Local government has got used to financial uncertainty, but even those of us who have worked with and in local government over the past 20 years or more struggle to think of a time when it was more precarious than it is today.

Financial leaders are facing a myriad of challenges, including double-figure inflation, rising interest rates and growing demand for services. The sector is fighting to stay afloat and, in some instances, is losing the battle. Our latest research finds that one in six English councils could now run out of money as early as next year, without additional income or substantial further budget reductions. We also project that the sector faces a £7bn funding black hole by 2025-26 – an enormous increase of £4.6bn since the beginning of this year.

We have been warned of ‘eye-watering' decisions needing to be made to restore public finances. All Government departments have been alerted of the potential need to find savings and even previously cast-iron commitments, such as defence spending and the pensions triple-lock, seem at risk. This does not bode well for local government.

Ahead of the upcoming fiscal statement, the sector will be hoping that it is not presented with further cuts. In previous years, local government has often been seen as the poor relation of the public sector, facing cuts and budget reductions not seen in other areas.

There may be a degree of cold comfort in the fact that the shift towards local taxation as the prime source of funding over the past decade and the cutting of revenue support grant, reduces what else can be taken.

Councils are on the frontline of the cost of living crisis. National macro-economic issues manifest themselves at a community level and as such, local authorities are uniquely placed to help local people through. Given the current economic environment, and with worse likely yet to come, there is a strong case to be made that this time around, councils should be among the protected areas of Government spending.

The sector as a whole has huge potential but it needs the necessary funding and support to seize the opportunity. There are clear efficiencies that can and should be made – the modernisation and digitisation of core services chief among them. But further funding reductions will only erode the transformational capacity and effort needed and increase the already growing efficiency gap between the public and private sector.

Ultimately, councils will be looking to Government to provide clarity, stability and some certainty for the medium term. If the trajectory is to be one of making do with less, yet again, the ability to plan effectively over three to five years will be crucial. Single-year settlements have and will continue to promote short-term solutions, the erosion of reserves and postpone genuine transformation.

Councils are best placed to decide how to fund local priorities and it is critical that Government protects, or preferably increases, the freedom with which councils can make local decisions around council tax, business rates and charging for services, and protects existing service grants for social care and other areas.

Even if the sector were to receive more funding from central Government – while of course desperately-needed and critical to the continuation of service delivery – without fundamental reform it will not, in the long run, address the sector's deep-rooted financial sustainability issues.

The traditional narrative around how councils ensure financial sustainability no longer goes far enough. Action is required from all sides and central Government has to play a role. We have seen centrally-led support plans introduced for the health service to help it work through the backlog caused by the pandemic – an approach which could be mirrored for local government.

A centrally-led support plan – locally delivered – would allow for efficiencies of scale and result in transformation plans that can both seize the opportunities of more efficient delivery models and tackle the precariousness of the sector's current financial position.

Ultimately, whatever the challenges or limitations in Government policy at present, local government must get on with the hard business of managing its finances. Financial sustainability and savings plans resilient enough to manage through a range of scenarios are key, delayed action in the hope of further support is a high-risk strategy.

If there is any comfort, it is that the sector and its financial leaders have become hardened to acute financial challenges and are better placed to find a way through than in other parts of the public sector.

Phil Woolley is head of public sector consulting at Grant Thornton UK LLP

@GrantThorntonUK