Conclusion 5

Departmental witnesses could not provide any potential solution to the critical and immediate financial challenges facing many local authorities due to persistent and significant SEN-related overspends. The impact of these are being deferred under the temporary “statutory override” scheme, which is due to expire in March 2026. This is currently expected to cause nearly half of all English local authorities to be at risk of effectively going bankrupt. With increasing demand for EHC plans, most local authorities have overspent their annual high-needs budget each year since 2016–17. This has contributed to growing cumulative deficits for many 5 local authorities within their dedicated schools grant budgets, with others using reserves to cover SEN costs. Since 2020, local authorities have been able to exclude these deficits from their main revenue budgets, so avoiding these overspends impacting their overall financial position. However, this only hides the deteriorating financial situation. When this arrangement ends in March 2026, 66 local authorities (43%) could be at risk of breaching their statutory duty to set a balanced budget, and so would be effectively bankrupt. Despite the obvious urgency, there is no solution in place to what will be an estimated £4.6 billion cumulative deficit. The Department is discussing the issue with the Ministry for Housing, Communities and Local Government (MHCLG) and HM Treasury, but says the issue is complicated given local authorities’ differing financial situations. There is a real risk of unfairness in the treatment of local authorities given some have accrued SEN-related deficits and others have avoided doing so. Left unresolved the issue risks undermining the whole of local government finance. recommendation Given the risks to local authorities’ finances, central government must urgently involve local authorities in conversations to develop a fair and appropriate solution for when the statutory override ends in March 2026, clear