UK Local Borrowing Surges on SEND Funding Crisis, Risks Loom

Local Authorities Borrow Record Amounts to Address Rising Special Educational Needs

UK local authorities are borrowing at an unprecedented pace, driven by surging demand for special educational needs (SEND) services. The Office for Budget Responsibility (OBR) now estimates local authority borrowing for the 2025-26 fiscal year at £16.4 billion, nearly tripling its previous forecast from March. Of this, around £2.5 billion is attributed to SEND deficits, which are expected to rise to £3.7 billion in the following year and nearly £5 billion by 2027-28 according to Bloomberg analysis.

Experts attribute the increased pressure to growing conditions such as autism, ADHD, and mental health issues, which have outpaced the capacity of local councils to provide adequate support. Health Secretary Wes Streeting recently launched an independent review into the sector, aiming to better understand the underlying causes and propose solutions.

While councils are legally required to balance their day-to-day budgets with revenue, they have been given a temporary reprieve to shift SEND deficits off their books until 2028. This deferral, however, masks long-term financial risks, as authorities must recognize an estimated £14 billion of historic deficits on their balance sheets by that year. The OBR has described this as an "insolvency risk".

Financial Challenges and Borrowing Practices

Local authorities are increasingly relying on borrowing to bridge the growing SEND funding gap. Councils typically borrow from commercial banks, other local authorities, or the government's Public Works Loan Board, which sets interest rates based on gilt yields. Much of the borrowing is short-term, aimed at managing immediate cash flow constraints caused by the SEND deficits.

The Local Government Association (LGA) notes that these deficits result in significant cash flow costs for councils. These include lost interest revenue and additional borrowing expenses if authorities must supplement their cash flow. An LGA spokesperson said, "Because these deficits are financed by cash, the sector incurs substantial cash flow costs."

With the pressure mounting, some councils are exploring asset sales to close their budget gaps. A survey of local leaders indicates that 60% of councils expect to use asset sales next year, highlighting the severity of the financial strain. These difficult choices reflect the impact of a decade of underfunding in public services.

Risks to the Outlook and Potential Consequences

The financial stress on local authorities is becoming more visible. As of early 2025, 29 councils in England have already required emergency government loans to meet their obligations. Norfolk, Birmingham, and Croydon are among those facing significant budget gaps that could only be closed through council tax increases or service cuts according to the Guardian.

The government's "fair funding review 2.0," expected to be announced on December 17, aims to address some of these imbalances. However, critics argue the proposed changes do not go far enough. Local leaders warn that without a substantial increase in funding, many councils could issue section 114 notices-effectively declaring insolvency-by 2028.

The OBR has also raised concerns about the sustainability of current borrowing levels. With local authority borrowing per capita now reaching £1,500, the fiscal watchdog warns of growing risks to the sector's long-term viability. The situation is compounded by the fact that many councils are already rolling over temporary loans rather than repaying them.

What This Means for Investors

The financial challenges faced by UK local authorities have broader implications for investors and the broader economy. The rising borrowing levels may impact local government bonds and related financial instruments. Investors should monitor how the government manages the transition of SEND costs to central authorities by 2028, as this could influence future fiscal policies and borrowing trends.

From a market perspective, the crisis in local government finance underscores broader structural issues in public service funding. The reliance on private consultancy and outsourcing has also grown significantly, with London councils spending over £500 million on such firms in 2024 alone. This trend reflects a long-term shift in governance and could affect the performance of firms that supply services to local authorities .

While the UK's fiscal outlook remains uncertain, the growing pressure on local authorities highlights the need for a comprehensive and sustainable solution to the SEND funding crisis. With the OBR warning of an insolvency risk, the coming months will be crucial in determining how the government responds to one of the most pressing financial challenges facing local governance today.