It is confusing and indeed a mystery to most of us to read about the dire state of local authorities and their economic woes.
We should be crystal clear that fully functional and effective Local Councils are critical to our general economic and community wellbeing. In their own right they are also some of our biggest businesses with strong staff numbers. They throw off high levels of disposal income and generate lots of benefits to other local businesses who are part of their supply chain. Many of their outputs are critical in providing the glue to assist our daily lives.
Politics apart we should highly value the services they provide.
Latest research and high-profile press reporting highlight that there is a major crisis playing out in many “Town Halls”. Some of the worst cases include significant Councils such as Birmingham, Woking, Croydon, Nottingham, Slough, and Stoke-on-Trent. Even Runnymede and South Cambridgeshire are on the list of casualties.
The results of financial distress are dramatic cuts “in local services”. This can also trigger the wholesale disposal of many “Crown Jewels” assets which have been acquired often after years of dedicated work by local community groups.
These headlines mask a much bigger problem which is that at least 20% of all our Authorities are facing severe financial difficulties and are effectively trading insolvently. Behind this there are at least another 10% teetering on the brink.
What happens when a Local Authority goes bust?
Well, it is an ugly situation of all involved particularly local communities being faced with hardnosed and dispassionate government appointed commissioners being parachuted in with sweeping powers. These powers focus on achieving financial stability invariably at the cost to the most vulnerable in our societies.
So, what is going wrong?
Is this simple bad business management of the result of wacky or radical local politicians pursuing idealistic dreams which lack real logic? Sadly, the answer is yes, but only in a small number of cases. Take the tiny Spelthorne Borough Council in Surrey which has built up up some of the biggest debts per person in the UK (£10,415 per person) by purchasing a wide range of properties and other investments seemingly under the sole direction of two officials. Warrington Borought Council has also run up a £1.8 bn shortfall allegedly by deal with advisors with doubtful financial reputations. Woking Council tops the list with an average debt per resident of £19,000.
The totally debt across all Local Authorities is estimated at around £100 bn.
So where do Local Authorities get their money?
There are three main sources which are central government grants, business rates and a tax on residential properties – Council Tax. This is supplemented by revenue from a wide range of services such as car parks.
What do they spend it on?
Well, a wide range of services – this is a huge and expanding list including elementary and secondary education, utilities, public safety, health, roads, waste services, street cleaning, leisure services, parks, and green spaces and increasingly adult, children and vulnerable person social care. It is this care function which absorbs huge amounts of resources (people and finance) and is growing seemingly out of control to levels, in certain cases, of over 60% of total revenues.
On paper it would appear that the financial numbers should add up and are more than adequate to make sure Local Authorities are viable. The latest Local Government Financial settlement for 2024-25 makes available £64.7bn for all our Local Authorities – an increase of 7.5% in cash terms above the last settlement. This package includes £600m in extra support to bolster local budgets and help fund the spiralling budgets for the provision of local social care. Government has also extended by 4% access to funding guarantees for capital projects. It is recognised that Local Authorities are not all on a level playing field so there are additional allowances of upto 18% more (per dwelling) for the most relatively deprived areas than the least deprived areas.
In reality, if we dig deeper, we discover that what our councils receive today is probably more closely related to its needs 20 years ago than the problems faced today. There are some huge inconsistencies as to how the money is allocated through a formula which is described by experts as “utterly baffling, complex and illogical and deliberately opaque”. The allocation system has not been updated in years. The real damage was done in 2010 when there were swinging cuts in grants which took no account of different needs and hence fell heavily upon the poorer authorities.
Both North Devon District Council and Torridge District Council have done a stirling job in trying to make up for the shortfall in Government funding to protect and enhance local services. The purchase of Green Lane Shopping Centre is a good example of this. The intention here was to generate a revenue stream and to be able to manage the asset to achieve the maximum benefit for the local economy and community.
It would be easy to argue, with the benefit of hindsight, that this asset was bought at the height of the market and with money which was borrowed when interest rates were at historically low levels. This, as we now know, has all changed. Money is now a lot more expensive and commercial shopping centres have lost their appeal and therefore have dropped in value and resulted in lower rental incomes.
Notwithstanding this, the council have got a very good grip on both this and other assets they have acquired.
The game of bashing Local Authorities is a net zero game. We should recognise the fact that Local Authorities are currently going through a difficult time. We should make every effort to assist them to ensure that they are restored to full financial health.
