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20 October 2023

A late election is not a risk-free strategy

The longer Rishi Sunak waits to call an election, the more the public realm will crumble under his watch.

By Will Dunn

Labour has overturned huge majorities in two Tory strongholds: voters in Mid Bedfordshire have decided they want an MP for whom the seat isn’t merely a platform for a TV career, and the people of Tamworth have turned down the opportunity to be represented by someone who makes crass jokes about hungry children

Calls for a general election sooner than the last possible moment (January 2025) will now increase, and are likely to be ignored, because the Conservatives will want as much time as possible to deliver on targets such as reducing inflation (see here for a full explanation). We’re going to hear a lot about Rishi Sunak’s “zombie government”. 

The downside for the Conservatives of waiting longer is that more of the public realm is going to crumble under their watch. Headline inflation will come down for Sunak and Jeremy Hunt in the year to come, but for local government it is yet to peak, according to the Local Government Association (LGA), which released new figures this morning showing that the rising cost of providing council services will lead to a record £2.4bn funding gap for local government this financial year, and £4bn over the next two years. 

More councils will go into “effective bankruptcy” by issuing Section 114 notices – of which there are different types, but the most common involves halting all spending except on wages and statutory services – before the next election. 

Council services are mostly bought using service contracts, which are typically uprated against the previous year’s inflation (as is, for example, your mobile phone contract). The LGA says this means peak inflation is arriving for councils now, in the form of service contracts that will cost £15bn per year more by 2024/25 than they did in 2021/22. This difference alone is enough to swallow a quarter of the funding (£60bn) that councils currently receive from central government. 

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At the same time, councils have run up huge debts – total borrowing is up 50 per cent over the last decade, to £133.5bn – and debt across the global economy is becoming more expensive. Meanwhile, much of their long-term, low-interest debt – such as the £95.4bn owed to the Public Works Loan Board – has been invested in assets such as commercial property, and the dwindling returns from these investments make that debt harder to service. 

Austerity is the root cause: in the decade from 2010, the government-funded spending power of local authorities fell by 52 per cent, according to the National Audit Office, leading to a 26 per cent decline in spending power overall. Worse still, cuts elsewhere demanded more spending on social care, so councils were forced to slash spending on services such as non-school education and housing. The £200m “potholes fund” given to the Department for Transport in the 2023 Budget is dwarfed by the £1,847m councils had to cut from transport in the first decade of austerity. 

Northamptonshire County Council (Con) became “the ground zero of government breakdown” when it declared insolvency after attempting to outsource its way out of the conundrum, but Thurrock (Con) is the most notorious example of a council trying, unsuccessfully, to make money rather than saving it. Much like Silicon Valley Bank, Thurrock’s treasury management strategy was to borrow short (from other councils) and lend long (to high-risk businesses); as with Silicon Valley Bank, it did not go well. Many other councils have tried, with mixed results, to get other people to make money on their behalf; last week Warrington (Lab) began unwinding its position in a hedge fund that invests in junk bonds, a considerable risk that has not paid off

The latest data on local government borrowing and investing gives some sense of how much gambling is going on: councils have invested £7.4bn in externally managed funds, £2.7bn in public companies, and £5.9bn in “other investments”, while lending between councils now adds up to £8.8bn. 

Parties should not underestimate how influential this could be when it moves from a point on an Office for Budget Responsibility report to a question of bin collections and potholes – or how long it will take for the next government to clean up.  

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