Councils face mounting debt as one fifth of council tax spent on interest payments

Britain’s local authorities are grappling with soaring debt, with almost £1 in every £5 raised in council tax now allocated to servicing interest payments. New figures reveal that councils collectively owe upwards of £148.5 billion, translating to around £5,200 per household. Since 2015, this debt mountain has surged by 60 per cent, fuelled by reductions in central government grants and increased demand for essential local services.

Many councils have resorted to large-scale borrowing to fund capital projects and, in some cases, speculative commercial property investments. Official data, which does not account for pension deficits or outstanding public liabilities, understates the true scale of financial commitments. Analysis shows an average of 18 per cent of council tax income is absorbed by interest charges. Combined with pension obligations, which consume a further 23 per cent, around £2 in every £5 collected from residents vanishes before being spent on frontline services.

This funding shortfall has made councils increasingly dependent on alternative revenues, such as business rates, fees, charges, and remaining government grants. The Local Government Association cautions that, without appropriate funding rising in line with inflation and demand, up to a quarter of councils may be forced to seek central government bailouts within two years. Six local authorities, including Thurrock and Birmingham, have already effectively declared bankruptcy in the past five years.

Disquiet is growing over high levels of executive pay amid tightening budgets. Lambeth council in south London is one of several highlighted for employing more than 50 executives with salaries exceeding £100,000, while still carrying debt over £1 billion. Across the UK, nearly 4,000 council employees now earn over £100,000, up by a quarter in the past year, with almost 250 making more than the Prime Minister.

Freedom of information requests reveal the average annual interest payment for councils stands at £12.8 million, with the total annual interest bill now topping £4 billion. To illustrate the scale, this is almost four times greater than the yearly spend on libraries, culture, heritage, and tourism combined. Although most borrowing is long term for initiatives such as transport infrastructure or regeneration, a significant share has financed risky commercial projects, some of which have led to heavy losses and even government intervention.

The impact is uneven across the country. Birmingham City Council tops the list with a debt pile of £3.35 billion and pays £178.3 million a year just in interest—equivalent to 37 per cent of its annual council tax revenue. Thurrock council’s interest bill is so high it consumes three quarters of its council tax receipts, translating to nearly £700 per household. While some district councils remain debt-free, nearly a quarter have invested in commercial property, with mixed results. Runnymede’s investments generated significant returns last year, while others, like Thurrock, face losses and direct oversight by Whitehall.

Councils now pay an average interest rate of 3.7 per cent, with most debts owed to central government or other councils. Many authorities’ finances remain on a knife edge, with escalating borrowing costs and rising service demand leaving a critical need for a sustainable and long-term funding solution.