East London Councils Face £1bn Deficit Ahead of Budget 2025

Key Points

• London borough councils face a cumulative £1 billion funding deficit, putting key public services at risk.
• The Local Government Association (LGA) has urged Chancellor Rachel Reeves to prioritise funding for housing, homelessness, special educational needs and disabilities (SEND), and social care.
• Croydon council, struggling with historic financial mismanagement and multiple bailouts, currently relies heavily on central government funding and faces severe financial pressures.
• Other East London boroughs including Hackney, Tower Hamlets, and Lewisham report significant overspending, with deficits running from £10 million to £26 million.
• SEND debt is a critical concern, with cumulative debts reaching tens of millions across boroughs; home-to-school transport expenditure for SEND children may reach nearly £2 billion nationally this year.
• Chancellor Rachel Reeves’ recent speech did not address these specific council funding crises, focusing instead on national debt reduction and cost of living.
• Councils have planned near-maximum increases in council tax to manage growing social care costs, but further increases would require local referenda.
• The LGA calls for systemic reforms including council tax base widening, government debt write-offs, and investment in technology-enabled social care.
• Croydon is noted as South London’s most deprived borough, with escalating social care and housing costs exacerbating financial strain.
• The government-appointed improvement panel has warned Croydon council’s current borrowing plans risk complete collapse without urgent intervention.
• Councils await Wednesday’s Budget announcement with anxiety, seeking measures to address the escalating financial and social service crises.

What financial challenges are London councils facing ahead of the Budget?

As reported by Meena Iyer for East London Lines, councils across London stand on the brink of a £1 billion financial black hole that threatens the delivery of essential services. The Local Government Association (LGA), representing all London boroughs, has formally written to Chancellor Rachel Reeves ahead of the Budget calling for urgent action focused on areas of critical financial strain: housing and homelessness, special educational needs and disabilities (SEND), and social care for both adults and children.​

Croydon council exemplifies the crisis’s severity. According to reporting by Lucy North/PA, Croydon has been embroiled in financial difficulties since 2020, necessitating multiple government bailouts. At a recent council meeting, Jason Cummings, Cabinet Member for Finance, said,

“We’re all fighting over a pie that won’t feed everybody.”

More than one-third of Croydon’s 2025/26 budget comes from central government, underscoring its dependence on external support. This borough has also been ranked the most deprived in South London, compounding the funding pressures.​

Other East London boroughs bear witness to similarly dire conditions. Hackney reports an overspend of £10.2 million, Tower Hamlets £16.5 million, and Lewisham £26 million against their respective budgets. The LGA’s analysis of first-quarter 2025/26 spending warns of likely overspends consistent with previous years in adult social care, child social care, and homelessness.​

How severe is the SEND funding crisis for London boroughs?

Special Educational Needs and Disabilities (SEND) funding poses an acute challenge. The LGA warns that the ballooning SEND debt, largely unaddressed by the government, seriously strains London councils’ general funds. Lewisham, Hackney, and Tower Hamlets collectively face a cumulative SEND deficit of £64.5 million. Croydon alone confronts a dedicated school grant deficit of £12.8 million. The LGA highlights home-to-school transport costs for SEND children as especially burdensome, predicted to approach £2 billion nationwide this year.​

In an earlier report, Cllr Arooj Shah, Chair of the LGA’s Children and Young People Board, stressed the urgency.

“The ending of the statutory override threatens councils’ financial viability. Only by taking bold and brave action in the Spending Review and writing off councils’ high needs deficits can councils have the financial stability they need to ensure children with SEND get the support they need,” she declared.​

What has Chancellor Rachel Reeves said regarding public service funding?

In a preparatory speech for the Budget, Chancellor Rachel Reeves emphasised goals including reducing the national debt and improving the cost of living. As reported by PA Media, Reeves stated,

“In the Budget and beyond, I will continue to drive for more productive and more efficient public services, right across government.”

However, she did not directly address the LGA’s highlighted financial pressures in SEND, housing, or social care services that London councils are experiencing.​

The government continues to cite austerity legacies, rising living costs, and inflation as constraints that result in “hard choices” being necessary for this Autumn Budget. These constraints have led to councils increasing council tax near the allowable threshold of 4.99% this year, with nearly half of the tax rises intended to fund growing vulnerable adult social care needs. Should councils require larger increases, local referenda would be mandated.​

How are councils responding to the financial pressures through council tax and other measures?

Lewisham, Tower Hamlets, Hackney, and Croydon have all published proposals to raise council tax close to the maximum threshold allowed without triggering referenda. The funds raised are predominantly intended to cover burgeoning social care expenditures. The LGA recommends a comprehensive financial system reform including expanding the council tax base, greater freedoms around local taxes and charges, and calls for a government-led cross-party review to explore reform options.​

On a forward-looking note, the LGA also suggests Chancellor Reeves consider supporting investments in “tech-enabled care” and “AI for social care” to potentially realise efficiencies and cost savings in the longer term. Still, councils in East London are, in the immediate term, seeking solutions for today’s escalating financial risks and growing social inequality.​

How critical is Croydon’s financial situation in the broader London council context?

Croydon council’s financial crisis stands as a stark example. It has repeatedly faced bankruptcy, with three official declarations since 2020. A government improvement panel has labelled the council’s financial position as “non-sustainable” with debts projected to rise beyond £1.9 billion by 2029. The council has received extraordinary government support amounting to over £550 million since 2021 but still faces a massive £136 million loan agreed this July.​

Croydon’s budget report from February 2025 noted increasing strains from inflation, market price pressures, and rising demand for social care and housing services. Adult social care and health service budgets increased by 17% this year to reach £165 million, while housing costs soared by 61%, from £24 million to £38 million. The borough also faces “unprecedented increases” in demand for homelessness support, with temporary accommodation costs rising by 16% year-over-year.​

Local government minister Jim McMahon has signalled potential government intervention through commissioners to manage Croydon until July 2027, following warnings from improvement panels regarding the risk of “complete collapse” if current borrowing plans continue.​

What next for London councils as the Budget approaches?

With Wednesday’s central government Budget looming, East London boroughs and the wider London council network wait anxiously. Despite the severe financial pressures dissipated by austerity, rising social care costs, SEND financial crises, and homelessness demands, there have been no concrete signals of immediate relief or funding reforms from the government.

The LGA’s letter to Chancellor Reeves stresses urgent stabilisation measures and calls for long-term systemic reform to avoid further degradation of local public services. Without swift intervention, the financial sustainability of councils remains precarious, risking reduced service delivery and widening social inequality.​

Councils are bracing for difficult decisions, including the potential for further council tax rises and service adjustments, while seeking government-led solutions to avoid deepening financial crises that threaten the well-being of vulnerable residents across East London and beyond.