Council crashes magnify the misery of inflation

November 28, 2023

Britain’s local councils are going bust – or getting close to it – left, right and centre. Literally, since the parlous state of local government finances is being revealed almost daily in councils controlled by all three major political parties.

Early examples of over-ambitious development schemes, equal pay claims, failed IT investment and general financial mismanagement over the last two years have been followed by a stampede of councils declaring near-insolvency for a wide variety of reasons. The scale of some individual budget shortfalls such as those in Birmingham, Woking, Thurrock and Croydon is eye-watering by even central government standards. However, the general direction of travel for what is now the majority of councils suggests that broader economic factors and the constraints of national funding are underlying factors that are hard to escape.

At present, an estimated one in 10 county councils in England is facing effective insolvency; groups representing that ‘top end’ of local government expect 60% to issue Section 114 notices – signalling that they will freeze all non-statutory spending – by the end of 2025. Obviously local residents suffer not only from losing services but from sharp rises in their council tax bills.

Beyond the catalogue of one-off costly disasters, the income and expenditure profile of councils has changed dramatically in recent years. Central government grant funding for councils dropped by 40 per cent in real terms between the years 2009-10 and 2019-20. Even stripping out emergency Covid grants,  overall funding was still more than 10 per cent below pre-Covid levels. Councils have become more reliant on income generated locally, through services and facilities provided. In terms of money out, a major cost has been soaring post-Covid demand for statutory services, notably  social care for adults and children, as well the provision of temporary accommodation and homelessness support.

In short, councils are faced with having to do more with less and inflation is piling on the woe – on a grand scale. Around two million people are employed by local government. The pay bill is huge and, relative to the better paid private sector, possibly harder to cut. In addition, higher energy costs throughout council offices and services have been crippling.

Often managers and financial workers in the corporate world have been sniffy about perceived bureaucracy, lethargy and cosiness in local government. It’s clearly right that in the present circumstances this huge area of the public sector should face greater scrutiny over decision making, governance, and accounting.  High core inflation will loom large for the foreseeable future, further eroding councils’ margin for error. If there were any money left for external advice, it might be well spent on growing resilience, establishing parameters of appropriate risk management and building revenue development pipelines with specialist partners across a variety of sectors. Forced to straddle the worlds of public spending and commerce more than ever before, councils need substantial help – if not from government, then from elsewhere – in adapting to a new model as quickly and effectively as possible.

Written by David Buchler, Chairman at Buchler Phillips, UK based independent boutique firm with an impeccable Mayfair heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.


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