More English councils are expected to fail owing billions of pounds in debts, a leading credit rating agency has warned, amid an escalating crisis for local government after years of budget cuts and mismanagement. In a report in the wake of the financial meltdown at Birmingham city council, Moody’s said several other local authorities across the country were close to issuing pre-insolvency warnings and listed the 20 most indebted in England relative to size. The country’s largest local authority in effect declared itself bankrupt last week, having issued a section 114 notice – signalling that it does not have the resources to balance its budget. It followed similar recent failures at cash-strapped councils, including Woking, Croydon, Thurrock and Slough. Sounding the alarm over the likelihood more would follow, Moody’s said councils were under pressure from the falling value of commercial property investments they had made, high inflation, rising interest rates and ballooning demand for social care services. It blamed cuts to local authority funding under the Conservatives’ austerity drive since 2010 for fuelling higher levels of debt, as well as the decision to scrap the Audit Commission in David Cameron’s “bonfire of the quangos” for a lack of external scrutiny. “We expect more English local authorities to fail over the near term,” it said in the report. “Borrowing for commercial investment increased significantly over the past decade to generate revenues and offset a decline in government funding. “This was facilitated by significant borrowing flexibility introduced by central government in 2003 and 2011. Borrowing rules have tightened since 2020, effectively ending local authorities’ property investment strictly for revenue gains, although legacy assets remain.” The report ranked the top 20 English councils for high levels of debt compared with their income, with Spelthorne borough council in Surrey first on the list with almost £1.1bn of debts worth almost 87 times its annual income. Seven of those listed are in the same county, largely with Tory or Liberal Democrat administrations. Others include Labour-run Warrington in Cheshire, with debts in excess of £1.8bn, and Hampshire’s Lib Dem-controlled Eastleigh, where borrowing levels are 41 times income. Several can count current and former cabinet ministers as their local MP, including the former chancellor Kwasi Kwarteng, at Spelthorne. Surrey Heath is represented by the levelling up secretary, Michael Gove, the cabinet minister responsible for local government. Moody’s warning comes after Rishi Sunak sought to capitalise on Labour-run Birmingham’s financial woes, telling the Commons last week: “They’ve bankrupted Birmingham; we can’t let them bankrupt Britain.” Highlighting a cocktail of risks facing local authorities, Moody’s said many councils had ploughed into risky commercial property investments in the past decade to offset a 17.5% real-terms cut in central government funding between 2010 and 2020. Commercial property valuations have slumped since the Covid pandemic amid a rise in working from home, while the rise of online shopping has cut demand for physical stores. Five local authorities have issued section 114 notices since 2021. While failures at Birmingham and Slough relate to accounting misstatements, falling property prices and bad investment decisions plagued Croydon, Thurrock and Woking. The rating agency warned there had been a lack of external scrutiny and transparency at councils, highlighting that the process had been left to private sector auditors since the scrapping of the Audit Commission in 2015. The agency, responsible for the oversight of local authority finances since 1983, was scrapped with the aim of saving £50m a year, as one of more than 100 quangos culled by Cameron’s Conservative-led coalition. However, Moody’s said the move had resulted in a “huge auditing backlog”, with many local authorities left without audited accounts for multiple years. With a lack of capacity among private sector firms to take on the work, it said as few as 12% of accounts for 2022 had been signed off. While the government launched a new Office for Local Government in June with the aim of improving transparency in the sector, Moody’s said the recovery process for councils in financial distress would take “many years” to complete. The Department for Levelling Up, Housing and Communities said: “Councils are ultimately responsible for the management of their own finances. “However, the government has been clear that local authorities should not take excessive risk with taxpayers’ money, and we have established the Office for Local Government to improve the accountability for performance across the sector. “Local authorities have seen an increase in core spending power of up to £5.1bn, or 9.4% in cash terms, on 2022-23.”