Council facing bankruptcy over £33.6m funding gap

A council facing a £33.6m funding gap will effectively declare itself bankrupt unless the government allows it exceptional financial support.

Worcestershire County Council is to ask the government for a "capitalisation direction" – described by the Institute for Government as a move that allows them to sell assets or borrow to fund day-to-day costs.

Papers for a cabinet meeting on 16 January said the council needed £33.6m in 2025-26 and a further £43.6m in 2026-27.

The Ministry of Housing, Communities and Local Government (MHCLG) said it was injecting £69bn of funding into council budgets across England.

The council report said: "If MHCLG do not grant the dispensation request, the council will not be able to balance the 2025-26 budget."

It said the situation would then "force" council officers to issue a Section 114 notice, which is where an authority effectively declares itself bankrupt.

Local authorities technically cannot go bankrupt, but under an S114 they cannot commit to any new spending and must come back with a new budget.

When that happens, it often means severe cuts to frontline services.

Worcestershire's report said it was facing "relentless demand and cost pressures" in three key areas – children's social care placements, home to school travel and adult social care.

The authority said its income from government was increasing by £17.6m in 2025-26, but £5.8m was allocated to changes in waste regulations, and the remaining £11.8m was "nowhere near in keeping pace".

The draft budget gap was £48.6m, it said, which could be reduced with the use of £15m of reserves, leaving "an unmitigated gap of £33.6m".

Papers for the cabinet meeting said a capitalisation direction would not solve Worcestershire's budget gap on an ongoing basis.

The Institute of Government website also points out local authorities can only sell assets once, and councils have to repay money borrowed - so "neither approach solves the underlying problems".

However, the report to Worcestershire's cabinet said a capitalisation direction was "simply a mechanism that provides the council time to radically change and develop sustainable solutions".

An MHCLG spokesman said: "We are injecting £69bn of funding into council budgets across England to help them drive forward the government's Plan for Change, including a £30.1m increase for Worcestershire County Council.

"We know that councils have suffered from short-term solutions, which is why we are working hand in hand with councils to reform this outdated system and fix the foundations."

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