Councils across the country find themselves in a turbulent financial position. Since 2021 six local authorities have declared themselves effectively bankrupt, with a raft of councils warning they may have to do the same. Exclusive polling of English councillors by New Statesman Spotlight revealed that a quarter of councillors believe their council will soon go bankrupt.
Amid dramatic cuts to the funding they receive from central government, councils continue to face increasing demand for statutory services (the services they are legally required to provide). These include adults and children’s social care and the provision of temporary accommodation and homelessness support. Central government grant funding for councils dropped by 40 per cent in real terms between 2009-10 and 2019-20 (from £46.5bn to £28bn).
This has left councils more reliant on funding generated locally, through council tax and business rates, but locally generated income has not been enough to compensate for the drop in central government funding. Local authority “spending power” (the amount of money councils have to spend in total) fell by 17.5 per cent between 2009-10 and 2019-20. Even when emergency Covid grants were given to councils in 2020-21 and 2021-22, overall funding was still 10.2 per cent below pre-Covid levels.
Such funding cuts are the backdrop to the series of local authorities issuing section 114 notices, effectively declaring themselves bankrupt. A section 114 notice is a report issued by the council’s chief financial officer effectively freezing all non-statutory spending.
In 2018, Northamptonshire County Council issued a section 114 notice – the first local authority to do so for 20 years. Since then Slough, Croydon, Thurrock, Woking, Birmingham City and Nottingham City have issued notices. In recent months, many other local authorities have reported that they may soon be forced to do the same. Once section 114 notices were often the result of financial mismanagement, but it is becoming increasingly likely that they will be issued more frequently by a wider array of councils due to dramatic changes in funding.
[Read more: What does it mean when a council declares bankruptcy?]
In December, research by the Local Government Association revealed that almost 1 in 5 council leaders and chief executives think it is very or fairly likely that they will need to issue a Section 114 notice this year, or next year due to funding shortfalls. The LGA has estimated that local authorities in England face a funding gap of £4bn over the next two years.
In February, MPs on the Levelling Up Select Committee argued in a report that the £4bn funding gap councils face should come as "no surprise", given the "significant reductions in local authorities’ spending power which has itself coincided with increasing demand for their services and inflationary pressures driving up costs". Clive Betts, the chair of the committee, said: "If the government fails to plug this gap, well-run councils could face the very real prospect of effectively going bust.
“Long-term reform is vitally needed. The funding model for local councils is broken."
Shaun Davies, the chair of the LGA and leader of Telford and Wrekin Council said "no council is immune to the risk of running into financial difficulty" and added that "if councils cannot thrive then our communities cannot thrive". He has called on the government to act urgently "to address the acute financial challenge faced by councils".
In a written ministerial statement in January 2024, Housing Secretary, Michael Gove announced the government would make an unprecedented intervention on council finances. The Department for Levelling Up, Housing and Communities (DLUHC) has added £600m to the annual local government finance settlement, which is expected in February. Of this, £500m will go to upper-tier authorities with social care responsibilities, and a further £100m will go to the rural services delivery grant and increasing councils' funding guarantee (which ensures all councils see a minimum rise in core spending power) to 4 per cent.
Many in the sector welcomed the funding as a good short-term intervention to support councils currently facing a rocky financial outlook. But they also cautioned that long-term financial reform for local government in England is required in order to prevent this becoming an annual occurrence, and to support those councils still facing financial difficulties over issues such as increasing rates of homelessness. Tim Oliver, chair of the County Councils Network, and leader of Surrey Council said the government must look to deliver a "comprehensive reform programme to bring in line the funding envelope available to enable us to deliver effectively our statutory responsibilities".
In January 2024, a report from the Levelling Up, Housing and Communities select committee called on the government to oversee a fundamental overhaul of council funding. It reported that evidence collated during its inquiry into local authorities' finances found a £4bn funding gap, with councils facing an "out-of-control financial crisis". The chair of the committee, Clive Betts, warned “if the government fails to plug this gap, well-run councils could face the very real prospect of effectively going bust”.
On 5 February 2024, it was confirmed councils in England would receive a £64.7bn funding settlement for the 2024-25 financial year. The government said this represents a 7.5 per cent uplift in cash terms on last year's settlement (inflation is currently at 4 per cent), and includes the £600m emergency funding package announced in January. This rise also assumes all councils will take up the maximum council tax increase for the next financial year - 5 per cent for unitary and county councils, and 3 per cent for district councils. Gove outlined details of the requirement for councils to produce new 'productivity plans', which are a condition of the added £600m in funding announced in January.
The productivity plans, which are to be submitted to DLUHC before the summer recess, will require councils to provide further detail on how they are transforming services to improve their use of resources, how they plan to use technology and data to improve performance, how they plan to reduce wasteful spending, and any barriers to their activity which the government might reduce or remove.
On 29 February, DLUHC announced 19 councils would receive support from the government through the Exceptional Financial Support framework. Of these, 11 are set to receive funding for previous years. They include: Birmingham, Bradford, Cheshire East, Croydon, Eastbourne, Havering, Nottingham, Plymouth, Stoke-on-Trent, and Woking. The announcement also included six of the councils which have declared a section 114 notice since 2018. The local authorities, named below, were provided with this support in-principle ahead of the Chancellor's Budget on 6 march.
On 10 March, following the Spring Budget, shadow chancellor Rachel Reeves said Labour would not bail out bankrupt councils if they are chosen to form the next government. Asked by Sky News's Trevor Phillips whether she would help local authorities such as Birmingham, Reeves said: "I am under no illusions about the scale of the challenge that I will inherit if I become chancellor later this year and I need to be honest with people."
Councils find themselves in a state of flux. New Statesman Spotlight will be regularly updating this page to keep track of the financial status of councils across England.
Exclusive polling by New Statesman Spotlight revealed that around one in four of councillors believed it was likely their council would go bankrupt in the next five years. Just over 5 per cent thought that their council issuing a section 114 notice was “very likely”.
We sent online surveys out to councillors from every English local authority and received 528 responses from all political parties and independents. The full results of the local government poll will be published in a series of online articles in the week following the magazine issue of 24 November, which will contain a special supplement on the results and Labour’s path to power.
Nottingham City Council - November 2023
After issuing a warning in October 2023, Nottingham City Council issued a Section 114 notice on 29 November. The council’s Chief Finance Officer – or Section 151 Officer – issued the notice and said the authority will be unable to deliver a balanced budget for the 2023-24 financial year. The council has been under government observation after the collapse of its council-owned company, Robin Hood Energy in September 2020. A report prepared for a meeting of the council’s executive board on 21 November indicated the authority is facing a £23m overspend. The significant gap in Nottingham Council’s budget has been caused by issues such as an increased demand for children’s and adult’s social care, rising homelessness pressures, and the ongoing impact of inflation.
Birmingham City Council – August 2023
Due to a backlog of equal pay claims, and a failed changeover of its IT systems, Birmingham City Council – Europe’s largest local authority – issued a Section 114 in August. The council faced an £87m budget shortfall and said the cost of its equal pay claims bill was up to £760m. In the past decade it has paid out £1.1bn in such claims. A paper prepared for the council’s cabinet in June said the cost of properly implementing its new IT systems could be in the region of £100m. Downing Street has since commissioned an independent governance review of the council. This year Ian Ward was ousted as leader of the council by the national Labour Party after a damning review found issues of factionalism and dysfunction within the council’s leadership.
Woking Borough Council – June 2023
Following a failed investment strategy, propelled by borrowing hundreds of millions of pounds for local regeneration projects, Woking Borough Council issued a section 114 notice in June. The council – which invested in building a new shopping centre, residential skyscrapers and the cutlery for a 23-storey Hilton hotel in the town centre – has debts which are forecast to reach £2.6bn. The Liberal Democrat council leader Ann-Marie Barker, who assumed the role in 2022, conceded that the local authority “had got used to living beyond its means” and needed a “reset” on how it conducted itself. Three weeks prior to the council officially issuing a section 114 notice, government-appointed commissioners were brought in to address the “exceptional level of financial and commercial risk” the authority faced.
Thurrock Council – December 2022
Thurrock Council issued a section 114 notice in December 2022. The council said it faced a £469m funding gap and barred any non-essential spending. Thurrock’s situation emerged after it provided £655m to companies via bonds, including the purchase of 53 solar farms. This investment was paused in September 2020, and in September 2022 Greg Clark, the levelling up secretary at the time, announced he was appointing Essex County Council as commissioner to oversee the running of Thurrock.
Croydon Council – November 2022
Last November Croydon Council issued a section 114 notice for the third time in two years. It had debts that totalled £1.3bn. At the time of being declared effectively bankrupt, the council was paying £47m a year – a sixth of its annual budget – to pay off existing debts, and would have had to make £130m worth of cuts to meet its legal duty to balance the books. Following the 2022 local elections, no party has overall control of the council. Labour ran the council previously, and has been in a long-running argument with the Conservatives over which party is responsible for the authority’s dismal finances. The council first went bust in 2020, which was largely attributed to a series of failed property investments and overspending on social care.
Slough Borough Council – July 2021
Slough issued a section 114 notice in July 2021 after Robert Jenrick, the housing, communities and local government secretary at the time, commissioned an external assurance review of the council. A series of financial issues led to Slough’s bankruptcy, including the quadrupling of council borrowing from £180m to £760m since 2016-17. Commissioners remain at the council. Their most recent report, which came out in September, said that Slough would require continuous financial support until at least 2028.
Other local authorities are under strain
Although only five councils have officially issued a section 114 notice, there have been several warnings throughout 2023 from other local authorities that have found themselves under financial strain.
A host of local authorities have identified themselves as struggling. One in ten of councils that are part of the Special Interest Group of Municipal Authorities (Sigoma), which represents 47 urban local authorities (including major cities such as Manchester, Liverpool, Sheffield and Leeds), reported considering making a section 114 notice this year; 20 per cent conceded that it may be possible within the next year. Similarly, one in ten members of the County Councils Network (which has 37 member authorities) have also reported facing effective bankruptcy.
There is a chasm facing local authorities: councils in England are dealing with a “funding gap” – the amount they will need to keep services running as they currently are, versus the money they are set to receive – of almost £3bn over the next two years, according to the Local Government Association. “The government needs to come up with a long-term plan to sufficiently fund local services,” said Pete Marland, a councillor and chair of the association’s resources board.
“This must include,” Marland added, “greater funding certainty for councils through multi-year settlements and more clarity on financial reform so they can plan effectively, balance competing pressures across different service areas and maximise the impact of their spending.”
Our tracker also includes research from the credit ratings agency Moody’s which revealed the 20 most indebted councils relative to their size. Among them were several councils that have already issued Section 114 notices, including Woking and Thurrock. The local authority with the highest level of debt relative to its size is Spelthorne Council (which falls within the constituency of Kwasi Kwarteng, the former chancellor) with £1.1bn worth of debt, 87 times larger than its income. Woking follows with debt 62 times its income ratio, followed by Eastleigh at 41 times its income.
This article was originally published in 2023. It is regularly updated and republished with the latest information.
[See also: Councils are the victims not the cause of their poor finances]
Listen to the New Statesman podcast
Content from our partners
Related
