Will the lights go out locally?

By Max Mosley | 17 May 2024

The switch goes off and everything goes dark. The lights that once lit a Birmingham youth centre go out for the final time. The aptly named ‘Lighthouse’ youth centre that once shone a light into the lives of others has its own lights extinguished. Such a  future is becoming a painful inevitability for this and many other centres over the next few months.

In a crowded field, a local authority structurally unable to invest in the lives of its youth is perhaps the best illustration of post-austerity Britain.

One all too predictable outcome is the division caused when essential services like these run out of cash and reach the inevitable conclusion of closure. The moment Birmingham declared bankruptcy, the Conservative Party Chairman was quick to claim on Twitter that this is proof you can’t trust Labour. The Prime Minister decried ‘they've bankrupted Birmingham, we can't let them bankrupt Britain’.

So perhaps amongst all the division and despair, a moment of introspection to understand how we got here might provide a glimmer of much-needed hope. Not least so that we can tell our youth workers, who are now tasked with closing the centres they have  given so much time to, that it’s not their fault.

It’s not their fault that Birmingham City Council saw their funding fall by 60%  in real terms by the end of the 2010s. It’s not their fault that demand for council services rose over that time. It’s not their fault their council tried to fill this funding gap with the returns from property investments. It’s not their fault that the value of these properties fell and the debt needed to finance these deals got more expensive as interest rates rose. And it’s not their fault that a seemingly harmless equal pay claim was the spark that ignited a fire over a decade in the making.

As keen as some may be to blame the indebted cash-strapped councils on Labour run administrations, of the 20 councils identified by Moody’s to be the most at risk of bankruptcy, three were Labour run, eight were Conservative and five Liberal Democrat. If it’s not politics, what is actually causing the financial crisis in local government?

Birmingham City Council is, sadly, not alone. Every region across England saw funding from central government to local authorities fall by around 63% on average over the 2010s in real terms. Similarly, their spending power (a combination of all funding streams including council tax) fell by 22.5%  on average. As funding fell, the need for the many vital services provided by local authorities rose, creating a growing chasm between what they need to finance and the money they have to pay for it.

Some councils chose to fill these funding gaps with property investments, taking advantage of historically low interest rates to finance large commercial and residential projects. Local government debt ballooned after changes were made to make it easier to borrow, as interest rates became cheaper and the need to finance big investment projects became more necessary to fill funding gaps.

This has been like a game of musical chairs, all fun while the music is playing and local authorities can risk more and more debt with cheap rates. But as inflation took hold and interest rates rose, the music stopped. Borrowing costs doubled almost overnight, and those councils needing to refinance their debt (much like a mortgage) faced even more financial strain.

Today, £3.2bn  is being spent every year by our local authorities on borrowing costs alone, roughly the annual amount the government spends on all prisons. On average, 15%  of council budgets is being spent on just paying these interest charges, up from less than 10% just a few years ago. Some local authorities like North East Derbyshire, Ipswich and Exeter are spending more than half their budget on debt service costs, and Spelthorne BC is spending well over their entire budget.

Debt as a tool to combat the funding pressures of the 2010s may now be the very source of funding pressures for the 2020s. The question is how will the next government handle this impending crisis?

A Labour government will find it hard to prove the ‘you can trust us with the economy’ line if local authorities start declaring bankruptcy soon after being elected, so you would imagine a willingness to add the necessary zeros to the local government budget. However, the rhetoric coming from the Labour front bench would suggest otherwise, with the party leader Keir Starmer saying he can’t ‘turn the taps’ on for local authorities and Rachel Reeves ruling out bailouts for the next councils to declare bankruptcy. If they hold this line, the 10 councils who have declared bankruptcy may become the canary in the coalmine, taking vital public services down with them.

In a nation which cuts funding to youth services, volunteering your time to fill the gap becomes a radical act of care for your community. The next government will need to provide funding that can match the ambition youth workers have for others. If it can’t, or won’t, it will have to deal with the fallout that comes from the inevitable rise in the number of councils declaring bankruptcy, and more and more people will have to turn the lights out on the services once at the heart of their communities.

Max Mosley is senior economist at the National Institute of Economic and Social Research (NIESR)

X - @NIESRorg

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