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  1. Spotlight on Policy
11 October 2023

Councils are the victims not the cause of their poor finances

National government blames local mismanagement, but the problems in local authorities stem from years of underinvestment.

By Jack Shaw

Significant attention has been paid to Birmingham City Council over the past month. Before the largest authority in the UK declared effective bankruptcy in September, issues of poor governance had been widely reported. In May, the Labour leader of the council was removed, having initially refused to step down following a leaked internal report that described a “dysfunctional climate”. A long-standing equal-pay liability involving 3,000 union members seeking claims against the council for pay discrimination practices has pushed Britain’s second city into the red. It will cost Birmingham’s taxpayers hundreds of millions, their council tax will increase, and local assets will be sold.

Though there are two other important contributory factors, much less attention has been paid to them. They include a significant deficit – £87m in 2023-24 – arising from pressure on local services. And at £100m, rolling out its new IT infrastructure has cost the authority five times more than originally forecast.

In many ways the disparity between the demand for Birmingham’s services and its ability to service that demand is the most salient because, in that sense, Birmingham is an archetype for most other local authorities across England.

By contrast, what are often presented as the two primary factors behind local authorities’ fiscal problems – commercial investments turned sour, plus big bills resulting from equal pay claims – are relatively rare. Only a small number of councils – including Sunderland and Coventry – are at risk of such out-standing, historical legal claims. Likewise, less than two dozen have invested heavily in commercial property, and even fewer are at risk of collapsing in the manner of Thurrock or Woking, whose investments in retail, housing and other businesses have gone south. These trends raise significant questions, but they reflect no more than 10 per cent of England’s 317 authorities.

Yet the emphasis placed on these features has enabled a narrative to emerge in which bankruptcies are cited as localised instances of mismanagement. This narrative has had two implications. First, it has turned attention inward, to identifying the immediate catalyst behind the failure of individual authorities rather than asking why so many authorities are at risk in the first instance, and what can be done to prevent more from collapsing. And second, by doing so it has prevented appropriate scrutiny of the role of the Department for Levelling Up, Housing and Communities (Dluhc).

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[See also: What does it mean when a council declares itself bankrupt?]

From Medway to Kirklees, Stoke-on-Trent to Hastings, the evidence suggests that the majority of authorities are issuing warning signals because of the acute pressure on their services, especially those that protect the most vulnerable, which they are legally obliged to deliver: social care, homelessness and special educational needs.

And this pressure can be traced back to 2010 when the Conservative-Liberal Democrat coalition took the decision to reduce local authority funding. The consequence of this decision has been a prolonged period of underinvestment, with authorities witnessing a 40 per cent real terms reduction in their funding. According to the Institute for Government, that has affected disadvantaged authorities disproportionately.

In other words, national policymaking has created challenges that are systemic and nationwide even if the issues those challenges have created take different forms from one authority to another. It is no coincidence that over the past three years the government has been forced to intervene in authorities at a rate that is without historical precedent.

What is curious, though, is that Dluhc has been slow to act. The same cannot be said of the Department for Education (DfE), which has been proactive.

The DfE has, for example, introduced a “safety valve” initiative that provides tailored support to 45 local authorities to manage the deficits arising from special educational needs and disabilities (Send) provision – which are now estimated to be £2.3bn. The Delivering Better Value scheme is providing similar support.

The department has also introduced temporary relief in the form of a “statutory override”, in which standard accounting rules have been relaxed and Send deficits have been removed from the balance sheets of local authorities. The DfE planned to end this practice in April but extended it for three years because it estimated that more than ten local authorities would have been required to issue section 114 notices – spending restrictions placed on a council when it, in effect, goes bankrupt – if the measure had been disappeared.

The criticism against this approach is that the DfE is encouraging local authorities to artificially reduce the number of children with access to special education needs support regardless of need. Currently, just shy of 1.5 million pupils in England benefit from support, equivalent to 17 per cent of the student population.

And given there were a record number of tribunal appeals against decisions made by local authorities in 2022, with 96 per cent of those that went to a hearing siding with families, there is truth in that criticism.

However, it is clear that the Dluhc isn’t taking action. It is engaging with authorities at risk on a one-to-one, ongoing basis, but it has not introduced measures aimed at supporting the sector as a whole.

And not doing so runs the risk of costing the Treasury more in the long run. Woking and Birmingham have requested financial support – they won’t be the last to do so.

[See also: New polling confirms Labour is now the party of business]

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