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Local authorities need an emergency rescue package

Starving councils of much-needed finance will prove to be a false economy.

By Jack Shaw

Public services are in crisis. The NHS is on its knees. The water industry – which is now largely privatised – has failed to invest in infrastructure and as a result sewage pollution is damaging the environment at an unprecedented rate. Thousands of pupils have been taken out of outdated and unsafe school buildings and are being educated remotely or in temporary classrooms. The urgent task of improving our energy security is being undermined by the prolonged delay to connect solar, wind and hydrogen projects to the National Grid network: a solar farm in Coventry is unable to connect until 2028. The backlog of court cases is growing, with the backlog in sexual offences the highest on record. Stagnating productivity and high inflation has suppressed real wages – and it is not surprising that many public sector workers have resorted to strike action.

As the parlous state of the public realm becomes increasingly clear, another, lesser-seen crisis that has been long in the making is unfolding: a crisis of local government finances. Local authorities are responsible for protecting our green spaces, investing in high streets and culture, safeguarding our schools, protecting the most vulnerable, building homes and maintaining road networks.

Yet local authorities are, according to the Office for Budget Responsibility last week, increasingly “de facto insolvent”. In the last three years, Slough, Croydon, Thurrock and Woking have declared bankruptcy. The government is intervening in at risk local authorities at growing frequency and that trend shows no sign of abating. In the last fortnight, Southampton, Kent and Guildford have all issued warnings that they’re near bankruptcy. The Local Government Association’s review of Hastings suggested it was in a similar position. Birmingham – England’s largest local authority, with over a million residents – has stopped all “non-essential spending”. Meanwhile, Cheshire is exploring how it can reduce its energy consumption, concluding that the most cost-effective approach is to turn off its streetlights.

There is a perception in Whitehall that local authorities are failing as a result of their own action – or inaction. And there is some truth in this: in Woking and Thurrock poor governance was a major cause for their failure, even if the decisions those authorities made can, in part, be traced back to the government’s failure to adequately fund them.

[See also: The death of local government]

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Yet that is only half of the picture. The lack of investment in local authorities has been exacerbated by high inflation and rising demand for services. Rising interest rates have made it more and more difficult for local authorities to service their debts. As people’s living standards are squeezed, particularly at the lower end of the income scale, a rising demand for council services has placed more pressure on local authorities year on year. Perversely, to manage that demand local authorities have had to make short-term decisions that aren’t in their long-term interests, such as making staff redundant or selling assets. As a result, even well-run local authorities find themselves on the brink. Interpreting every council failure as a case of mismanagement is at best reductive and at worst misleading.

None of this bodes well for the UK’s economic recovery or its future resilience. Communities now have access to fewer and poorer quality services, which will only get worse. Local authorities are anchor institutions – often the biggest employers and biggest investors in their area. The reasons for the economic underperformance of our towns and cities are manifold, but the inability of local authorities to service the needs of communities undermines the social fabric that is essential local economies – which in turn has a significant impact on national economic growth.

Addressing this deficit is simple: the government should invest in local authorities. There is a strong case for an emergency cash injection in the short-term, coupled alongside medium- and longer-term reform. Local authorities should be held to account on their spending via the new Office for Local Government, and the extended audit backlog should be addressed. Only 12 per cent of local authorities in England had their accounts for 2021-22 signed off on time, hindering accountability over £100bn of expenditure.

The sum required to rescue local authorities, however, is not one that the Department for Levelling Up, Housing and Communities can authorise; that is a decision for the Treasury. That could come in the form of a top-up of the Local Government Finance Settlement, which is £60bn for 2023-24. A 5 per cent increase would require the Treasury to identify an additional £3bn.

This would need to be fully funded – and that may require tax rises, an increase in short-term borrowing, or making painful decisions about spending across services elsewhere. But the consequences of the failure to invest in local authorities are plain to see, as everyday public service provision continues to deteriorate. Aside from the social consequences of inaction, which in themselves produce long-term financial stresses, delaying a fiscal injection could also prove to be a false economy in the short and medium term. If further council bankruptcies were to follow over the next financial year, a domino effect could be set in motion. That could affect the government’s ability to borrow and push up the interest rates charged to the Exchequer, putting the government’s entire fiscal position at risk. The time to act is now.

[See also: How might Keir Starmer run the country? Look to Labour councils]

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