Why are so many local councils on the brink of bankruptcy?

Inflation, underfunding and growing demand for services has put pressure on local authorities at the worst time

Woking Council
Four councils have collapsed financially in recent years including most recently Woking
(Image credit: Leon Neal/Getty Images)

As many as 30 councils are at risk of bankruptcy and the UK’s local government funding system is “completely broken”, according to a new survey of the sector.

Four councils – Slough, Croydon, Thurrock and most recently Woking – have declared themselves bankrupt in recent years, but according to a survey of 47 local authorities in the North, the Midlands and on the south coast, more may follow.

The study found that roughly a third of the authorities are experiencing severe strain on their finances, with five currently deciding whether to issue a section 114 notice of their inability to balance their annual budget in 2023-24.

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A further nine councils that are members of the Special Interest Group of Municipal Authorities (Sigoma) said they may have to declare bankruptcy next year.

What did the papers say?

The threat of financial collapse is largely being driven by the shrinking of cash reserves that are usually held to address shortfalls in budgets, The Guardian said.

Growing demand for children’s social care services are also causing significant issues, the paper added. In addition, “sky-high inflation costs and related wage rises” are increasing the broad financial pressures local councils are facing.

Overall, the primary cause is “the chronic local government underfunding that took place over the past decade”, said City A.M.

“An overly centralised public-finance system leaves local authorities few other ways to raise money, even as spiralling demand, especially in social care, puts increasing strain on local services,” added The Economist.

It isn’t a new story, either. “Since 2010 councils have come under heavy financial pressure as money has been taken out of their budgets and they have had to make drastic cuts,” said The New Statesman.

Local governments in the UK don’t “go bankrupt” in the way that a person or a company might, the magazine explained, but the impact is similar.

Councils receive money from tax, from services like parking and funding from central government. All the money they bring in then pays for the legally mandated services they provide, such as social services, and “discretionary” services like fitness facilities and public halls.

However, since the 1980s councils in the UK have had to balance their books. If they fail to do so, they are issued a section 114 notice, which effectively halts all spending. Following this, the council needs to respond with cuts.

Politics also “plays a role”, said The New Statesman. “A central government governed by one party is usually less sympathetic to what they might consider profligate spending or financial mismanagement by a local government controlled by an opponent. Similarly, it would reflect poorly on the party of government if one of its flagship councils were to fail.”

“It won’t do for the Government to simply brush off the issue as the responsibility of local authorities,” agreed The Yorkshire Post in a leader article. “Ultimately, ratepayers in the most deprived areas are going to end up with poorer services.”

What next?

The most important thing is for Westminster to help local councils deal with the problem of inflation and the added demand for services, said Stephen Houghton, Labour leader of Barnsley Council and Sigoma chair.

“The government needs to recognise the significant inflationary pressures that local authorities have had to deal with in the last 12 months. At the same time as inflationary pressure, councils are facing increasing demand for services, particularly in the care sector.”

At present, the local council funding system is “completely broken”, Houghton added. “Councils have worked miracles for the past 13 years, but there is nothing left.”

A change appears unlikely, said City A.M. A recent survey by the Local Government Association warned that 90% of councils are drawing on ever-depleting finances to continue operating.

“Against this backdrop, the list of bankruptcies might be getting just a little longer fairly soon,” the paper concluded.

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Arion McNicoll is a freelance writer at The Week Digital and was previously the UK website’s editor. He has also held senior editorial roles at CNN, The Times and The Sunday Times. Along with his writing work, he co-hosts “Today in History with The Retrospectors”, Rethink Audio’s flagship daily podcast, and is a regular panellist (and occasional stand-in host) on “The Week Unwrapped”. He is also a judge for The Publisher Podcast Awards.