What’s behind the crisis in council services – and can Labour fix it?

England’s councils are in financial crisis and many will collapse in the coming years, according to the Local Government Information Unit. It warns that, unless the funding system is reformed, more than half the councils who responded to its survey will be unable to balance their books over the next five years.

Two-thirds of councils say they are cutting services, and many are pushing council tax and charges higher. All of which is on top of the deep cuts suffered during the “age of austerity” after 2010.

The problem has been highlighted by the plight of Birmingham City Council, which last year had to issue a Section 114 (s114) notice, in which a local authority’s finance director is required by law to give notice the council can no longer afford to keep operating. It refers to the relevant part of the 1988 Local Government Finance Act. The widening crisis will not be easy to contain.

Local authorities get around 40 per cent of their income from central government, and the amount is about 10 per cent lower than in 2010 in real terms (though it has been recovering from a nadir in around 2018). Right now, despite an emergency £600m uplift, support is still planned to be lower than forecast in 2021 and 2022, and the squeeze is on.

In some areas, unique factors have driven councils into unsustainable debt. Birmingham’s troubles were worsened by an expensive legal case on historic equal pay claims, and a bungled IT project, neither of which can be blamed on Whitehall. Others have been caught out by acquiring commercial property in struggling town centres with a view to regeneration which never came as the economy weakened.

Business rates, a significant source of cash, are set by central government. Councils keep half of the income from business rates; the other half is paid to central government to fund individual grants back to local authorities.

About half of council leaders think they will go bust in the next few years; the LGIU survey found that 14 are likely to issue an s114 notice in the next financial year alone; but many more will be imposing draconian cuts to avoid this. Since 2000, such collapses have befallen Hackney, Northamptonshire, Croydon, Slough, Lambeth, Thurrock, Nottingham and Woking; but it seems the rate of collapse will quicken, and many more casualties will follow.

The secretary state for local government may appoint commissioners to run the council for a time; in any case, residents can expect asset sales, a sharp rise in council tax, and deep cuts in budgets. Only services that councils are obliged by law to provide, such as social care, are protected. Budgets for arts and culture are often decimated, and jobs are lost.

Principal areas for precautionary cuts identified in the LGIU survey are, in order: parks and leisure; arts and culture; business support. Also at risk, to a lesser degree, are SEND services (special educational needs and disabilities); children’s care; and adult social care.

Sometimes this may be unavoidable, but it is resisted because of “moral hazard”, the idea that it would be encouraging reckless, wasteful or corrupt behaviour.

Ministers have often found it politically advantageous to slash grants to local authorities because the blame for subsequent cuts in services is laid at the door of councillors and officials rather than Whitehall. However, the government is currently so unpopular it is getting the blame even for things that aren’t actually its fault at all. Voters are blaming the government for potholes in the road, inadequate special educational needs provision, and having to sell their homes to pay for increasingly costly social care.

In the areas worst affected by public service cuts, the May local elections will no doubt see councillors punished, although it is not easy to see any one party winning an advantage from the crisis. In terms of national politics, the overall state of the economy remains the defining issue.

This has never been adequately settled because very few councils are able completely to fund their services through council tax, charges or rents. Central government has always had to subsidise their activities and preserve some minimum levels of provision. This creates a gearing effect in which even a modest percentage reduction in central government support can only be recouped by a really steep rise in locally set council tax. With such rises capped (currently at 4.99 per cent) the result has been some harsh reductions in spending.

On top of that is the way council tax is levied, resulting in strange anomalies in bills between areas and even between categories of property owners. The old domestic rates and the short-lived “community charge” (aka the poll tax) also suffered from unfairnesses because local property taxes don’t bear much relation to ability to pay, as income tax does; reform or revaluation is a virtual impossibility because it creates far too many losers and ends with fresh anomalies.

Not much, probably. If Rachel Reeves becomes chancellor, and simply accepts the fiscal plans set down by Jeremy Hunt, she will have very little room for manoeuvre anywhere in public spending and will also have to face the same demographic challenges as the Tories have ducked, such as funding local government social care for the elderly and vulnerable. The bankruptcies will continue.