Why your local council may be going bust

Can a council actually go bankrupt?

A council can't go bankrupt in the same way that a business can, and be forced to close up shop – because local authorities have certain essential services that they are legally obliged to provide, from social care to roads to bin collections, to aspects of social housing and schooling. But a council can nonetheless find itself in a situation where it does not have the money to cover its budget for the year, which is unlawful under the Local Government Finance Act 1988. In that case, it issues a section 114 notice under that act. Over the 30 years from 1988, this happened only three times. But since 2018, eight English councils have issued section 114 notices – including, last year, Birmingham City Council, Europe's largest local authority.

Which councils are in trouble?

Last year, Woking and Nottingham councils issued 114 notices, as well as Birmingham. In the three years before that, Thurrock, Northumberland, Slough and Croydon have done the same (in Croydon's case, three times). But they are by no means the only ones struggling. Middlesbrough Council has warned that it needs "exceptional financial support". A recent survey by the Local Government Association (LGA) found that one in five councils in England are estimated to be at risk of bankruptcy within the next year; authorities including Coventry, Somerset and Leicester are thought to be under severe strain. Councils needs to balance their budgets by March, which means that some are likely to issue notices in the coming weeks – and to announce many new cuts.

Why is it happening?

Owing to austerity, central government grants, which typically account for around about a quarter of English councils' income, were cut by 40% in real terms between 2009/10 and 2019/20, while council tax rises were limited by law to 2% during most of this period. The Institute for Government estimates that local authorities across the country experienced a fall in real spending power of 31% between 2009/10 and 2021/22. Yet at the same time, demand for council services, particularly social care and social housing, has surged. To take one example, in Basildon, Essex, spending on temporary accommodation skyrocketed from £7,000 in 2017 to £2m in 2022. Birmingham Council published a graphic showing spending going up, and grants going down, – which it referred to as the "jaws of doom". Covid also increased demand for services while cutting income (from parking, for instance); and inflation has made the situation still more difficult. Some councils, though, have struggled more than others.

Why are some faring worse?

The pressures have not been evenly spread. More deprived councils have been harder hit, because the central grant constitutes a larger part of their incomes. But most of the councils that have gone bust have faced specific local issues. Birmingham had a bill of more than £650m for an equal pay claim (female employees successfully argued that their lower rates of pay were discriminatory), and lost £100m on a botched IT project. In a number of cases, councils have tried to improve their financial situation by making investments that proved ill-advised.

What sort of investments?

Nottingham set up an energy company, Robin Hood Energy, designed to help people struggling with their bills and to turn a profit for the council, but ended up losing millions. Thurrock invested £655m in an overvalued solar power company. Woking racked up a massive £1.2bn deficit (the equivalent of £19,000 per person) after making risky investments in tower blocks and hotels in the centre of the Surrey commuter town. As a result, the new government watchdog, the Office for Local Government, has blamed the bankruptcies primarily on "failures in management or failures in governance". The LGA rejects this, and points to the "growing financial crisis". It's notable that the troubled councils are spread across the nation and the political spectrum, affecting Labour, Tory and Liberal Democrat authorities alike.

What happens when a council issues a section 114 notice?

Once it has been issued, a local authority may not commit to any new spending unless its chief financial officer permits it. The council's leadership must meet within 21 days to discuss how to bring spending under control. Since councils have a legal duty to provide services such as social care, it is "discretionary" services, such as sports and leisure centres, arts and youth services that suffer most. Having said that, social care and "essentials" are in reality also stripped back; budgets for social workers and other council staff are tightened. There are many grey areas: councils have to provide library services, but the level of provision is not specified. Affected councils will also try to raise more money.

How can they raise more money?

Primarily, by hiking council tax and business rates. Council tax is legally limited to a 5% annual rise, but Birmingham is asking permission to increase it by 10% for each of the next two years. Councils can also sell off assets; or reallocate budgets from the "capital budget" (which is meant for maintaining existing assets, such as buildings) to the "resource budget" (for funding day-to-day spending). The latter move is also only possible with special permission from the central government. Ministers can also intervene directly in a local authority's management, or launch a bailout – but this is rare. The situation has been improved by a better financial settlement from Westminster for 2023/24, up 9.4%, and a £3.8bn grant for social care. But councils are still under great pressure. "We trimmed the fat a decade ago," says Jonathan Carr-West of the Local Government Information Unit. "And then we trimmed the flesh. And now we are just right down to the bone."

The decline of local democracy

A long-standing criticism of the British political system is that local authorities, and local democracy, have been systematically downgraded. Since the 1970s, particularly in England, powers have been centralised. Although local authorities still deliver crucial aspects of housing, schooling, and health and social care, control of policy and funding have largely been assumed by Westminster. "Across Europe, most locally elected bodies have power, resources and the status to match," says Simon Jenkins in The Guardian. In Britain, local taxation is capped, and services are centrally regulated. But the country is certainly not better run as a result, says Jenkins. "From policing to care homes, from postal services to sewage spills, from youth clubs to potholes, everywhere is failure."

Proponents of centralisation, though, point to local government's many failures, not just in Birmingham and Woking, but on crucial national issues: local authorities, for instance, do not build homes in sufficient numbers. And decentralisation brings its own challenges. Since 2013, councils have been allowed to keep more of the money received from business rates; but this of course benefits richer authorities, which also generally require a lower level of social services.