Council crisis takes another lurch downwards

March 5, 2024

The financial crisis facing Britain’s councils is deepening. A new poll of local government leaders and managers claims to show, for the first time, the true extent of a structural funding issue that is leaving authorities close to bust.

Only 4% of council leaders responding to the annual Local Government Information Unit (LGIU) survey felt confident about the sustainability of local government finance – a sharp fall from 14% last year and 20% in 2020.  Nine per cent of councils (14 authorities) surveyed reported they were “likely” to declare what they call effective bankruptcy in the next 12 months, with more than half saying they would be insolvent in the next five years without extra funding.

The rate of decline seems to be accelerating after more than two years of warnings and a number of official declarations.  Yet there is no single reason and the affected councils cover the whole political spectrum. Early examples of over-ambitious development schemes, equal pay claims, failed IT investment and general financial mismanagement have forced individual budget shortfalls – such as those in Birmingham, Woking, Thurrock and Croydon  – that are 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.

Member bodies representing that ‘top end’ of local government expect 60% to issue Section 114 notices – signalling that they will freezing 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.

The LGIU report describes a “dysfunctional” relationship between councils and Whitehall, with the vast majority (94%) of local authority leaders believing ministers have little understanding of the scale of the financial crisis facing councils. An inescapable fact is that councils are faced with having to do more with less, and inflation has piled on the woe. 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.

Surveying the crisis from a corporate, private sector perch, it’s too easy and almost certainly unfair to focus on perceived bureaucracy, lethargy and cosiness in local government. Nonetheless, this huge area of the public sector needs more effective and consistent scrutiny over decision making, governance, and accounting.  Higher-than-expected core inflation is here 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 our analysts’ team at Buchler Phillips, an independent boutique firm with an impeccable Mayfair London heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.

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