One in four British councils could need bankruptcy bailouts in the next two years. Councils in the North are ‘twice as likely’ to be at risk compared to those in the South. Living standards are falling, and regional inequality is rising. The UK Shared Prosperity Fund was supposed to replace the EU's European Structural and Investment Fund which tackles these issues. So has it failed?
Are English councils going bankrupt?
Local government funding for councils in England is broken. During 14 years of Conservative government, per-capita spending by councils fell by 18% in real terms. The scythe of austerity disproportionately cut council budgets, making them one of the only areas where real-terms spending is lower today than in 2010.
Between 1988 and 2018 only two councils declared bankruptcy (Hillingdon and Hackney in 2000). In the last six years a staggering 12 councils have done the same. Despite the Tories' (empty) promise of levelling up, funding cuts have hit deprived areas hardest. Whilst the least deprived areas in England saw a 3.1% decrease in local authorities' spending power between 2010/11 and 2024/25, the most deprived areas saw a drop of 24.4%. Regional inequality is making it harder for councils to ride out funding pressures - councils in the North and Midlands are most at risk of bankruptcy, and it's set to get worse. In the next five years, 55% of northern councils are expected to be at risk of bankruptcy, compared to 30% today.
What does this have to do with Brexit?
Before leaving the European Union, the UK could access European Structural and Investment Funds (ESI), which aim to reduce structural regional inequality within EU countries. Between 2014 and 2020, the UK received an average of £2.1 billion per year in ESI funding. This was split across 17 national and regional programmes, which sought to tackle regional inequalities by supporting small businesses, encouraging sustainability, improving education and investing in infrastructureThe way in which ESI funding was allocated made sure the most deprived areas of the UK received the highest levels of funding per person. So whilst council funding in England declined in the Midlands and the North, ESI funding in these areas was much higher than in London and the South East, offering some financial respite. For example, people in the North East received over €40 each a year in ESI funding compared to €12.60 each for those in London.
Has EU regional funding been replaced since Brexit?
Leaving the EU meant that the UK lost access to ESI funds. To replace them, the Conservative government introduced the UK Shared Prosperity Fund (UKSPF) in 2022, which promised to deliver targeted local socio-economic development to 'level up' the UK. As expected, that promise has been broken. Cornwall, one of the most deprived areas of England, was due to receive £100 million from the EU each year before Brexit, but has only received £66 million a year from the new UKSPF. Insecurity surrounding the availability of future funding has led Cornwall Cllr Louis Gardner to claim that the authorities funding is on ‘a cliff edge’.
Whilst the UKSPF pledged to deliver £2.6 billion in funding over a period of 25 months between January 2022- March 2025, the European Structural and Investment fund the programme was meant to replace had been delivering £2.1 billion each year. Therefore, the new UKSPF is equivalent to a budget cut of over £850 million each year. For example, under the ESI fund the West Midlands received an average of £181 million a year, in comparison the region received a mere £42 million a year under the new UKSPF programme.
With the current funding having already been used up many months before the 31st March 2025 end date, Cllr Louis Gardner has claimed Cornwall’s council funding is on ‘a cliff edge’.
What impact does regional inequality have on who we vote for?
The failure of the UKSPF to adequately replace the ESI funding of the EU has exacerbated the pressures felt by local councils following years of Tory austerity, worsening regional inequality. A recent report by the Economic Observatory revealed that the UK has ‘some of the deepest spatial inequalities’ amongst OECD countries. Regional inequalities were exposed during the Brexit referendum and 2019 General Election, with the strongest support for Brexit found in towns which had suffered through the socio-economic effects of de-industrialisation.
Research from the IFO Institute analysing the increase in support for the hard-right AfD Party in Germany found a causal relationship between poverty and support for extremist parties. They found that as the ‘proportion of households below the poverty line increases by 1%, the share of votes for hard-right parties increases by 0.5%’. We see this playing out in the UK. Reform UK won five seats in the 2024 General Election. In each of these areas of the country, weekly income in 2023 was on average £71 lower than the national weekly average. This equates to £3,700 less per year.
The budgetary vulnerability many councils are feeling after 14 years of austerity has been worsened by the failure of the previous government to replace EU funding post-Brexit. Both austerity and the failure of the UKSPF disproportionately affect the most deprived areas in the UK. The further collapse of councils and associated fall in living standards could push more people into poverty - and potentially into the grasp of hard-right politicians.