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8 February 2018updated 28 Jun 2021 4:39am

What happens when a council runs out of money?

Northamptonshire County Council is facing “severe financial challenges”. What happens next?

By Dulcie Lee

In 1985, as the autumn nights drew in, 31,000 redundancy notices were sent out to council workers in Liverpool. A few months earlier, the local authority, led by Labour’s hard left faction Militant, passed an illegal budget, deliberately proposing to spend more than it had. It was an act of extraordinary defiance against Margaret Thatcher’s imposed spending restrictions. The councillors demanded central government cover the deficit, and months of chaos ensued. Councils since have preferred to inflict cuts rather than find themselves in such financial disasters.

Last week, though, Northamptonshire County Council admitted it was heading for a £21.1m overspend for 2017/18. It issued a so-called section 114 order, imposing immediate spending restrictions. In contrast to the staged political impasse of Liverpool City Council in the 1980s, Northamptonshire’s Tory-led council has been desperately trying to balance its books, despite waves of relentless cuts from its fellow Tories in central government. After years of struggling, it has now admitted defeat.

So what happens when a council runs out of money?

Councils cannot technically go bankrupt and are required by law to have balanced budgets. If they can’t find a way to finance their expenditure, as a last resort a section 114 order can be issued. The order bans all new expenditure, with the exception of safeguarding vulnerable people and statutory services. It is only issued in the gravest of circumstances when the council is deemed “unsustainable” by chief finance officers.

Once the section 114 is in place, councils then have a 21 day breathing period, during which all current services – crucial or otherwise – continue as normal. But behind the scenes, council officials must work together to come up with an alternative (and usually more extreme) balanced budget. The first port of call is, of course, more cuts.

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Depending on the problems the council is facing, this could involve mass redundancies, selling off valuable assets, or renegotiating contracts and reductions in services. But when councils have more than 1,000 statutorily functions to fulfill, there are a huge number of services that seem impossible to cut in any circumstance.

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It’s hoped that by the end of the breathing period, the council will be able to agree on an extreme spending and saving programme, and a balanced budget can be put forward.

If it still can’t make it work, then in come the external auditors, who must try again to find a viable budget. At this point, central government will get more heavily involved. It is unlikely the current government will present the magic money tree the council is hoping for: it will most likely sharpen the axe and keep cutting.

Despite clearly laid out statutory process, the future for Northamptonshire County Council remains unclear. It’s believed the last time a council issued a section 114 order was in Hackney in 2000. The council brought in the Audit Commission to help sort out their woes – but that organisation no longer exists. The huge overhaul of local government has left Northamptonshire County Council unable to work from precedent. There’s only one thing for certain: more cuts.