Brum deal: how many more councils face financial peril?

News that Birmingham City Council has run out of money – or “gone bust”, as the headlines have it – has focused attention on the plight of many local authorities facing unprecedented financial pressures.

Coventry, West Oxfordshire, Bradford, Middlesbrough, Kirklees, Guildford and Southampton have all made ominous noises about their immediate future, and the Special Interest Group of Municipal Authorities (Sigoma) suggests 26 councils could follow Birmingham over the next year.

Meanwhile, Transport for London, under the control of the city’s mayor, recently had to be rescued by the Department for Transport (additional funding for which was conditional on the expansion of Ulez). Politically, such events add to the general feeling of malaise about crumbling public services, symbolised by the school buildings scandal, and the sentiment that nothing seems to work any more. Blame is a ping-pong game between the councils involved – mostly, but not exclusively, Labour – and the Conservative government. One thing we may be sure of is more crises in our council chambers.

What happened in Birmingham?

The city’s chief financial officer made a “Section 114” declaration under the Local Government Finance Act 1988. It acts as a kind of life support, restricting council spending to the bare minimum of essential services in order to conserve scarce funds

Thus, the citizens of Britain’s second city can have some confidence that vital “statutory” functions will continue and staff will be paid – but areas such as leisure centres, parks and libraries might be in more jeopardy. Statutory services are limited to such items as payroll and pension, refuse collection, housing, safeguarding of vulnerable citizens, and any expenditure required to meet existing contracts or mitigate additional costs.

Councillors have 21 days from the issue of a Section 114 notice to discuss the implications at a full council. In reality, Whitehall is likely to step in with some sort of funding package and appoint local government commissioners to put things on a more sustainable footing. Last year, Nottingham City Council had to be sorted out after officials identified “an accounting error” that led to £15.9m being diverted from its housing revenue account to general funds.

Why has it happened in Birmingham?

The Labour-run city council (the West Midlands Combined Authority has a Conservative mayor) is not alone but its sheer size makes it a high-profile casualty. Particular factors that seem to have especially hit Birmingham include a £2bn bill for back pay following a ruling on historic equal pay claims, and the resources devoted to last year’s successful Commonwealth Games (it is notable that Australian and Canadian contenders have recently turned down the chance to host the event). Critics say it’s also a symbol of Labour ineptitude; others point to the cuts to support for local government since the Cameron-Osborne austerity era – Whitehall grants were cut by 40 per cent in real terms between 2010 and 2020 (excluding Covid-related payments).

How can a local authority “go bust”?

It can’t, in the sense of laying off all workers or locking up the premises as would happen with a business. (That does happen in the United States when public agencies run out of approved funds, including at federal level, but councils in the United Kingdom don’t close down.) In practice, central government stands behind councils – but rescue may also involve reform and restructuring, as has happened in districts of Northamptonshire in recent years.

Nonetheless, the “Section 114” status is hardly good news, and the problem is going to be more widespread. Local councils of all sizes face rising wage bills and other cost inflation, with limited options left to save money or raise revenue. The most common cause of financial pressures lately, councils say, is increased demand for children’s social care services after the government said these should be given equal priority with adult social care and funded accordingly. As with other public services, Whitehall is prone to ask councils to do more with less money.

It is also true that councils of all hues can blunder into costly schemes that lead to financial collapse. Typical examples include the purchase of ageing shopping centres with a view to redevelopment that doesn’t pay off, or lending money to other authorities.

Has this only happened to Labour-run councils?

No. Conservative-led Croydon council in south London has declared Section 114 status three times in two years. Thurrock, Slough, Woking, and Northumbria County Council have also run aground in recent times. In the 1980s, Liverpool City Council, controlled by councillors in the Militant wing of Labour, defied the Thatcher government by sacking its own workers and deliberately driving itself into the ground. Even that was nothing new: Poplar council, run by proper socialists in the 1920s, also went bust to challenge a previous Tory government; for their efforts to provide “poor relief” without ramping up taxes, 30 councillors were sent to jail. Their successors in Brum won’t suffer that fate, but the spirit of “Poplarism” persists among municipal leftists to this day. For balance, it’s worth adding that plenty of Tory councillors have destroyed their local administrations, albeit only proving their own stupidity rather than purity of principle.

What is the price of failure?

Prison is no longer an option for messing things up. If a council is lucky enough to find sympathetic friends in Westminster, it can find relatively generous financial relief. In 2017, when Surrey went “bust”, chancellor Philip Hammond – conveniently, also a local MP – permitted a rules-busting 15 per cent hike in council tax. Tony Blair’s government dished out £25m to Hackney Borough Council. More usually, the result is long-term austerity, privatisation, and more cuts.

Why can’t councils manage their money properly?

It’s incredibly hard. In reality, very few local authorities generate enough in council tax and business rates to provide the services required by law, let alone the wishlists demanded by their electorate; they are thus always “in the red’ and depend on support grants from HM Treasury. On average, in normal times,  local authorities in England received 22 per cent of their funding from government grants, 52 per cent from council tax, and 27 per cent from retained business rates – but this varies and central support can be much higher in poorer areas with high levels of deprivation. With strict limits on how much council tax can be increased, the squeeze on local government in inflationary times is apparent.

What happens next?

More “bankruptcies” in local authorities and similar financial pressures affecting other self-governing bodies such as NHS trusts and universities. The concrete crisis doesn’t help, either. In the end, the buck always stops with the Treasury and the taxpayer.