Why are councils going bankrupt?
Nottingham City Council has become the latest local authority to effectively declare bankruptcy as it is unable to fulfil its legal obligation to balance its budget.
The state of the council’s spreadsheets has been blamed partly on mistakes of its own making – namely the collapse of an energy firm it launched back in 2020, and using funding ringfenced for housing in its general budget that then had to be replaced.
But it is far from the only authority facing such pressures, and the issuing of Section 114 notices is a story being echoed across a number of local authorities in England.
Politics live: Five minutes notice for Raab when Johnson fell ill
Since 2018, six councils have effectively declared bankruptcy, including Birmingham City Council – the largest local authority in Europe – with Nottingham becoming number seven.
When these Section 114s are issued, all new spending – with the exception of protecting vulnerable people and statutory services – must stop immediately.
Again, many of these councils have had specific big spends and mismanagement at the heart of their problems – Birmingham, for example, had to spend £760m in settling equal pay claims, while Thurrock got into difficulties over investing in solar power.
But council sources say they have been consistently encouraged by government to take bolder, commercial steps to fill the coffers as a result of much wider issues slamming their budgets.
And many more could follow down the effective bankruptcy route, with the Local Government Information Unit suggesting as many as one in 10 councils are already at risk.
“I think if we don’t do something in the next parliament, my guess is half the councils in the country will go bankrupt,” said Clive Betts, chair of the Commons Levelling Up Select Committee, which has been carrying out an inquiry into council finances.
“It is that bad. I think it is getting to the point of tipping over now and I think central government is going to have to put some more money in, at least as a short term fix until the middle of next parliament.”
But how did we get here?
Government funding
Many in local government – including some at Nottingham City Council – place the blame on a change of policy in 2013 over how much funding councils would be given by central government.
Then-chancellor George Osborne decided to reduce that funding pot, known as the revenue support grant (or RSG) and replace it by allowing local authorities to keep more of the council tax and business rates they collected.
But better off areas have higher rates, while more deprived areas can struggle to even collect council tax due to the hardship of their residents, and the promise of keeping 100% of business rates has failed to come to fruition.
In reality, the figures have rarely settled out, with the Institute for Fiscal Studies saying the poorest fifth of councils are getting about 10% below their needs, compared with the richest fifth getting about 15% above their requirements.
And this is born out in a National Audit Office (NAO) report, that showed councils’ spending power fell in real terms by more than 50% on a like-for-like basis between 2010-11 and 2020-21.
Mr Betts said this change was “fundamental” to the state of council finances.
“The austerity that came in between 2010 to 2015 hit really hard,” he added. “Yes, council tax has gone up, but you can only push it up so far.”
Costly services
It is not just the funding model that is hitting councils across the country, but the demand – and the cost – of what they spend it on.
First up is social care. According to the NHS Confederation, the number of over-65s in England increased by more than 400,000 in the last five years, and the older people get, the more likely they are to need care.
There has also been a surge in the need for children’s services, with the County Councils Network pointing to more than 20,000 extra referrals between 2020-21 and 2021-22, compared with a decrease of 1,400 year-on-year between 2018-19 and 2019-20 – putting the blame on the fall-out of the pandemic and the cost of living crisis.
Councils with responsibility for providing these services – a legal obligation for many – have seen prices rocket as a result, with the NAO saying local authorities were using 80% of their spending power on care in 2019-20, compared with 52% in 2010.
The spending watchdog said that in the same period, spending across other council services had dropped by nearly 25% as they sought to cover the rise in care costs.
But with such a high amount needed, local authorities have increasingly less “financial space” to make further spending reductions without affecting the social care pot.
And the prices are only set to grow, with government projections showing that if current patterns of care continue, around 29% more adults aged 18 to 64, and 57% more adults aged 65 and over, will require care in 2038 compared with 2018 – seeing costs rise from £17.9bn in 2018 to £34.7bn in 2038.
Then there is housing. Statistics from homeless charity Shelter showed the number of households living in temporary accommodation – a cost incurred by local councils – had risen by 87% in the past 10 years to nearly 100,000.
Government figures released in October also showed the bill for authorities to cover that hit £1.7bn between April 2022 and March 2023.
Shelter called the figure “outrageous” but also “illogical”, with the organisation’s chief executive, Polly Neate, saying: “We simply can’t keep throwing money at grim B&Bs and hostels instead of focusing on helping families into a home.”
But that price tag is only set to go up as demand continues to rise, with rents still on the up and no fault evictions – a major driver in people losing their homes – still yet to be banned by the government.
As well as demand, the recent record high inflation has seen the costs of, not just these services, but all services rise.
“On a daily basis, councils are facing all the other costs that people in their lives are facing,” said Mr Betts. “Extra energy bills, extra cost for construction projects, if they are doing road repairs there is the cost of materials.
“All those costs are going up at the same time, and inflation in local government is significantly higher than their income.”
Why does it matter?
As we said before, if a council issues a Section 114, statutory services – including care – still have to be delivered.
But Mr Betts says even before it hits that point – and even if you don’t need help with care or housing – residents are going to feel the impact of their local authority having financial struggles.
“Most people want their streets swept and repaired, their bins emptied, their parks open and pleasant, their bus services to run,” he said. “But they are finding they are paying increased council tax each year and getting less and less of the services that they actually use.
“People can see it already. People say to me I am paying more and getting less and for most people, that’s what the reality is.”
And if a council does go bankrupt, those services you may hold dear could be the first on the chopping block to save cash.
Politics Hub with Sophy Ridge
Sky News Monday to Thursday at 7pm. Watch live on Sky channel 501, Freeview 233, Virgin 602, the Sky News website and app or YouTube.
Tap here for more
“It can mean things like the library is shut, the grass in the park isn’t cut, the planning service gets reduced, environmental health inspector get made redundant,” said Mr Betts.
“They have got to keep the statutory services going… so the rest of the services get squeezed even harder and you probably find your council tax goes up significantly, because when commissioners come in after a Section 114 is issued, they can put it up more than councils are allowed to.”
This cocktail of hardships being faced by local government is sure to mean more councils struggling to make ends meet, and is likely to mean more Section 114s in the near future.