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Five solutions to the council finance crisis

Other than a cash injection, how can local leaders save authorities from a wave of bankruptcies?

By Spotlight

Bankruptcy in local government is a nationwide crisis. Last year, exclusive polling of English councillors by New Statesman Spotlight found that a quarter of councillors believe their authority will soon go bankrupt. In fact, since 2021 six English local authorities have declared themselves effectively bankrupt, as the combination of rising costs and slashed budgets has taken its toll. Last month, the government confirmed an additional £600m in the financial package for English councils to address budget shortfalls. But a top-up is no long-term solution. Whichever party is next in power will need to deal with this problem. Spotlight asked the experts: how do you solve the crisis?

Jessica Studdert, deputy chief executive, the New Local

The local government finance crisis isn’t simply a challenge for the sector. It reflects a failure of our state to meet society’s needs. Austerity’s logic recognises only short-term cost savings within services and overlooks longer-term value. Reducing council budgets has been a false economy: as community-based early intervention support for families and people with care needs has reduced, pressures have simply shifted to crisis response services such as hospitals and the police.

We need a different approach to allocating resource across our system. The Treasury model of driving cost reductions within departmental silos is leading to less efficiency and poorer outcomes.

Local government should have greater power to convene public service partners in a place to jointly plan provision in order to meet local, identified needs – including across health, criminal justice, education, employment and skills. Partners should be able to pool budgets to invest upfront in holistic support that shifts the balance from reaction to prevention.

In the long run, local governments should receive a share of income tax and VAT raised in their area, alongside equalisation between wealthier and poorer areas. This would diversify resource bases and localities that are less dependent on the whims of national administrations.

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Andrew Carter, chief executive, Centre for Cities

Councils need more funding after a decade of cuts but simply granting them more cash is the wrong solution to the current financial crisis – in fact, it’s part of how we got into this mess. Over time, local councils have been deprived of the autonomy, capacity and long-term financial security needed to make prudent economic policies and grow their local economies. There are few places around the world where funding decisions are as centralised as they are in the UK today.

The biggest city-regions – London, Greater Manchester and the West Midlands principally – could do with extra powers and incentives to grow, and this is where fiscal devolution plays a key role. By allowing the combined authorities to collect a proportion of income taxes locally and to retain local business rates in full, and by reducing central government grant in return, we can tie the tax revenues of those places to the growth of the local economies. This not only provides added incentives to grow but also gives mayors more fiscal decision-making powers in the long run. This would open England up for overdue reforms in other areas, such as council tax.

Sarah Longlands, chief executive, Centre for Local Economic Strategies

Council finance – regardless of whether it’s employing cleaners, commissioning social care, or making school meals – directly supports the local economy. Even in the middle of a crisis, it matters how that money is spent.

Similarly, as custodians of public assets and spaces such as parks, libraries and play parks, if decisions are made to dispose of assets because of financial pressure, it needs to be done responsibly. It needs to be done in a way that recognises the public value of these assets to the community, not sold off to venture capitalists whose interest is purely financial.

Wealth building in a crisis can also mean bringing services and asset management back in-house from private providers so that costs can be more effectively controlled, and employees receive decent terms and conditions.

The emergence of anchor partnerships in areas like Wigan, Leeds and Birmingham shows what can still be achieved when cash-strapped partners work together. None of this is a substitute for long-term sustained funding but it shows that even a crisis as big as this one is compatible with local wealth-building.

Kate Ogden, senior research economist, Institute for Fiscal Studies

Councils have seen their overall funding increase by £9.5bn – or 19 per cent in cash terms – in just two years. That so many still seem to be struggling suggests that for some, costs and demands for their services have been increasing even more quickly.

Given the difficult fiscal situation, and the many competing demands on the public purse, councils are unlikely to see big increases in grant funding in the next few years, whatever the stripe of the next government. Further rises in council tax bills, like those allowed this coming April, will be part of the answer. But council tax rises are regressive, falling hardest on those on low and middle incomes. And relying solely on council tax risks leaving more deprived areas behind, as these can raise less from their residents.

We need a clearer understanding of the range and level of services that politicians (and voters) expect councils to provide, and then of how much funding would be needed to deliver those services. This will be different in different places. With overall funding likely to be tight, we urgently need a finance system that reflects patterns of need across the country, and that is responsive to changes in those needs.

Stephen Houghton, chair of the Special Interest Group of Municipal Authorities (Sigoma)

Spending power for local authorities in the next financial year will be £14bn lower in real terms compared to 2010-11. This is a huge difference, and the current economic climate will likely preclude any future governments from restoring this level of funding to councils. This means we have to think hard about how that existing funding is distributed, and how we can improve the situation without new money.

When there is insufficient funding, as there is now, how that funding is allocated becomes even more important. The overall trend of how funding is allocated has changed quite considerably in recent years – from predominantly a grant system based on need, to one driven by council tax and business rates growth. This has meant that poorer areas have lost out, as they raise far less from their local tax bases.

We need to get back to a fairer way of doing things. The government should “reset” the business rates system to return accumulated growth back to the needs pot, update the funding methodology and set out allocations over a multi-year period and set up an independent body, as there is in Australia, to determine fair evidence-based allocations. The model for local government funding is broken – unless we make major reforms, the number of councils pushed to the brink will continue to rise.

[Read more: Council bankruptcy tracker: authorities under increasing financial strain]

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