioritize NHS and education spending, with local government receiving more modest increases. This may mean another year of managed decline, service cuts, and rising risk of bankruptcy declarations across multiple boroughs.
The Risk of Cascading Failures
A particular concern is the risk of cascading failures if multiple councils issue Section 114 notices simultaneously. The government has intervention mechanisms to support councils in financial distress, including appointing commissioners, providing exceptional financial support, and facilitating asset sales or service transfers. However, these mechanisms were designed for isolated cases, not a systemic crisis affecting multiple authorities at once.
If numerous London boroughs simultaneously declare effective bankruptcy, the government might lack the capacity and resources to support them all adequately. This could lead to severe service disruptions, unpaid bills to suppliers and contractors, and breakdowns in essential services including child protection, waste collection, and housing support. The consequences would be particularly severe for vulnerable residents depending on council services for basic needs.
Scenarios for the Future
Several scenarios are possible for London local government over the coming years. In an optimistic scenario, the government recognizes the severity of the crisis and provides substantial funding increases combined with structural reforms to SEND, homelessness policy, and the funding system. Councils stabilize their finances, begin rebuilding services, and restore reserves to prudent levels. Service quality improves and residents regain confidence in local government.
In a pessimistic scenario, funding remains inadequate, deficits continue to grow, and multiple boroughs issue Section 114 notices. Services are cut to statutory minimums, discretionary services disappear entirely, and the quality of life in London’s poorest boroughs declines markedly. The government is forced to implement emergency interventions across multiple authorities simultaneously, potentially leading to de facto abolition of democratic local government in affected areas as unelected commissioners assume control.
A middle scenario sees councils continuing to muddle through with inadequate resources, implementing incremental cuts and tax rises while hoping that economic growth or future policy changes will eventually ease pressures. Services continue deteriorating gradually, a few more councils issue Section 114 notices, but most authorities avoid formal bankruptcy through increasingly severe austerity. This scenario avoids catastrophic failure but means prolonged decline in local public services and growing inequality between affluent and disadvantaged areas.
Key Questions Facing London
Can Councils Survive?
The question posed by this article’s title—can London councils survive the 2025 budget crunch?—has no simple answer. In a narrow sense, councils will survive because they are statutory bodies that cannot simply cease to exist. Even councils that issue Section 114 notices continue operating under government supervision and provide essential services.
However, survival as functioning democratic institutions capable of meeting residents’ needs and providing decent public services is a different question. Without significant changes to funding, service responsibilities, or revenue-raising powers, many London councils face effective bankruptcy with corresponding loss of autonomy and severe service cuts. Some councils may survive this period relatively intact while others are fundamentally transformed by financial crisis and government intervention.
What Does Survival Look Like?
For councils that navigate the crisis successfully, survival will likely involve painful adaptations. Councils are reimagining their roles, focusing on core statutory services while abandoning ambitions for community leadership, economic development, and quality-of-life enhancement. They are becoming smaller, leaner organizations delivering essential services rather than the broad civic institutions that characterized British local government in the past.
This narrowing of vision and ambition represents a profound loss for local democracy and community resilience. The preventative services, early interventions, and community supports that councils have traditionally provided save money in the long term and improve social outcomes, but they are discretionary and therefore vulnerable to cuts. As these services disappear, problems escalate until they require expensive crisis interventions, creating a cycle of managed decline.
The Human Cost
Behind the financial figures and administrative processes are real people whose lives are affected by the council funding crisis. Children with special educational needs who cannot access appropriate support, homeless families living in inadequate temporary accommodation far from their communities, elderly residents unable to access social care, and communities watching their parks, libraries, and youth services close or deteriorate.
The financial crisis has direct human consequences measured in worsened life chances, increased poverty and inequality, diminished wellbeing, and reduced social cohesion. These impacts fall disproportionately on those least able to afford private alternatives to public services, exacerbating existing inequalities and undermining social justice.
London councils face an unprecedented financial crisis driven by soaring costs for homelessness, special educational needs, and social care combined with inadequate government funding and limited revenue-raising powers. The autumn 2025 budget represents a critical juncture that will determine whether councils receive the resources needed to stabilize finances or whether more boroughs will follow Croydon into effective bankruptcy.
Meaningful solutions require action at multiple levels: increased central government funding, reform of council tax and other revenue mechanisms, systemic changes to SEND and homelessness policies, and potentially structural reorganization of London local government. Without such measures, the most vulnerable residents will bear the consequences through diminished services, while the quality of London as a city will decline as public infrastructure and civic institutions deteriorate.
The question is not simply whether London councils can survive the 2025 budget crunch, but what kind of local government and what kind of city will emerge from this crisis. The decisions made in the coming months will shape London’s future for years to come, determining whether the capital maintains its position as a world-leading city with strong communities and effective public services, or whether financial constraints force a retreat to minimal service provision and widening inequality. The stakes could not be higher for London’s eight million residents.
Stay informed with the latest news and in-depth features below:
Spotify UK Price Hike: Everything You Need to Know About the Latest Subscription Increase
UK Clocks Change 2025: Complete Guide to When Clocks Go Back, Daylight Saving Time, and Time Changes
To read more, London City News