As Britain’s local councils finalise their budgets ahead of their usual sign-offs in March, the financial crisis that has left many authorities close to bust appears to be deepening.
The latest estimate from councils is that their budget shortfalls will reach £9.3bn by the 2026-27 financial year. Nottingham City Council alone faces a gap of £69 million for the year beginning in April, rising to a combined £172 million over the next three years. In leafy Surrey, a review into Spelthorne Borough Council’s £1bn debt has been extended. It’s the second most indebted borough council in the country, after nearby Woking.
Nationwide, councils are frantically juggling job cuts, closure of amenities and council tax hikes to avoid issuing Section 114 notices – signalling that they will freezing all non-statutory spending and seen as effective bankruptcy – many for the second time. Only 14 of 303 authorities expect to deliver balanced budgets.
While examples of over-ambitious development schemes, failed IT investment and general financial mismanagement have been paraded as reasons for the woes of individual councils, broader economic factors and the constraints of national funding are common have affected all, regardless of their political leadership.
Beyond the catalogue of one-off costly disasters, the income and expenditure profile of councils has changed dramatically in recent years. Central government grant funding for councils dropped by 40 per cent in real terms between the years 2009-10 and 2019-20. Even stripping out emergency Covid grants, overall funding was still more than 10 per cent below pre-Covid levels. Councils have become more reliant on income generated locally, through services and facilities provided. In terms of money out, a major cost has been soaring post-Covid demand for statutory services, notably social care for adults and children, as well the provision of temporary accommodation and homelessness support.
Academic experts in public policy from the universities of Newcastle and Cambridge recognise that fundamentally, the financial challenges facing authorities are the product of this structural issue: unfunded mandates in a highly centralised governance system. They warn that a one-size-fits-all solution will ignore important local factors: demography, geography and location. the funding system is broken and requires bold and radical reform, rather than more incremental and short-term tinkering, to avoid ‘deficit belts’ in certain areas of the country.
More than 10 years ago, the European Charter on Local Self Government identified central principles under which local government finance should be built: autonomy to make decisions locally; the ability to raise income unilaterally, without permission needed from government; respect for local priorities; access to national and international capital markets and proportionate redistributive measures to ‘protect’ less financially resilient local authorities. Few of these elements are recognisable in the present landscape.
It certainly appears that Whitehall may still have little understanding of the scale of the financial crisis facing councils, but it is very clear to those familiar with rescuing organisations: councils are having to do more with less, a trend exacerbated by inflation; high volumes of staff used to relatively good job security and benefits; lack of experience in key areas such as growing resilience, establishing parameters of appropriate risk management and building revenue development pipelines with specialist partners across a variety of sectors.
Differentiating between the local experiences and predicaments of councils is undoubtedly important. However, injecting some restructuring acumen with the expectation of overdue financial surgery is critical. It’s an inescapable fact that councils are connected to the world of commerce more than ever before; probably more than they would like to be. If government won’t help them make a sustainable transition, then hands-on advisers from the private sector are needed to accelerate migration to this new model – it’s here to stay.
Written by Runita Kholia, Senior Analyst at Buchler Phillips, a UK based independent boutique firm with an impeccable Mayfair heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.