Over a decade of austerity has put a serious squeeze on local authority budgets, with increasing numbers declaring themselves bankrupt. Meanwhile, the government wants to make it easier for councils to sell off assets - a tempting prospect for cash-strapped authorities.
This week’s New Economy Brief explores the dire state of local authority finances, explains how mass asset sales could lead to the increased extraction of wealth from local communities, and suggests better alternatives for repairing local economies.
In 2018, Northamptonshire Council declared itself bankrupt, becoming the first council to do so since the London Borough of Hackney in 1998. Since then, a wave of local authorities have been forced to issue a Section 114 notice (which effectively freezes spending), including Nottingham, Birmingham, Croydon, Thurrock, Slough, Woking, and Northumberland (the New Statesman has even set up a tracker). Croydon council has effectively declared bankruptcy three times in two years. According to the Local Government Association, almost one in five council leaders and Chief Executives say bankruptcy is “very or fairly likely”.
Why do councils go bankrupt? While there are some instances of financial mismanagement and other issues (for example, Birmingham’s historic pay inequality claim and Woking’s risky investments), poor council finances are more often than not the simple result of shrinking budgets and rising service costs. Local government has arguably been one of the biggest victims of central government austerity policies over the last 13 years. The Local Government section of what was then the Department for Communities and Local Government suffered the deepest cuts of any department between 2010 and 2015, losing over half of its funding during this period. According to the Institute for Government, local government core funding fell 40% in real terms between 2009/10 and 2019/20, from £46.5bn to £28.0bn (2023/24 prices).
Impact. Councils are operating on a shoestring, but the statutory services they must deliver are becoming increasingly expensive. An ageing and increasingly unwell population puts pressure on the cost of social services, while the shortage of social housing is forcing councils to spend huge portions of their budgets on temporary accommodation. Children’s services are at breaking point. This leaves very little cash for ‘discretionary spending’ on things like libraries and leisure centres. Sarah Longlands, Chief Executive of the Centre for Local Economic Strategies (CLES), has said that “the systematic defunding and devaluing of local government is… one of the reasons why there are growing levels of poverty, hardship and destitution, creating huge vulnerability in places across the UK, generating significant pressure in the NHS and in social care and undermining the potential of local economies.”
After years of austerity and squeezed budgets, local authorities now have little wiggle room to make cuts to save their finances, and there is not much room to raise council tax on struggling residents either. This means that increasingly councils are being left with no choice but to sell off assets to plug the gaps in their finances. This is often referred to as a ‘Capitalisation Direction’, in which central government effectively gives councils permission to use their capital funds. Earlier this month, Bloomberg reported that Ministers are “quietly working on a major loosening of budget rules for local councils”, essentially making it much easier to sell off assets to fund frontline services.
An unsustainable solution? CLES argues that a “fire sale of council assets would only be a sticking plaster for the disastrous state of their finances” and would “open the floodgates for private sector wealth extraction”. UK in a Changing Europe’s Jack Shaw explains the shortcomings of the government’s proposals and argues “the government’s failure to make additional investment available for authorities means they may have no other option but to sell assets, even if it’s not in their long-term interests”.
The outsourcing spiral. To plug the gaps left by asset sales, local government is much more likely to outsource services to private companies. The overreliance on the private sector to deliver core public services and develop strategy over recent decades has eroded public sector capacity, which in turn encourages further outsourcing. And as we have seen with the recent Post Office scandal, outsourcing can lead to some pretty costly mistakes. On the other hand, the Institute for Government claims that insourcing public services “can improve quality, increase reliability, and save money” and lays out guidelines for when and how public services should be brought back into government hands.
With the lack of central government funding underpinning poor council finances, an obvious solution is for the government to boost local authority funding. London Councils - the collective of London local authorities - says the Government should “use the forthcoming provisional Local Government Finance Settlement to provide councils with sufficient resources to set balanced budgets next year without having to make drastic cuts to services”. Similarly, CLES has called on the next government to commit to delivering a five-year settlement within its first year.
Community Wealth Building. While one might hope that central government will boost funding in the future, recent years have shown that it can take it away just as quickly. One way that local government can gain more independence from central government is to use the power of the local state to create a more vibrant local economy where wealth flows within the community rather than being extracted from it, ultimately increasing council revenue and ability to reinvest in the area. In a recent report, ‘This Must Be the Place’, CLES describes community wealth building as “where the wealth that exists, and is created, flows to the people and communities who need this the most, rather than trickling out to those who can best help themselves”. It argues that some areas have managed to “break the mould” of selling off assets to bolster finances. Instead they have maintained control over local land and assets, ensuring these are used in a way that maximises local wealth, not that of private companies. By prioritising the local economy’s needs, procuring locally and protecting services from wasteful and expensive outsourcing, councils can build community wealth and, subsequently, their own income streams.
Fiscal devolution. A number of experts have also been calling for greater fiscal devolution for local authorities – that is, giving them more power over taxes and spending, according to the Centre for Progressive Policy’s explainer. The Fabian Society calls for a devolved economic development budget and limited powers to raise levies and charges to fund new projects, in order to counter an overly centralised funding system controlled by Westminster.
Global elite gather in Davos. As world leaders, heads of prominent businesses and the super-rich gather in Davos for the 2024 annual meeting of the World Economic Forum, a new report from Oxfam unveils the scale of inequality and corporate power. They found that the five richest men in the world have doubled their fortunes since 2020, whilst nearly five billion people have become poorer. Seven out of ten of the world's biggest corporations have either a CEO who is a billionaire or a billionaire as principal shareholder.
Moving media commentary on borrowing and investment. Oxford professor Simon Wren-Lewis’s latest blog post criticises media coverage of fiscal policy and argues for a shift away from “obsessing about government debt to obsessing about public investment.” He warns the Conservatives’ electoral strategy hinges on arguing that Labour’s plans for additional green investment will push up mortgage rates.
Green Land Value Tax. The University of Oxford’s Institute for New Economic Thinking have published a short explainer of Professor John Muellbauer’s paper explaining why we need a green land value tax. The paper explains how reforming property taxes and the planning system could “resolve conflicts among meeting climate goals, equity and housing affordability, while reducing intergenerational injustice”.
Declining life expectancy. Professor Sir Michael Marmot has published an open letter to UK party leaders urging them to act on declining life expectancy, following new analysis from the UCL Institute for Health Equity. The research shows that “1,213,949 people’s lives were cut short between 2011 and 2020 in 90% of areas in England, as a result of avoidable social and economic inequalities”, and the UK is now “well below the EU average” for how long people can expect to live in good health, which has declined since 2014 due to “austerity and regressive funding cuts”.