Six months ago, we warned that a £5bn funding time bomb was ticking beneath local government balance sheets as the cost of providing support for children with special educational needs and disabilities (SEND) continued to outstrip available funding.
Since then, Whitehall has reached for the wire cutters. The Government has announced a major intervention to tackle the accumulated deficits in councils’ Dedicated Schools Grant (DSG) accounts, alongside wider reforms intended to put the SEND system on a more sustainable footing.
The immediate threat to local authority finances has therefore receded. But the underlying arithmetic remains uncomfortable.
For several years, councils have been permitted to keep DSG deficits relating largely to SEND spending off their main balance sheets under a temporary accounting measure known as the statutory override.
Without that protection, authorities would have had to recognise accumulated deficits estimated at around £5bn – in some cases potentially overwhelming their reserves.
The Government has now committed to cover 90% of eligible accumulated DSG deficits as at 31 March 2026 through its High Needs Stability Grant arrangements.
At the same time, the statutory override has been extended until March 2028, giving councils considerably more time to deal with the remaining liability.
This is significant support. The prospect we highlighted earlier this year of a sudden accounting cliff edge has, for now, been removed. However, it would be premature to conclude that the SEND funding crisis itself has been solved.
The distinction is between the stock of historic debt and the continuing flow of new spending. Writing off most of councils’ accumulated SEND deficits deals with the former. It does not automatically eliminate the latter.
Demand for Education, Health and Care Plans (EHCPs) has risen rapidly, while councils have faced escalating expenditure on specialist school places, independent provision and transport.
The County Councils Network has previously estimated that, without effective reform, annual SEND deficits could reach as much as £4.4bn by 2029.
That is the real danger facing the sector. Clearing most of an accumulated deficit provides welcome breathing space, but if expenditure continues to exceed funding, another deficit simply begins to build.
Councils also remain responsible for the residual portion of their historic deficits. The statutory override is due to disappear in 2028, so local authorities will need credible plans for dealing with those liabilities from their own resources.
The financial intervention is consequently only one part of central Government’s response. The wider reform programme is now taking shape, shifting attention from the historic deficit to whether the SEND system itself can be put on a sustainable financial footing.
It aims to shift more support into mainstream schools, intervene earlier in children’s education and reduce dependence on expensive specialist provision.
The direction is understandable. A system in which growing numbers of children require formal plans before accessing appropriate support is expensive for the public purse and frustrating for families.
If mainstream schools can provide more effective support earlier, the potential benefits are substantial – educationally as well as financially.
Nonetheless, transforming provision while simultaneously controlling costs will be difficult. Councils have broadly welcomed the recognition that the existing system is unsustainable, while warning that successful reform will depend on adequate funding, sufficient specialist capacity and careful implementation.
There is also an unavoidable timing problem. Changes to the way children are supported may take years to generate meaningful savings, while councils are dealing with financial pressures now.
SEND does not exist in isolation from the rest of local government finance. Authorities continue to face intense pressure from adult social care, children’s services, homelessness and temporary accommodation, alongside higher staffing and borrowing costs.
Several councils have already required exceptional financial support from central government and the financial resilience of the sector remains under close scrutiny. For those authorities with particularly large SEND deficits, the Government’s intervention removes one major source of uncertainty. It does not necessarily restore the underlying strength of their finances.
The next two years will therefore be critical. By extending the statutory override and absorbing 90% of eligible historic deficits, Whitehall has bought councils something they badly needed: time. What matters now is what they do with it.
If SEND reforms succeed in bringing annual expenditure and funding closer into balance, the Government’s intervention could prove to be the moment when a potentially destabilising local government liability was finally brought under control.
If they do not, councils may arrive at March 2028 confronting a familiar problem – only with a new generation of deficits.
The SEND time bomb has not exploded. Whether it has actually been defused, rather than simply reset, remains to be seen.
Written by the analysts’ team at Buchler Phillips, a UK based independent boutique firm with an impeccable Mayfair heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.