Local government grants to charities are at risk through the increasing number of local authorities facing financial hardship and at risk of insolvency, a report by think tank Directory of Social Change (DSC) is warning.

Seven in ten councils in financial difficulty slashed their annual grant spending to charities in 2023/24, compared to less than half of those whose finances are more stable, according to freedom of information data given by councils to the think tank.

The number of councils facing financial problems is also rising, the DSC found, with an increasing number issuing Section 114 notices in which they are effectively declaring themselves insolvent following more than a decade of central government funding cuts.

Earlier this year the London Borough of Barnet became latest to issues a section 114 notice. Other councils to issue the notice in recent years include Birmingham City Council.

Last October council membership body the Local Government Association published a survey which found that one in four councils are likely to apply for additional financial help from the government over the next two years.

“The collateral damage to communities — and to the VCSE organisations that serve them — when councils are in financial crisis can no longer be ignored by central government policymakers and politicians,” said DSC director of policy and research

“Decades of cuts and underinvestment in local services have taken a heavy toll.”

He called on the government to use its forthcoming spending review to invest “more in local government and the ecosystem of vital local services that people depend on, which are often delivered by charities”.

Without this extra support “there’s a real risk that people’s health, well-being and social cohesion will deteriorate,” he said.

The DSC is also concerned about council transparency around their grant making, after fifth of local authorities either failed to respond or denied a request to respond to its FOI Act enquiry.

Also “the quality and comprehensiveness of the data returned to DSC were also inconsistent”.

Among those councils that responded a total of £461.9m from more than 35,000 grants was allocated to charities in 2023/24. The possible total is £600m, says DSC, when taking into account likely grant making by those charities that failed to respond.

Grant making to charities increased by around a quarter between 2021/22 and 2022/23 but only by 2% in 2023/24.

A value of a typical grant is £13,000 and grant making failed to keep up with the high rate of inflation in 2022/23, the DSC also found.

Four in five grants are awarded via open competition. “This provides strong evidence that the majority of council grants are open to new applicants,” said the think tank.

Just three councils reported their grant making practices had been the subject of a formal complaint. One council said it had been subject to legal proceedings due to its grant making .

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