(Bloomberg) -- The UK government has drawn up a “watch list” of local authorities that are on the brink of financial collapse and acknowledged that a funding shortfall is causing “significant” strain on many councils.

Michael Gove, the UK’s secretary of state for leveling up, distanced the central government from the growing crisis after cuts to real terms funding for councils since 2010, saying that the troubles were largely linked to mismanagement.

The remarks follow findings from the Local Government Association that one in five councils are on the brink of going bust. A number of them including Birmingham and Nottingham have issued so-called section 114 notices declaring effective bankruptcy.

“It is absolutely the case that the local authorities that have had to issue Section 114 notices have had failures of leadership, management and governance, and some have taken risks that were unmerited,” Gove said Wednesday in testimony to Parliament’s Levelling Up, Housing and Communities Committee. 

Councils have been squeezed by a sharp cut in real terms funding from central government since the financial crisis, high inflation, rising demand for services such as social care and risky bets on commercial property turning sour.

The LGA has warned that a £4 billion funding gap over the next two years will push more authorities to adopting emergency measures that put a significant number of local services at risk.

“I would say that saying that there are one in five at risk is an over-estimate, but of course we keep a close look at the picture and the pressures that are faced,” Gove said.

©2023 Bloomberg L.P.