Recently Birmingham City Council made headlines by declaring themselves ‘effectively bankrupt’. Whilst many expressed surprise that this was possible for a local council, let alone the UK’s largest, they are far from the first. In fact, they are the fifth local council to recently declare themselves effectively bankrupt; joining Slough, Croydon, Thurrock and Woking in doing so.
What makes Birmingham City Council different from the others is its size and because of this, attention has been drawn to the state of English local councils’ finances and, what currently seems to be, a bleak outlook for the next few years.
Effectively bankrupt and Section 114 notice
It should be noted that the five councils declared themselves effectively bankrupt, as opposed to declaring insolvency. This is because a local council can’t go bankrupt like an individual or insolvent and liquidated like a business. Instead, they file a Section 114 notice that advises they cannot balance their books and are unable to make new spending commitments.
Whilst filing a Section 114 notice does not legally require a council to reduce spending on services and projects that are currently ongoing, the fact they are in effect bankrupt means they have little to no money available and services and current projects are generally slashed to the bare minimum in order to reduce expenditure. For example, residents of these councils have reported waste collection frequency being halved and the number of street lights in operation reduced.
What is the state of English local councils?
Whilst councils have declared themselves effectively bankrupt before, either by misfortune or mismanagement, it has always been a rare event and five councils failing in short order is a state of affairs that many would have said was unthinkable. Despite this, it seems that Slough, Croydon, Thurrock, Woking, and Birmingham, may soon be joined by other local authorities.
SIGOMA (Special Interest Group Of Municipal Authorities), a collection of 47 urban local councils, recently met to discuss the state of financial affairs for their members and reported that five are considering filing Section 114 notices in the 23/24 financial year, nine are considering filing in the 24/25 financial year and its members understand that at least twelve non-member councils are considering filing the notice. This means that at least 26 local councils are on the verge of collapse, with many more yet to comment on whether they will be able to balance their books at the end of the financial year.
The government has so far been resolute in their standpoint that councils will receive no major help, which suggests there will be no last-minute reprieve for any struggling local authorities.
Why are local councils struggling?
There is no single cause for the money troubles being experienced by English local governments, having faced a string of both historic and recent pressures, with the failed and struggling councils citing similar reasons.
The age of austerity never ended for local councils across England, with cuts of nearly 60p to the £1 of central government funding over the last 13 years. Councils were forced to both make cuts and look to create new revenue streams to make up for the decrease in funding. This also had the effect of slowly eroding council finances. As budgets were slashed, council tax and business rates became an important revenue stream. The decline of the UK’s high streets meant that many councils were receiving significantly less in business rates income than they once had.
Local government has not been immune to the recent macroeconomic pressures of soaring inflation, the rising cost of energy and wages, and high-interest rates. As with many corporate failures, these are often cited as being the final nail in the coffin of those authorities who were just getting by. One increased cost of special note is that of child social care. This had previously received less funding than adult social care, but a government ruling that required its funding and priority to match has placed extreme pressure on many councils’ budgets.
Critics of the five failed councils have pointed out a series of disastrous investments on the council's behalf. Woking’s £1.2 billion deficit is aided in no small part by investment in a complex of skyscrapers, the tallest buildings in the UK outside of a major city. Thurrock made over £600 million of highly speculative investments into solar farms, and Croydon spent half a billion on ill-fated commercial ventures.
Critics of council investment have pointed to the dissolution of the Audit Commission, a quango that included assessing council investments amongst its responsibilities, leaving local councils with no oversight or advice on their investment plans or risk appetite.
What does the future hold?
Further council failures are predicted to be inevitable, with some predicting that around 30% of councils are at risk. A fresh wave is predicted before the end of the financial year, with more to follow in 24/25.
Currently, it is not expected for the government to free up funding or offer much in the way of help to struggling councils and as such the future looks somewhat uncertain. However, with a general election looming there is a possibility that the issues of local government solvency become a political point of contention. If so, increased funding or reform for a more financially prudent system may be forthcoming.
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