How do we move local government balance sheets from critical care to financial resilience?

The first law of holes says if you find yourself in one, stop digging. There’s no law, however, that says if you are in one you should build a house over it. This is what local government has been asked to do.

Large funding deficits are pervasive, and with them the threat of section 114 notices looms large over many authorities. There is a critical need to turn this precarious situation around at the same time as building a modern digital government that not only supports but also adds value to the lives of citizens and communities. Not least, as this maps directly onto the objectives and devolution, for which many councils will now be preparing.

Finding a firmer footing, financially, is a short-term goal, of course, but how do we go about building long-term financial resilience from such shaky ground? How do we set up services, internal processes, people management and operations ready to support unification programmes?

The answer lies in planning digital strategies to deliver results and impacts in a gradual, sustainable and incremental way.

The funding gap

Just as any good transformation expert will tell you, a journey of change starts by knowing exactly what your desired outcome is, and then to understand the problem statement that stands in its way.

At a very high level, councils are all looking for ways to deliver public services that are accessible, efficient, reliable and affordable, enabling them to support citizen welfare and deliver on community commitments. Perhaps establishing that part of the equation is simple – we know where we want to be.

The problem statement, however, is slightly more complex. First and foremost, as we’ve opened with, local government finances are in need of critical care right now. Service demands continue to mount up and overwhelm authorities working with very tight budgets.

The Local Government Association projects a funding gap of £8.4 billion by 2028/29, while UNISON, the public service union, says that next year alone the hole in budgets across English councils will amount to £3.4 billion as demands far outstrip current capabilities.

Already many authorities are on the brink. The Institute for Government’s Public Services Performance Tracker 2025 flagged that 28 local authorities successfully applied for Exceptional Financial Support in 2025/26. Yet the most significant budget pain points are common across all authorities; the rising costs of social care, homelessness and special educational needs and disabilities (SEND) have all been highlighted. It begs questions as to whether ‘exceptions’ are instead becoming the rule.

New multi-year settlements as part of the Fair Funding Review have provided clarity for authorities on their additional funding arrangements from central government for the next three years at least. They prioritise areas where communities are more deprived, councils’ abilities to raise income are more limited, or population demographics link up with greater care needs, and rightly so. But it’s important to make the distinction that these reforms were not intended to unlock any new funding, and in some cases have reduced funding, so financial pressures remain.

Discussions need to continue around how to increase local authorities’ core spending power. In the meantime, councils still face the day-to-day needs of citizens, so the problem might feel like trying to dig your way out of a hole.

Controlling the controllables

While councils are limited in their control over funding and have finite options available to raise more money – most of them undesirable, like raising taxes or selling community assets – there is another part of the problem statement to explore that is more within their sphere of influence, and that’s around digital maturity.

In Civica’s Future of Local Government Report 2025, 51% of councils said that modernising outdated systems was a top priority. However, a third of councils reported making no progress so far in training employees in digital competencies and 40% flagged a resistance to change and the adoption of new technologies among the workforce as a problem. The bottom line is that local authorities struggle with low digital maturity, and this impacts their ability to establish better financial resilience.

Archaic tech stacks are present alongside lots of outdated, manual processes and a resistance to change. This presents significant blockers to the financial and operational gains that technology solutions can unlock.

Authority leaders will want to spend precious time and resources working on things that give them more influence over the trajectory of their financial resilience. They need sure bets on ways to increase productivity and enhance service capabilities, and that’s where improving digital maturity through transformation comes in.

Making change in small steps

A study from EY on How can governments build trust and demonstrate value in a time of scepticism and change noted that ‘given the financial pressures and economic uncertainty facing both governments and people, “business as usual” won’t meet the moment.’ This is a powerful challenge to mindset, encouraging organisations to look at ways of doing things differently.

So, back to those first two steps of digital transformation, this time with a more tactical focus on improving digital maturity.

The desired outcome: to reduce the burden and heavy costs of legacy systems, upskilling staff in digital tools that make them more productive.

The problem: breaking down the attitudes of ‘that’s the way we’ve always done it’.

It’s time to look at every process and strip it back to the core outcome versus legacy problems, and then to see where technology can start to bridge the gap. Breaking deeply engrained behaviours is going to be vital to success, so plan in detail how you can bring people with you. Involve them in the change programme and regularly communicate benefits and progress.

This is an approach that will unearth lots of incremental gains in places you might not expect, and it means tackling digital transformation one piece at a time. The secret is to keep iterating, improving and optimising in smaller measures to build incrementally.

Some of these benefits will be very immediate, while others will form part of a multi-year roadmap, not least among councils going through unification programmes. That’s why it’s so important to have a digital strategy that works from top to bottom, from the big vision to the day-to-day operational impacts and is actionable over a sustained period.

Now is the time to explore how digital tools can work together towards gradually shifting the financial position of local authorities away from the critical care and towards sustainable financial resilience.

Because how do you fill a hole? One spade at a time.

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