Andy Pike, from the Centre for Urban and Regional Development Studies at Newcastle University, assesses the causes of a broken local authority finance system and presents a framework for possible solutions.
The crisis in local council finance in England intensified in summer 2023. High-profile cases hit the headlines as local councils – from Woking to Birmingham, Kent to Kirklees – have continued the struggle to balance their budgets.
As the UK government reduced expenditure and introduced local financial self-sufficiency in pursuing austerity after the 2008 crash, local councils were forced to find savings and new income sources to close funding gaps.
Pressured into formulating new and untried financial strategies and arrangements, ‘councillors at the casino’ were characterised as running risks with local taxpayers’ money and taking a local public service gamble with local service provision.
Stepping back from the high profile and dramatic cases, my new book – Financialization and Local Statecraft – examines the wider and more diverse landscape of 300-plus local councils in England since 2010.
Understanding this bigger picture is vital to make sense of the relations between the structural workings of the national local government funding system and locally particular issues and decision-making in explaining the local councils’ ongoing financial crisis.
Local councils have had to pursue more active and integrated financial and risk management strategies since 2010 amidst austerity, centralisation, and heightened risk.
Rather than a wholesale shift to ‘councillors at the casino’ taking chances with local service provision, a differentiated landscape exists of overall limited engagements with financial innovations and risk taking since 2010.
Only a few local councils have been pursuing vanguard approaches involving innovative strategies and arrangements such as large-scale debt-based commercial property portfolios. A further group of councils are active but less engaged in such novel practices, while for most councils in the long tail such riskier activities are limited or non-existent.
These different approaches to balancing budgets across England are explained by the types and sizes of local councils, variable capacities and capabilities, risk appetites, openness to commercial finance, and economic and financial conditions.
While local councils have continued to deal with unprecedented financial situations, by early autumn 2023 their coping strategies are running out of road.
As risks have multiplied from 2010, they have been displaced and relocated onto local councils, reducing margins for error, and increasing the possibility of failure.
Intensifying and expanding fiscal stresses and risks are manifest in the outburst of impending and actual s114 notices across England, often with national and local factors compounding each council’s financial plight.
Financial meltdowns at vanguard councils have attracted the most attention, especially those engaging in commercial activities with high levels of UK sovereign-backed borrowing relative to their balance sheets.
Fiscal stress is now even reaching councils historically considered well-run and cautious, including those following long tail approaches that had not participated in riskier financial schemes, through a sheer lack of funding to meet their statutory service provision responsibilities.
While it has been a worry since the mid-2010s of the austerity decade, the current moment is critical for local council sustainability, resilience, and local public service provision as the cumulative impacts of prolonged fiscal pressure bite ever deeper.
To close continued budget gaps into the next financial year and cope with inflation, increased interest rates, and rising local service demands, strategies include improving efficiencies, strengthening cost controls, prioritising essential services, further rounds of asset disposal, reducing and/or refinancing capital programmes, reserve depletion, spending moratoria, and vacancy controls and voluntary redundancies.
Significant uncertainty and volatility exist for local councils as it is unclear whether such measures will be enough to stave off unbalanced budgets and additions to the growing list of s114 notices.
National government continues to explain financially failing local councils largely in terms of bad decisions, poor culture, and weak governance and leadership. While there is consensus that the local council funding system is broken and needs long overdue fixing, the role of systemic dysfunctions in council financial failure is underplayed in favour of accounts that emphasise locally particular difficulties.
Rather than engage in any thoroughgoing but politically difficult reform such as ‘fair’ funding reviews or business rates and council tax revaluation, national government holds the line that it is not prepared to bail-out failing councils as a result of their local mismanagement. This avoids what economists call the moral hazard of creating perverse incentives for others.
Local councils are left trying to follow strengthened national prudential borrowing rules, bolster internal control and risk management especially in copying vanguard approaches, hope the strengthening of local audit and its backlog eventually get resolved by the implementation of the Redmond Review recommendations, and believe that DLUHC’s tightening of the best value framework and warning notices plus the new Office for Local Government will enhance the resilience of the system.
Strengthening oversight and scrutiny, each local council has the potential to go further in improving the disclosure and transparency of financial strategies and arrangements rather than hiding behind exemptions and commercial confidentialities.
Longer term and systemic changes include reinvigorating formalised and structured systems and practices of accountability and scrutiny, enhancing the financial literacy of councillors and officers to support greater oversight, scrutiny, and accountability, and enhancing internal controls and monitoring.
As the local council finance crisis rolls on, the costs of short-term fixes ultimately fall back onto local residents through increased local taxes and reduced services.
Yet this is not a simple story of gung-ho elected local politicians and appointed officers across England staking local taxpayers’ money in the casinos of international finance and imperilling local public service provision.
To avoid continued fiscal stress, financial failure, and the spectre of unfunded mandates to provide essential services, local councils have continually to ask national government what local government is for and how can it be funded? Only then can pressure be maintained for much needed and long overdue change to the currently broken system.
Andy Pike is based in the Centre for Urban and Regional Development Studies (CURDS) at Newcastle University. He can be contacted at andy.pike@ncl.ac.uk
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