Local Councils in Financial Crisis

Examining the Causes and Solutions

Rubbish piled up on streets was one of the most evocative images of the 1970s. Now, the spectre of the winter of discontent has returned as Birmingham City Council struggles to stave off bankruptcy. But Birmingham is not alone in this predicament. According to the National Audit Office, a cumulative deficit of nearly £5 billion could place 43% of local authorities at risk of bankruptcy in the coming years.

This looming financial catastrophe stems from a complex web of factors: the legacy of austerity measures, growing demands for social care, increased special needs education requirements, equal pay claims, and inadequate means of collecting local taxes. Perhaps most concerning is that financial distress is no longer confined to traditionally deprived areas; affluent, leafy suburbs such as Woking and Croydon in Hampshire now find their councils nearly bankrupt.

The Equal Pay Challenge

Birmingham declared bankruptcy in 2023, citing a £760 million bill for equal pay as a key factor. The issue dates back to the 1970 Equal Pay Act, which initially prohibited firms from paying women lower wages for performing identical jobs to men, as famously occurred at the Dagenham Ford factory. However, since the 1980s, this principle has evolved into the concept of “equal value,” meaning that if jobs are judged to be of comparable value, the pay must be equivalent.

This has practical implications: if predominantly male refuge collectors are assessed to be of similar value to predominantly female cleaning or administrative roles, it would be illegal to pay refuge collectors more. The UK’s litigation system, which embraces “no win, no fee” claims, has fostered an industry of lawsuits centred on this equal value clause, with local councils bearing the brunt of substantial financial penalties.

Birmingham City Council alone has already disbursed over £1 billion to resolve equal value claims. In an attempt to mitigate future claims, the council is currently trying to remove a fourth worker from refuse lorries. The issue isn’t simply about adjusting binmen’s wages; it’s about the ripple effect on jobs that may be somewhat arbitrarily deemed equivalent to refuse collection.

Ironically, this predicament particularly affects left-wing councils that prefer to maintain direct employment within the council rather than outsourcing. One method of circumventing equal pay claims is to outsource work to private companies, though this approach typically incurs higher costs and presents its own set of challenges.

Austerity: The Elephant in the Room

Whilst equal pay claims represent a significant burden, arguably the most substantial factor in council financial distress has been the austerity measures implemented since 2010. Local authorities bore the brunt of budget cuts under the coalition government, with the real value of central government grants slashed by 40% between 2010 and 2019.

This shortfall was theoretically meant to be offset by higher local taxes, new funding sources, and spending reductions. However, local authorities face restrictions on their ability to raise taxes. Council tax itself is highly regressive, claiming a larger proportion of income from lower-earning households. Moreover, central government can impose limits on council tax increases.

In desperate attempts to generate revenue, some local councils have made questionable investments. Croydon, for instance, borrowed nearly half a billion pounds to invest in property development businesses. However, oversight was inadequate, and the council has yet to realise any significant returns whilst paying millions in debt interest.

Despite implementing higher charges—such as increased car parking fees and new fees for council services—the core spending power of local authorities has diminished by 25% since 2010. Although there has been a marginal increase in spending in recent years, when accounting for population growth, real spending per person remains lower than 2015 levels.

Rising Homelessness and Housing Challenges

Another significant factor contributing to council overspending is the surge in homelessness rates over the past two decades. Councils have a legal obligation to provide temporary accommodation for homeless individuals, resulting in substantially higher expenditure on hotels and B&Bs. The UK unfortunately has one of the highest rates of homelessness in the developed world, reflecting the exorbitant rental costs prevalent across the country.

Although local councils have been assigned housing construction targets, they frequently struggle to meet these objectives. This difficulty stems partly from local “NIMBY” (Not In My Back Yard) pressures, as there’s typically minimal local interest in housing development. Additionally, councils argue that expanding housing stock and population isn’t financially attractive because it leads to increased demand for council services without a corresponding rise in central government funding.

One potential solution would be to provide local councils with greater financial benefits from increasing housing stock. In the long term, this approach could prove more economical than funding temporary accommodation in hotels and B&Bs. Historically, the UK spent more on building houses than on housing benefit, but in recent decades this pattern has reversed—a telling indicator of a failed housing strategy.

One positive development in the past decade has been giving councils 50% of business rate collection, which provides stronger incentives for councils to attract businesses to their areas.

The Social Care Crisis

While real funding per person has declined, statutory spending requirements for councils have increased. The most significant driver of higher demand has been social care needs. Local authorities have a legal obligation to provide both adult and children’s social care, and demand has risen dramatically due to an ageing population and declining public health.

Social care is undoubtedly an essential component of a welfare state. However, unlike healthcare or pension provision, responsibility for social care falls to local authorities with severely limited fundraising capabilities. As a result, councils are allocating an ever-increasing share of their constrained budgets to social care, forcing them to drastically cut other services such as libraries, parks, and refuse collection.

The fundamental issue is that successive central governments have avoided implementing a comprehensive solution to social care funding, consistently postponing difficult decisions. With the over-65 population continuing to grow, social care expenditure will only increase for local authorities in the coming years.

Special Needs Education Funding Gap

Special needs education represents another area of escalating statutory spending. The Children and Families Act of 2014 mandated that children with special needs should receive the highest quality education possible. Since then, there has been an unexpectedly sharp rise in the number of children requiring these services, accompanied by substantially higher costs.

Yet again, while demand has soared, funding has failed to keep pace. The Local Government Association estimates a funding gap of approximately £600 million. Much of this deficit has been temporarily concealed through accounting techniques. When these measures expire next year, council budgets will appear even worse than they currently do.

The Fundamental Problem

In essence, the central issue is that since 2010, local authorities have had their central government grants cut by 40%. Simultaneously, they were expected to maintain increased spending on social care, special needs education, and homelessness services. The expectation that local councils could magically generate new funding sources to compensate for this enormous reduction in spending was fundamentally unrealistic.

One doesn’t need to be an accountant to recognise that this situation was destined for disaster, particularly because many areas of local spending have grown much faster than anticipated, especially special needs education and social care. Additionally, many local councils have been hit by massive backdated equal pay claims.

Consequently, councils have performed poorly in perhaps one of the most crucial areas of local responsibility: providing affordable housing, which the UK successfully delivered in the 1960s and 1970s. Constantly grappling with short-term cash crises has left no capacity for long-term investment in social housing.

Potential Solutions

What are the potential solutions to this crisis? Meaningful regional devolution would require councils to have greater tax-raising powers or at least financial incentives to permit housing and property development.

One approach that councils should avoid is attempting novel and untested financial strategies to address budget shortfalls through commercial investment. They typically lack the necessary expertise, and such ventures rarely succeed.

Any genuine resolution to the challenges facing local authorities will necessitate a more sustainable long-term solution for funding social care. It’s worth noting that in 2017, Theresa May’s government proposed utilising housing wealth to fund social care, but the proposal was derided as a “dementia tax.” The policy proved deeply unpopular and nearly caused her to lose the election to Jeremy Corbyn. Nevertheless, it represented an attempt to leverage the UK’s substantial property wealth to address an issue that will only become more pressing in future years.

Unfortunately, financial difficulties are not confined to local authorities. The central government faces its own substantial fiscal challenges, which will make it difficult to provide bailouts to struggling local councils. As the country navigates these complex financial waters, finding sustainable solutions to local government funding will be one of the most critical challenges for policymakers in the years ahead.

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Comment

There is a reason that is not mentioned by mainstream media, and that is the demographics of the local authorities that are going bankrupt. It does not require a lot of research to establish that there is a common denominator that is conveniently overlooked.

We all know what that common denominator is and despite their best efforts, there comes a point when they cannot squeeze any more out of those who contribute, to fund those who take.