Andy Pike analyses the precarious financial situation of local councils in England, arguing that this ultimately stems from central government’s political choices rather than local mismanagement.
The local council financial crisis in England is reaching a tipping point. A rash of Section 114 notices – the legally required statement that the council cannot balance its budget – has spread across the country; from Birmingham to Woking, Northumberland to Thurrock. While certainly complex and difficult – but not ‘boring’ – such dramatic events have thrust local council funding into the national headlines.
As local councils in England were forced to find savings and new income sources to close funding gaps by UK government austerity from 2010, accusations emerged of ‘councillors at the casino’ taking risks with local taxpayers’ money by engaging in novel and untried financial strategies and jeopardising local public service provision.
But it is important to look beyond the high-profile councils hitting the headlines to examine the wider local government landscape in England since 2010. A diverse map comprises over 300 local councils managing £100bn of revenue expenditure and employing almost 1.5m providing essential services to over 56m people across England.
The UK government reduced expenditure and introduced local financial self-sufficiency in pursuing austerity after the 2008 crash, pressuring local councils to find savings and new income sources to balance their budgets. For national ministers, the rationales were cutting expenditure, encouraging innovation and commercialisation to generate local revenues, and reducing local dependence upon national grants and transfers.
Rather than a widespread shift to ‘councillors at the casino’ taking chances with local services, the landscape is more differentiated.
Since 2010, only a handful of local councils have been pursuing vanguard approaches involving novel and untried strategies and arrangements including debt-based commercial property portfolios, income strip leases, and interest rate swaps on borrowing.
A sizeable number of councils are active but less engaged in such innovations, while for the long tail of most councils these kinds of riskier activities are limited or non-existent.
These different approaches to balancing budgets across England are explained by the types and sizes of local councils, variable capacities and capabilities, risk appetites, openness to commercial finance, and economic and financial conditions.
Risks have multiplied for local councils since 2010 as cuts have been made and available financial reserves depleted. Margins for error have been reduced and the already fragile system has become less resilient and able to absorb shocks, increasing the possibilities of financial failure.
Indeed, by late summer 2023 local councils appeared to be running out of road as they struggle to manage growing funding gaps and greater risks amidst rising service demands and inflation.
Some – such as Birmingham – are even considering further financial innovation as a way out of their fiscal fix by securitising its near £1bn of equal pay claims, borrowing against them and paying them back over time. Paradoxically in the highly centralised funding system, such a novel and vanguard approach would need UK government support and agreement.
More councils are going public about not being able to balance their budgets and having to issue the legally required S114 notice, often with both national and local factors compounding each council’s financial plight.
Following more than a decade of austerity, the current moment looks like a critical turning point for local council sustainability, resilience, and local public service provision as the cumulative impacts of prolonged fiscal pressure bite ever deeper.
Yet the UK government continues to explain financially failing local councils as the result of locally particular bad decisions, poor culture, and weak governance and leadership.
While there is consensus that the complex, byzantine, and highly centralised local council funding system is broken and needs long overdue fixing, the UK government plays down the role of systemic dysfunctions in local council financial difficulties and failure.
But even the UK’s national Office for Budget Responsibility notes the ‘de facto insolvencies’ of local councils are resulting from national fiscal management.
From 2010, in pursuing austerity and local financial self-sufficiency, the UK government effectively took the chance that local councils could bear the increasingly complex and weighty burdens of continuing to provide essential local services while reducing expenditure and generating new income sources.
A decade on its local financial self-sufficiency agenda appears somewhat riskier than originally envisaged. As a growing number of councils struggle to balance their budgets, it seems it is national rather than local government that has been taking the local public services gamble.
Rather than engage in any thorough but politically difficult reform – including funding system reviews, multi-year settlements, and local commercial and residential property tax revaluations, the UK government holds the line that it is not prepared to bail-out failing councils as a result of what is deemed to be their local mismanagement for fear of moral hazard and creating perverse incentives for other local council profligacy.
As the UK government persists with this risky approach, costs ultimately fall back onto local residents through increased local taxes, asset sales and reduced services.
When even seasoned commercial finance executives working with the sector are calling for ‘a grown-up conversation’ about local councils’ unfunded mandates of statutory responsibilities to deliver vital public services without appropriate and matching levels of funding, it is clear that the wider question of what local government is for and how it can be funded remains unanswered in England.
By Professor Andy Pike, Centre for Urban and Regional Development Studies (CURDS), Newcastle University, UK.
For more on these themes, you can find Andy’s new book Financialization and Local Statecraft here.
