Councils in crisis as local government goes bust

The acute financial challenges facing England’s local councils are fast becoming a national disaster.

As many local authorities’ debt mountains across the country reach staggering levels, Meg Hillier, chair of the Public Accounts Committee, issued a fresh warning today over the “extreme and long-lasting effect” if any more councils go bust.

In 2018, Northamptonshire County Council issued a section 114 notice – effectively declaring itself bankrupt – making it the first local authority to do so for 20 years. Since then, a pattern has emerged. Slough, Croydon, Thurrock, Woking, Birmingham City and Nottingham City have all issued notices. 

And many others could soon suffer the same fate. Nearly one in five council leaders in England now say they are likely to declare bankruptcy in the next 15 months – a move which effectively forces them to freeze all new spending for the year, bar spending on statutory services to protect vulnerable groups. 

The challenges driving many councils to bankruptcy could be characterised as a perfect storm. But certainly they must be seen within the context that, between 2010 and 2020, money councils receive from central government underwent a real-terms cut of 40 per cent. 

At the same time as their spending power has drastically reduced, demographic changes mean that demand on council services has only increased. 

An ageing population has placed acute pressure on councils. According to the NHS Confederation, the number of over-65s in England increased by more than 400,000 in the last five years. Demand for adult social care is now at a record high. 

Then there is the problem of housing. According to homeless charity Shelter, the number of households living in temporary accommodation – a cost incurred by local councils – has risen by 87 per cent over the past decade to nearly 100,000. 

Immigration also means the population is up 10 per cent in 15 years, adding further pressure.

And inflation – alongside higher energy costs – has burnt even more holes in their finances. 

Aside from making drastic cuts, these financial pressures have forced financially blitzed councils to take steps such as imposing hefty council tax hikes. 

But on top of this, some have resorted to another higher-stakes method in an attempt to balance the books: pursuing commercial investments. 

In 2012, a government document actively encouraged councils to take commercial steps to fill the coffers. 

And, for many local authorities, such advice has proven helpful. However, some of the councils now in the most trouble are ones whose investments in retailing, housing and other business ventures have turned sour. 

Woking Council declared bankruptcy back in June, following a failed investment strategy which involved borrowing hundreds of millions of pounds for local regeneration projects, even going so far as investing in the cutlery for a 23-storey Hilton hotel in the town centre. The debt figure at Woking Council is now estimated to be nearly £19,000 per person, the highest in the country.

Similarly, Thurrock council declared bankruptcy in December 2022 with a £469m deficit, after gambling hundreds of millions of pounds on risky commercial investments, including in a costly overvalued renewable energy scheme. 

In such instances, a blame game ensues. Local authorities are criticised for irresponsibly managing funds. They in turn say austerity has pushed them into an unenviable position of either taking gambles in commercial ventures or imposing drastic cuts to services. 

This pattern of risky council investments requires proper scrutiny. Though the most widespread and inescapable long-term problem for councils is almost certainly the growing funding gap as demand for social care intensifies further. 

The extra £2bn Jeremy Hunt has set aside for social care in 2023/2024 will slightly take the pressure off councils. But longer-term, broader reforms to social care will be imperative. 

In the general election, the strain on services and the crisis in local government is bound to add to pressure on the Prime Minister and the Tory party.

Write to us with your comments to be considered for publication at letters@reaction.life