Britain is no country for old institutions, be they a Crooked House pub, a retail chain like Wilko, or councils like Birmingham, Europe’s largest local authority according to the BBC. We will find out in due course why Birmingham failed, but according to the headlines, it has been felled by a combination of back payments for an equal pay award (£750m to £1bn) and a cost overrun by a factor of five on its Oracle IT system at around £100m.
Councils, unlike Central Government, must balance income and expenditure when producing a budget. A council can run a current account deficit, as long it has reserves of ready cash. This is called ‘raiding the balances’. As a temporary measure or in an emergency, if an unforeseen expenditure occurs, it is acceptable practice to fund a deficit from cash reserves. As a long-term measure it is not recommended. In short, Birmingham ran out of road, and ongoing liabilities could not be funded from its reserves anymore.
Central Government’s options
Birmingham declared a section 114 notice under the 1988 Local Government Act, and so cannot agree to any new expenditure. Central Government has various options if a council goes bankrupt: it can choose to assist by allowing it to capitalise its revenue deficits by using capital reserves or selling assets. Central Government can choose to send in the commissioners and in effect run the Council. And in the case of Slough, Northamptonshire, and Thurrock, this is what happened. It appears that Michael Gove has chosen to appoint commissioners to run Birmingham City Council. In Surrey Heath, which is Gove’s own constituency, the council warns of potential bankruptcy. Kent County Council and Hampshire also both report dire finances. If such failure becomes an epidemic, Central Government will be faced with a serious issue in an election year.
Just a few bad apples?
At least 26 other councils are at risk of bankruptcy, according to a report in the Guardian. The words ‘at least’ could mean far more, because many councils took on debt by buying commercial real estate, especially retail real estate, when interest rates were low, as a means of increasing income by becoming landlords. Hampshire, a Conservative-run council, is in financial trouble and may be joining this unhappy band of distressed councils. It is a virtual certainty that others will reluctantly come out as indigent councils.
Central Government is trying to downplay the crisis by saying that this is just down to a few bad apples mismanaging their finances. While mismanagement and wishful thinking may be a part of the problem, austerity has driven some councils to take risks or do the equivalent of hiding the invoices under the carpet. Birmingham’s problems with equal pay are different from Kent’s financial chasm over social care, or those districts like Woking or Spelthorne that gambled in the commercial property market.
‘Phone a loan’
At Spelthorne BC, a £1bn office buying spree leaves a dangerous legacy, an extreme example of a virtual ‘phone a loan’ arrangement with the Public Works Loan Board. As someone who worked for a Town Council, I found obtaining a PWLB loan might have been easier if the Council had gone instead to the International Monetary Fund to ask for a loan, so to find out that the PWLB virtually agreed a loan to Spelthorne over the phone was hard to bear.
Those councils that, like Birmingham, declare a S114 notice face a grim future, as the Government will send in a commissioner. After shutting down services, jacking up council tax, and having a fire sale of council assets, the council under a commissioner’s care becomes so enfeebled that it may be abolished (Northamptonshire) or, at the very best, live on in a half-life of minimal local government services while serving no one adequately.
The growing funding crisis
Michael Gove, the Communities Minister, chooses to blame the indigent councils, but is this fair or reasonable? Councils are the means by which many public services are delivered, whereas Whitehall often seems remote and out of touch, if not downright incompetent. The Local Government Association, which represents all Councils bar Town and Parish Councils, in its campaign for devolution, states that in regular surveys it has commissioned, 66% of the public trust local government, compared with only 12% trusting central government.
The House of Lords has expressed concern about the growing enfeeblement of local government in England. This concern is based on two issues. The first concern is the growing funding crisis. Many councils, especially in the poorest areas, have lost up to 60% of their funding, as Central Government removed financial support in stages from 2010, purportedly because of austerity. At the same time, Central Government has not addressed funding for big ticket items such as adult social services, which is becoming a pressing matter as the population ages. Now, it is becoming increasingly clear that financial pigeons are beginning to come home to roost, but the owner of the pigeon loft is choosing to ignore their fluttering.
Byzantine devolution
The second issue is the problem of English devolution. The Institute for Government points out that England is governed by a tangle of incoherent organisations that obscure accountability because very few members of the public know who to apply to for a remedy. Incoherence leads to managerialism, silo management, and ‘passing the buck’ when things go wrong, as sometimes they do. The Covid pandemic put this byzantine structure under a strain it was ill-fitted to bear in some areas, which the Covid19 public inquiry is likely to expose. What is not helpful is the tendency of the Government to introduce ‘quangos’, or quasi-autonomous Government organisations, that are only accountable via a minister and sometimes replace democratic bodies.
It was not always so. In Victorian Britain, local governments led the way, in the more enlightened areas, in providing what is now known as social housing, energy (gas and electric), medical services, and mass transit transport systems. London Transport has never been bettered as an integrated transport network, and Birmingham was a dynamic council, when Central Government policy was run on a laissez-faire basis with a minimal welfare system. Birmingham was a pioneer in relieving poverty and improving the environment. The infrastructure of many cities still owes more to local governments than any ‘levelling up scheme’ from Central Government.
So, where has it all gone wrong?
As with so much of present-day England, a ‘small government’ ethos, which promotes outsourcing and individual self-reliance, has overreached the collectivist way of operating. The right to buy a council house has produced a shortage of social housing. The competitive bid funding system for local councils in need of large funds from the national fiscus, which is in the gift of national ministers, has left much of local government finances in a parlous state.
England’s slow-motion debt crisis is gathering pace. Unless notice is taken, we may be facing an avalanche of financial failures in local government. Some are suggesting that one in ten municipal authorities are facing section 114 notices. If this happened in banking, in retail or in, say, construction and house building, the alarms would be sounding and levers would be thrown. But because Whitehall thinks local government is in some way inferior, it prefers to send in commissioners rather than tackle the problem at source.
What steps are necessary?
1. A fair funding formula, which sets a property tax at a reasonable level and adjusts income between deprived communities like Blackpool and those like Westminster, which were hardly affected by the complete withdrawal of revenue support grant. The Joseph Rowntree Foundation in its report points out that the poorest communities that need local services are suffering the most. The problem will be: how do you arrive at a ‘reasonable’ property tax? Woking ought to have been all right, which shows how bad central government is in overseeing local government. The current outsourced audit system uses some very low-grade staff who understand very little about council finances, and it has been a disaster. A new audit commission, recruiting and training accountants who understand council finance, could oversee and advise councils so that they don’t get into trouble.
2. Restructure local government to make it more accountable with a simpler structure. Devolution will at least partially resolve the problem of the democratic deficit regarding England and the other three nations. With devolution should also come the relevant funding and not, as at present, more requirements but no funding.
3. Austerity has gone too far. Local Government in England is hollowed out. NHS care needs to be combined with adult social care, which is crippling both unitary and county councils. Part of the reason is outsourcing provision, which meant that cost control went out of the window.
PR is outside the scope of this article. However, had Woking been administered by a coalition, perhaps a poorly advised ‘one party’ administration might not have been able to wreak havoc with the municipal finances. A matter of checks and balances not available in administrations like KCC, which has been Tory since God was a boy.
