Bankruptcy: Coming to a town hall near you?
What’s behind the epidemic of bankruptcies at Britain’s councils? Audley Director Rolf Merchant investigates.
In the last week, one in ten English councils warned that they expect to go bust in the next 12 months. A day after this dire news broke, the government made multimillion-pound bailout agreements worth a total £2.5bn with 19 councils, yet even this staggering amount is seen as only providing a temporary solution to a problem that increasingly threatens to overwhelm councils up and down Britain.
The past year has seen a drip-drip of bad news about local government finances. We hear more about local services being cut and council taxes being raised, together with several stories about councils going ‘bankrupt’, sometimes in spectacular fashion. On Monday, Nottingham councillors approved a series of cuts in order to address a £53m budget gap, after the council declared itself bankrupt last year. This week has also seen Birmingham councillors vote to take similarly drastic action, cutting up to 600 council jobs (amongst other cuts) in what have been described as “the biggest budget cuts in local authority history.”
The Local Government Association warns that many more councils are at risk of bankruptcy, from Kent to Kirklees and from Somerset to Southampton.
The problem cannot simply be dismissed as isolated cases of bad financial management. Nor does party politics have much to do with it: Labour and Conservative-run councils are going bust. It is becoming obvious to politicians – local and national – that council finances are becoming a widespread issue.
Recent council ‘bankruptcies’ – a story of bad management
A council cannot ‘go bankrupt’ in the same way that an individual or business can. What it really means is a local authority cannot balance its budget. It is then forced to issue a Section 114 notice, a legal declaration of serious financial difficulty. Since 2020, 10 S.114 notices have been issued. This is significant given only four were issued between 1988 and 2019.
The stories behind the recent council bankruptcies are cases of financial incompetence and poor governance.
For example, Nottingham Council lost millions of pounds from the collapse of Robin Hood Energy, its own energy firm. An independent report said the council was guilty of “institutional blindness” and a determination that Robin Hood Energy “should be a success” despite its financial failures.
Thurrock amassed debts in excess of £1.3bn after a series of failed investments largely in solar farms. The saga included the astonishing story uncovered by the Bureau of Investigative Journalism that a local businessman involved in the deals, Liam Kavanagh, appears to have cheated the council out of £130m.
Other examples of poor decision making, and even worse governance, include Croydon, Woking, and Birmingham.
But there are deeper, structural issues
Bad management alone cannot explain why so many essentially well-run councils are under strain.
The biggest and most often cited is the impact of cuts in funding available to local authorities. Central government funding, which accounts for over 50% of a council’s money, dropped by 40% in real terms from 2009-10 to 2019-20. The picture improved somewhat during Covid, with more government money available. At the same time, councils have made cuts and raised council tax. Nevertheless, the amount local authorities have to spend is now 10% lower than in 2009.
This has happened at the same time when council spending has had to grow.
Most immediately, the inflation spike has increased expenditure, as has statutory increases in the minimum wage.
But the biggest issue is the rise in demand for core services provided by local authorities, including adult social care, children’s services, and support for the vulnerable.
With an ageing population, there are many more elderly and frail people who need assistance with personal care and support for independent living. Greater recognition and understanding of special educational needs and mental health support for children and teenagers has put up children’s services spending. Local authorities also have a responsibility to help the homeless. Again, with numbers of rough sleepers rising, councils have to spend more to accommodate people.
For some councils, like Devon, Derbyshire and Lancashire, social care accounts for more than 70% of total spending.
In response, the Conservative government has upped the amount available to local authorities. In December 2023, the government announced a 6.5% increase in funding for councils.
What’s next for local authorities?
Local authorities can of course make financial choices of their own. They can look at options for increasing income at a local level and making cutbacks in expenditure.
Most local authorities are expected to raise tax on all bands by the maximum allowable under law, 4.99%. Certain councils, who are in deep financial difficulty, can raise tax by a higher percentage with the government’s approval. For example, Thurrock is going to raise council tax by 9.44%.
But the government isn’t approving all these requests. Somerset Council was recently rebuffed when it sought permission to raise council tax by 10%. The other option open to local authorities is to hold a local referendum on tax increases above 4.99%. Only one such referendum has ever taken place, and the result was a resounding ‘no.’
Service cuts have so far involved things like reduced bin collections and lower spending on road maintenance. It is distinctly possible they may become more serious with library or leisure centre closures.
However, many councils fear that even increased taxes and cuts won’t be enough to balance the books.
Westminster politics
Seen through the narrow lens of the upcoming general election, the issue of councils going ‘bankrupt’ is yet another political headache for prime minister Rishi Sunak.
News of struggling councils and cuts to local public services only adds to the dominant narrative that Britain is ‘broken’, and Tory mismanagement is to blame.
Two of Mr Sunak’s main priorities to make an effective pitch for another term in office at the election are to show he has a firm grip on public finances and is delivering tax cuts.
It is difficult for him to do the former when the demands for more spending keep growing – especially when they are from within his own party. In January, a group of MPs, including 40 Conservatives, wrote to him to demand further financial support for local authorities. This pressured the government into providing an extra £600m in funding, £500m of which was aimed specifically at social care provision.
As for tax cuts, the benefit voters will feel from the 2p cut in national insurance is going to be minimal if they end up having a much higher council tax bill.
The Labour Party has been quick to criticise the Conservatives’ decisions to cut local government funding from 2010-2019. However, Labour has not detailed how it will approach local authority finances if it forms the next government. With the UK’s public finances in a weak position, promising a significant uplift in funding would be risky.
Town hall leaders across the country would be wise not to hope that they will receive relief from central government anytime soon. The NHS, defence and welfare remain much higher up the list for spending injections. Even another round of council ‘bankruptcies’ in 2024 might not change that.
By Rolf Merchant, Director at Audley.
Image credit/Mason Taylor/Simon Taylor/License