Two-fifths of local authorities will face the threat of bankruptcy if more is not done to tackle the £4.6bn special educational needs (SEN) deficit, watchdog warns.

A new report by the National Audit Office (NAO) has looked at the financial impact of what it describes as the ‘soaring demand’ for support for children with SEN.

The NAO found that between 2015 and 2024 there was a 140% increase in children with an Education, Health and Care (EHC) plan alone.

According to the auditor’s report, high-needs funding has risen by more than half (58%), to £10.7bn for 2024-25, to address the increase in demand.

However, the NAO estimates that due to the dramatic rise in EHC plans the real-terms funding per plan has fallen by 35%.

It warned that the local government SEN deficit could hit £4.6bn by March 2026.

March 2026 is when special accounting arrangements known as ‘statutory override’ – which prevent deficits affecting councils’ financial position – will end.

The end of the statutory override could leave two-fifths (43%) of councils at risk of having to issue a section 114 notice, according to the NAO.

The Chartered Institute of Public Finance and Accountancy (CIPFA) and the Association of Local Authority Treasurers (ALATS) has also warned that the special educational need and disability system is ‘fundamentally broken’.

A survey from ALATS revealed a SEND deficit currently exceeding £3bn across English councils and is projected to rise to £8bn in 2026/27.

President of ALATS, Lorna Baxter, commented: ‘The issue has been “hidden in plain sight” through the statutory override which has masked the scale of the problem and allowed the deficits to accumulate to a position which is untenable.

‘Without prompt government intervention, we risk the financial stability of many councils and the essential services they provide.’