Councils have warned the Prime Minister of a surge in effective bankruptcies unless he makes a last-minute intervention to boost next year’s financial settlement for local government.

A letter from council leaders to Rishi Sunak, exclusively shared with the PA news agency, highlights an imminent threat to financial sustainability and support for the most vulnerable adults and children.

Analysis of the proposed financial settlement by the Special Interest Group of Metropolitan Authorities (Sigoma), which represents 47 councils in some of England’s most deprived areas, identified a series of flaws in the Government’s proposals.

Sigoma said the overall allocation of £64 billion from the Department of Levelling Up, Housing and Communities will add about £4 billion to budgets in 2024/25.

This annual rise of 6% “is not nearly enough to fix the financial situation councils find themselves in”, it added.

The Government expects half of the total increase in spending power to come from residents through council tax rises, but Sigoma warned this “regressive” approach is unrelated to local needs and will likely leave councils unable to balance their books.

“This additional funding will fall short of what is needed as budgetary pressures have grown beyond council tax bases and will mean councils are still forced into making savings and at risk of issuing a section 114 notice,” it added.

Sigoma identified a funding gap of at least £1.5 billion in adult social care next year if support is maintained at current levels, meaning the overall extra £1 billion allocated for these services “will do little in the face of rising demand”.

Annual pay rises are not covered by Government funding, with the cost of about £1 billion putting “significant pressure on service provision”, while the increase in the national living wage will also come at a “significant cost”, Sigoma said.

The analysis identified a funding shortfall of at least £1.6 billion in children’s services, the biggest single pressure facing Sigoma members, with no new money allocated and restrictions applied to the social care grant limiting spending decisions in this area.

Sigoma also called for an end to single-year settlements that limit vital strategic planning.

The letter said it is crucial that funding elements increased in line with inflation must be based on the consumer price index figure for September of 6.7%.

It also said the Government must instigate “full equalisation” for council tax to ensure local authorities in poorer areas which raise less revenue are not disadvantaged and “a postcode lottery doesn’t develop for care services”.

The letter, signed by Sigoma chair and Labour leader of Barnsley Council Stephen Houghton, added: “Whilst we appreciate the difficult national financial position, council finances are on a knife edge.

Without this support, as we head into next year, the current proposals by the Government will see a surge of S114 notices

“We hope there is still the opportunity for the Government to provide local authorities with more assistance, even at this late stage.

“The local government finance settlement is a last resort and must be used to stabilise council finances.

“Without this support, as we head into next year, the current proposals by the Government will see a surge of S114 notices.”

A total of seven councils have issued at least one section 114 notice since 2020, three of which were issued this year.

Nottingham City Council, which issued its second declaration of effective bankruptcy last month, is a Sigoma member.

The council has proposed cutting more than 500 jobs as it faces a £50 million budget gap in the next financial year.

A Department for Levelling Up, Housing and Communities spokesperson said: “We estimate that the upcoming Local Government Finance Settlement will make available approximately £64 billion to the sector, and expect that councils will see, on average, an above-inflation increase in the funding available to them next year.

“Councils are ultimately responsible for the management of their own finances, but we stand ready to talk to any council that is concerned about its financial position.”