Why Councils go “Bankrupt”

By Ray McLennan Feb 19

And How it Affects You

The Financial Crisis Facing UK Councils: A Deep Dive into Section 114 Notices

In recent years, the financial landscape of local government in the United Kingdom has become increasingly precarious. A growing number of councils have found themselves in dire straits, forced to issue what are colloquially known as “bankruptcy notices.”

Despite this, they are still allowed to issue council tax notices. So, this is potentially another reason why you are not obliged to pay council tax levied against you.
pic

These Section 114 notices, named after the relevant section of the Local Government Finance Act 1988, have become alarmingly frequent, signalling a crisis in local government funding and management.

The Rising Tide of Section 114 Notices

Since 2018, there has been a significant rise in the number of councils issuing Section 114 notices. In the past six years, eleven local authorities in England have taken this drastic step, effectively declaring themselves unable to meet their financial obligations [9]. This marks a stark contrast to the previous two decades, during which only two councils had issued such notices.

The chronology of these declarations paints a concerning picture:

1. Northamptonshire County Council (February 2018 and July 2018)
2. Croydon Borough Council (November 2020, December 2020, and November 2022)
3. Slough Borough Council (July 2021)
4. Nottingham City Council (December 2021 and November 2023)
5. Northumberland Council (May 2022)
6. Thurrock Borough Council (December 2022)
7. Woking Borough Council (June 2023)
8. Birmingham City Council (September 2023)

This list represents a diverse range of local authorities, from large metropolitan areas to smaller boroughs, indicating that the financial crisis is not limited to a particular type or size of council [5].

Understanding Section 114 Notices

Before delving into the reasons behind this financial meltdown, it’s crucial to understand what a Section 114 notice actually means. Contrary to popular belief, local authorities in the UK cannot technically go “bankrupt” in the same way a business or individual might [3]. Instead, a Section 114 notice is issued when a council’s chief financial officer believes that the authority is about to incur unlawful expenditure or when the council’s expenditure is likely to exceed its available resources [1].

The issuance of a Section 114 notice has immediate and severe consequences:

1. All new spending is prohibited, except for statutory services and pre-existing commitments [5].
2. The council must meet within 21 days to discuss the situation and consider what action to take [4].
3. A financial recovery plan must be drawn up, often including radical budget cuts [2].
4. The government may intervene in council spending and service management [2].

The Perfect Storm: Factors Behind the Financial Crisis

The surge in Section 114 notices is not attributable to a single factor but rather a confluence of challenges that have created a perfect storm for local authorities. Let’s examine the key drivers:

1. Funding Shortfalls and Austerity Measures
   Since 2010, local authorities in England have faced significant cuts to their funding. Between 2009/10 and 2021/22, funding for local authorities fell by 10.2% in real terms[3]. This prolonged period of austerity has eroded the financial resilience of many councils, leaving them ill-equipped to handle additional pressures.
2. Increased Demand for Services
   Simultaneously, councils have faced growing demand for statutory services, particularly in areas such as adult social care, children’s services, and homelessness support. This increased demand has not been matched by proportional increases in funding, creating a widening gap between resources and needs.
3. Inflationary Pressures and Rising Costs
   Recent years have seen significant inflationary pressures, with the cost of providing services rising sharply. The introduction of the National Living Wage and other cost pressures have further strained council budgets[2].
4. Risky Investments
   In an attempt to generate additional income and offset funding cuts, some councils engaged in large-scale borrowing for commercial property or other investments. In several cases, these investments have not yielded the expected returns, and in some instances, their value has fallen considerably below the sum invested[9].
5. COVID-19 Pandemic
   The global pandemic placed additional burdens on local authorities, increasing demand for services while simultaneously reducing income from sources such as parking fees and leisure facilities.
6. Structural Issues

Some councils have faced structural challenges, including issues with governance, financial management, and long-term planning. These underlying problems have been exacerbated by the external pressures mentioned above.

Case Studies: Lessons from the Brink

Examining specific cases provides insight into how these factors have played out in real-world scenarios:

Birmingham City Council

As the largest local authority in Europe to issue a Section 114 notice, Birmingham’s case is particularly significant. The council cited a perfect storm of issues, including equal pay claims, the implementation of a new IT system, and broader financial pressures facing the sector [7].

Croydon Borough Council

Croydon’s repeated issuance of Section 114 notices highlights the ongoing nature of these financial challenges. The council’s issues stemmed from a combination of risky investments, overspending, and inadequate reserves[5].

Northamptonshire County Council

As one of the first councils in recent years to issue a Section 114 notice, Northamptonshire’s case was a harbinger of the crisis to come. The council’s financial collapse was attributed to years of mismanagement, unrealistic budget-setting, and failure to address known financial problems[3].

The Broader Implications

The increasing frequency of Section 114 notices is not just a problem for the affected councils; it has broader implications for local governance and public services across the UK:

1. Service Reduction: As councils struggle to balance their books, non-statutory services such as libraries, parks, and cultural amenities are often the first to face cuts.
2. Public Trust: Repeated financial failures can erode public trust in local government, potentially impacting civic engagement and local democracy.
3. Regional Inequality: The financial crisis in local government may exacerbate regional inequalities, as struggling areas become less able to invest in infrastructure and services.
4. Central Government Intervention: Increased financial instability in local government may lead to greater centralization of power and decision-making.
   Looking Ahead: Potential Solutions and Reforms
   Addressing the financial crisis in local government will require a multi-faceted approach:
5. Funding Reform: A comprehensive review of local government funding is needed, considering both the level and distribution of resources.
6. Improved Financial Management: Councils need to strengthen their financial oversight and risk management practices.
7. Long-term Planning: Local authorities must develop more robust long-term financial strategies that account for changing demographics and service demands.
8. Collaboration and Shared Services: Increased collaboration between councils could help reduce costs and improve efficiency.
9. Innovation in Service Delivery: Exploring new models of service delivery, including greater use of technology and community partnerships, could help councils do more with less.

Conclusion

The rising tide of Section 114 notices in the UK is a clear indicator of a systemic crisis in local government finance. While each council’s story is unique, the overall trend points to a need for fundamental reform in how local services are funded and delivered. As we move forward, it is crucial that policymakers, local leaders, and communities work together to find sustainable solutions that ensure the viability of local government and the essential services it provides. The future of local democracy and the well-being of communities across the UK depend on addressing this challenge head-on.

Citations:

[1] https://en.wikipedia.org/wiki/Section_114_notice
[2] https://www.tussell.com/gov/blog/why-is-local-government-going-bankrupt
[3] https://www.instituteforgovernment.org.uk/explainer/local-authority-section-114-notices
[4] https://commonslibrary.parliament.uk/what-happens-if-a-council-goes-bankrupt/
[5] https://mycouncil.oxford.gov.uk/documents/b24445/Agenda%20Item%209%20-%20Background%20and%20Implications%20of%20Local%20Authority%20Section%20114%20Notices%20Wednesday%2006-Dec.pdf?T=9
[6] https://www.bbc.co.uk/news/uk-politics-66878229
[7] https://www.birmingham.gov.uk/info/50306/commissioners_intervention_and_improvement/2757/frequently_asked_questions_faqs_about_section_114/3
[8] http://www.willmottdixon.co.uk/how-can-cash-strapped-councils-facing-section-114-still-invest-in-place
[9] https://commonslibrary.parliament.uk/why-are-local-authorities-going-bankrupt/
[10] https://www.newstatesman.com/spotlight/economic-growth/regional-development/2024/01/council-bankruptcy-tracker-local-government-authorities-finances