Local governments in England staring 'bankruptcy' in the face

First case

The first sign of the coming storm was in 2018, when Northamptonshire County Council became the first local authority in 20 years to issue a section 114 notice — this quasi-bankruptcy step prevents any new council expenditure, other than on maintaining support services for the most vulnerable.

The issue affects councils across England, from the richest regions to the most impoverished. Since Northamptonshire, Slough, Croydon, Thurrock, and Woking, all in the southeast of England, and two major Midlands metropolitan councils, Birmingham City and Nottingham City, have followed suit, with the Daily Mirror newspaper reporting that 40 more councils are at risk.

While funding challenges are universal, some councils also face specific difficulties, often of their own making.

The most high-profile problem is in Europe's largest local authority, Birmingham, which provides services for more than 1 million people, and that has the second-largest Chinese population of any British city, after Manchester.

In September 2023, years of difficulties saw the council effectively go bust, with a deficit for the year of 87 million pounds ($111 million). Its specific problems sprang from a lost court case about unequal pay to council workers that cost it hundreds of millions of pounds, and a failed IT system.

Such is Birmingham's desperation that it has been given special dispensation to raise council tax by up to 10 percent for each of the next two years, a move so drastic that it would usually require a local referendum, on top of redundancies and cuts across all sectors of council services.

Refuse collections will be less frequent, with the potential for health concerns, and street lights will be dimmed, which may raise safety issues, in a bid to save money in the city wherever possible.

Birmingham council leader John Cotton apologized "unreservedly" to local residents during the meeting where the "devastating" budget was passed, but added "the mistakes made in Birmingham have not occurred in a vacuum and councils are facing a perfect storm of smaller budgets but higher costs".

Impact on people

Another struggler is Nottingham in the East Midlands, which covers an area with a population of around a third of a million people and that lost millions of pounds in a failed energy company.

In February, the government appointed external commissioners to help run the council's finances, with the council being liable for their pay, which in the case of the lead commissioner is 1,200 pounds per day.

In early March, council leader David Mellen told the BBC that councilors had voted to approve a harsh budget "with great reluctance", including a 5 percent council tax rise, cuts to services, and redundancies, as the only way to plug a deficit of 53 million pounds and keep essential services going.

Citing a rising social care bill and cuts in central government funding, he said the local government was "cutting beyond the fat into the bone".

"Things that are basic requirements for people; to have a library in their community, to have community protection officers in their streets, to have a voluntary sector that offers cheap play schemes to children and their families, all those things are a basic requirement of councils and those are the areas that we're having to cut today because of a broken care system that a number of prime ministers have said that they will fix but they haven't done it."

Although particular circumstances in cities like Birmingham and Nottingham have made a bad situation worse, Muldoon-Smith said they were not the main problem, as things such as property investments only made up a small portion of their income.

"Central government tries to say it's down to local government mismanagement but this process has shown local government is not an independent being, it's inextricably part of an integrated system in terms of finance and management," he explained. "All international studies show countries where it works best have systems where different tiers of government know what they need to do, with clear demarcation and communication, and finance is arranged around that.

"England, in that sense is a real outlier. Overseas, local governments have much more access to other sources of income, like value added tax, income tax. In England it's reliant on council tax, property tax, and central government transfers, a lot of which are ring-fenced, so funding allocated can only be used on certain things. Local authorities have very little discretion on what they can and cannot spend."

Across England, local governments are stuck in thick financial mud, and getting out of it will be a slow, messy process.

"There is now recognition that this is a problem that can't be ignored, so we've moved from the stage of not thinking about it to the stage where people are starting to listen, but we're not quite at the solution stage yet," said Muldoon-Smith.

While local governments bear the brunt of the crisis, ultimately, with a general election across the whole of the United Kingdom imminent, the consequences could be felt at a national level.

"I think what is happening at local government level will have a national impact," he said. "Saying what a council can and cannot do fundamentally impacts on people's lives, and feeds into their decision-making.

"People are starting to realize the impact it has on their lives, and it's becoming more conspicuous how important it is."