England's bankrupt councils: Brexit's unfilled funding gap
Ten years after the referendum, English local authorities are filing insolvency notices at a historic rate.
The cause goes beyond mismanagement — it’s a structural funding shortfall that central government has never adequately filled.
On September 5, 2023, Birmingham — one of the largest local authorities in Europe — declared effective insolvency. It did so through a Section 114 notice: the legal mechanism by which a council’s chief finance officer formally declares that the authority cannot balance its budget for the current financial year. It was not an accident. It was the culmination of a documented spiral that British institutions had been tracking for years, and the most visible symptom of a systemic crisis now affecting dozens of English councils.
The question is not whether Birmingham mismanaged its finances. The question is why so many councils, of different political persuasions, in different regions, are collapsing simultaneously — and what Brexit has to do with that convergence.
This image is used for illustrative purposes only.
At a Glance
Between 2018 and late 2023, eight distinct English local authorities issued a total of twelve Section 114 notices — a phenomenon without precedent since the 1980s, according to the House of Commons Library.
The UK Shared Prosperity Fund (UKSPF), created to replace EU structural funds after Brexit, delivered roughly £860 million per year — against the approximately £1.3 billion per year the UK received from EU structural funds over the 2014–2020 cycle, according to UK in a Changing Europe. An annual shortfall of some £400–500 million.
English councils’ core spending power has fallen more than 22% in real terms between 2010/11 and 2024/25, with cuts two to three times deeper in the most deprived areas, according to the Local Government Association (LGA).
An unprecedented wave of municipal insolvencies
Under British law, local authorities cannot go bankrupt in the legal sense of the term. A Section 114 notice is not a bankruptcy filing — it is an administrative declaration that a council is unable to balance its budget for the coming year. Once issued, all new spending is suspended except for legally mandated services. The full council must convene within twenty-one days to adopt an emergency plan. In practice, it amounts to placing the council under central government financial supervision.
The first modern Section 114 notice dates to Northamptonshire in 2018. Since then, the phenomenon has accelerated sharply: Croydon (three separate notices), Slough, Thurrock, Woking, Birmingham, and Nottingham (two notices, in November 2022 and November 2023). By late 2023, the LGA found that nearly one in five council leaders in England considered it likely that their authority would issue a Section 114 notice within the following twelve months. The Institute for Government, in its December 2025 Performance Tracker, confirmed the sector remains structurally fragile despite modest funding increases since 2020.
What is striking about this list is its political incoherence. Croydon was Labour-run. Thurrock, Conservative. Woking, Liberal Democrat. Nottingham, Labour. The press has readily sought a culprit in each case — a reckless chief executive, a failed property gamble, poorly managed equal-pay liabilities. In some cases, those explanations carry real weight: Woking and Thurrock collapsed partly under the strain of speculative investments — solar farms, commercial real estate — made during years of central funding cuts, as councils reached for financial returns to compensate for shrinking grants. Those individual stories are accurate. They are also insufficient, because they obscure the structural conditions that made such gambles feel necessary in the first place.
The funding gap Brexit created
To understand the fragility of English council finances, it is necessary to trace two distinct shocks that compounded each other.
The first predates Brexit: the austerity program pursued by coalition and then Conservative governments from 2010 onward. According to the National Audit Office (NAO), the UK’s independent public spending watchdog, central government grants to local authorities fell by 49.1% in real terms between 2010/11 and 2017/18. The IFS estimated in its 2024 analysis that overall council funding across the full period 2010/11 to 2024/25 remains 9% lower in real terms than at the start of the decade — and 18% lower in real terms per person. The IFS further found that the most deprived areas absorbed cuts two to three times deeper than more affluent ones. That structural pre-weakness matters: critics of the Brexit-causation argument rightly point out that rising demand for social care, special educational needs and disabilities (SEND) transport, and homelessness support — pressures largely independent of EU membership — added roughly £15 billion to the cost of delivering council services since 2021/22 alone, according to LGA projections. The Brexit funding gap did not occur in a vacuum.
The second shock is post-Brexit. Leaving the European Union ended access to EU structural funds — the European Regional Development Fund (ERDF) and the European Social Fund (ESF), which together financed regional economic development across member states. Over the 2014–2020 cycle, the UK received approximately £9 billion in EU structural funding, according to UK in a Changing Europe — a figure that reaches up to £9.4 billion depending on the exchange rates applied to the euro allocations documented by the House of Commons Library. Those funds fed directly into local economies: support for small businesses, vocational training, infrastructure renewal, and employment programs for people furthest from the labor market.
The Conservative government had promised to replace those funds “pound for pound.” The result was the UKSPF, launched in April 2022. Its total allocation over three years (2022–2025) amounted to £2.6 billion — roughly £860 million per year. By comparison, the UK’s EU structural fund allocation ran over seven years (2014–2020), equating to around £1.3 billion per year. The gap is real — an annual shortfall of some £400–500 million — but more modest than a raw comparison of the two headline figures suggests. The IFS bluntly described the UKSPF as “bad policy,” noting that it missed a genuine opportunity to correct distributional inequities inherited from the EU system. More significantly, the management model changed. Where EU structural funds operated through multi-year project calls allowing councils to plan investments six or seven years out, the UKSPF ran on annual or biannual cycles, generating chronic uncertainty in local budget planning.
The transition has not stabilized. The UKSPF was wound down at the end of March 2025, replaced by a transition year at a further £900 million, before the Labour government announced in June 2025 a full redesign: a Local Growth Fund concentrated on eleven mayoral strategic authorities in the North and Midlands — effectively excluding rural areas without a designated metropolitan authority, precisely those most reliant on replacement EU funding.
The fiscal spiral in rural England
Rural English councils have suffered a particularly acute version of this double shock. Not only did they lose EU structural funds on which they were often more dependent than major cities — the ERDF funded specific rural development programs through the LEADER and EAFRD schemes — but their local tax base contracted simultaneously.
The main autonomous revenue source for English local authorities is the business rates: a property tax levied on commercial premises, a portion of which is retained locally. This revenue is directly correlated with local economic activity. Rural and post-industrial areas in northern and eastern England were among those most exposed to Brexit’s economic consequences: new customs friction on exports to the EU, the loss of seasonal agricultural labor that had come through EU free movement, and contraction in export-oriented food and drink sectors.
According to UK in a Changing Europe’s June 2026 analysis marking the tenth anniversary of the referendum, Brexit has imposed on the UK economy a gradual and cumulative drag on trade, investment, and productivity. The OBR confirmed that the UK’s trade intensity — the ratio of trade to GDP — has fallen considerably since 2016, more so than in any comparable advanced economy. In areas already under pressure, that contraction translates directly into lower business rates collected and reduced local fiscal autonomy.
The spiral is documented: lower local tax revenues, reduced capacity to fund discretionary services, deteriorating territorial attractiveness, flight of businesses and middle-income households, lower tax revenues. Councils cannot escape it alone: unlike central government, they cannot borrow to cover day-to-day spending.
Scotland and Wales: a different story
The comparison with the UK’s devolved nations offers a decisive perspective. Scotland, governed by the Scottish Parliament in Edinburgh, and Wales, governed by the Senedd (the Welsh Parliament) in Cardiff, have seen no Section 114 notices during this period. That divergence is not explained solely by better management — it reflects structural differences in how local funding is designed.
Wales in particular maintained greater continuity in its regional development programs, partly because the Welsh government used its own budgetary flexibility to cushion the loss of EU funds in the most exposed areas. Scotland adopted a similar approach, with an emphasis on multi-year funding stability.
This does not mean Scotland and Wales are insulated from public finance pressures — reports from Audit Scotland and the Wales Audit Office confirm real tensions. But the absence of Section 114 notices in these nations isolates a crucial variable: it is the specific combination of central austerity and the loss of EU funds, without an adequate compensating mechanism, that appears most strongly correlated with the English crisis. Brexit is a necessary condition — not sufficient alone, but necessary.
Analysis
The long trajectory: a pre-existing vulnerability
It would be inaccurate to make Brexit the sole cause of the English councils’ crisis. The IFS confirms the decade 2010–2019 had already structurally weakened the sector. A 40% real-terms reduction in central grants between 2009/10 and 2019/20, documented by the Institute for Government, forced councils to choose between their legal obligations — adult social care, child protection, homelessness support — and discretionary services. Libraries, cultural programs, public space maintenance: everywhere, budgets were cut to the bone. Brexit did not create the fragility — it struck a sector already running on empty.
The mechanics of power: who designed the UKSPF?
The design of the UK Shared Prosperity Fund was not the result of accident or incompetence. It was the product of a deliberate political trade-off. The then-Conservative government sought to “re-nationalize” regional redistribution — reclaiming control over funding flows that had passed through Brussels — while simultaneously reducing the total volume. The IFS’s verdict was explicit: the decision to replicate EU geographic allocations without correcting their inequities was “a real missed opportunity.” More significantly, the short-term design of UKSPF funding cycles denied councils the multi-year visibility essential for planning structural investments.
The Labour government that took office in July 2024 abandoned the “levelling up” label (the Conservative government’s former regional development agenda) without resolving the underlying equation. The Local Growth Fund announced in 2025 is more strategically focused and better structured for the long term — but by design excludes rural areas without a designated metropolitan authority, the very areas most dependent on EU structural funding.
The real impact: what municipal insolvency means in practice
A Section 114 notice is not an abstract accounting event. In Nottingham, it triggered the closure of libraries, the elimination of support services for young adults, and reductions in waste collection. In councils placed under Section 114, central government authorized council tax increases above standard caps — a burden falling directly on the most modest households. The government approved “exceptional financial flexibilities” for nineteen local authorities in 2024, according to Public Finance, permitting them to use capital borrowing to cover day-to-day spending — an emergency measure that defers rather than resolves the problem.
The fundamental question: can you nationalize supranational redistribution?
Brexit raised a question that few of its architects had clearly articulated: can a nation-state reconstitute, at the national level, a redistributive logic that was inherently supranational? EU structural funds compelled a transfer between wealthy and poorer regions at a scale that national politics struggles to sustain. Brussels imposed that redistribution; Westminster must choose it — and that political choice is far harder to make.
The English councils crisis may be read as evidence that this transfer of redistributive sovereignty carries a real territorial cost, one that does not manifest immediately but accumulates silently — until the Section 114 notices start arriving.
The bottom line
Ten years after the Brexit vote, the question is no longer whether leaving the EU carried an economic price. Britain’s own institutional data answers that. The real question — the one insolvent councils pose without articulating it — is who pays that price, and for how long.
The Labour government of Prime Minister Keir Starmer has inherited a structurally broken municipal sector and an unanswered question: Brexit transferred sovereignty over regional redistribution from Brussels to Westminster — but has Westminster been willing, or even able, to exercise it at equivalent scale?
The local funding reform announced for 2026, with its Local Growth Fund centered on major metropolitan areas in the North and Midlands, represents an editorial bet on Britain’s economic future: concentrating resources where growth potential is most visible, rather than maintaining a universal redistributive safety net. It is a coherent strategy. It is also a wager — that rural and post-industrial areas excluded from the new perimeter will find other engines of development.
For the communities living through library closures, rising council taxes, and the quiet degradation of public services, the outcome of that wager is not yet written.
Sources: Local Government Association · National Audit Office · Institute for Fiscal Studies · House of Commons Library · Office for Budget Responsibility · UK in a Changing Europe · Institute for Government · Public Finance · HM Government / DLUHC (gov.uk)