FINANCE

Councils' last throw of the dice

Government may believe councils’ financial failures are the result of gambling with the public purse, but it is centralisation and a lack of reform driving the problems, says Andy Pike.

The crisis in local council finances is coming to a head. A growing number of local council leaders are warning of funding gaps across England – from Hastings to Kirklees, Derby to Kent.

More than a decade on from the UK Government's introduction of austerity and its declared ambition for local government financial self-sufficiency, local councils continue to struggle with balancing their budgets.

As local councils were compelled to find savings and new income sources to close funding gaps from 2010, accusations emerged of ‘councillors at the casino' taking risks with local taxpayers' money by engaging in new and untried financial strategies and jeopardising essential local public service provision.

Some cases garnered wide attention, seen as risky and speculative and at odds with general perceptions of local government's role. These activities included commercial ventures, lending, investment strategies, property acquisition, and financial innovations – even an interest rate swap on borrowing last seen in the Hammersmith and Fulham LBC swaps affair in the late 1990s.

In my new book, Financialization and Local Statecraft, I look beyond the high-profile councils hitting the headlines to examine the wider local government landscape in England since 2010.

Financialisation is the growing role, power and influence of external financial actors, innovations and markets in local councils and local public service provision. Local statecraft is the work of local politicians and officials in leading and managing local councils and their finances.

Based on research including more than 50 interviews with national and local politicians and officials and finance executives, my study finds local councils have been compelled to pursue more active and integrated financial and risk management strategies in attempts to balance their budgets since 2010.

But instead of a wholesale shift to ‘councillors at the casino' taking chances with local services, I identify different strategies pursued by local councils across England.

Only a limited number of councils have followed vanguard approaches based on untried financial innovations involving the greatest risks. A sizeable intermediate group are active in such novelties but at a much smaller scale. While most councils are in a long tail adopting more cautious and risk averse strategies where such innovations are limited or non-existent.

These different strategies for balancing budgets are explained by several factors: the types and sizes of local councils with different powers, responsibilities, and resources; capacities and capabilities; political leaderships and experience; risk appetite; openness to external advice and commercial finance; and local economic and financial conditions.

The pandemic and most recent financial settlement saw some additional financial resources provided to the sector by the UK Government but, following a decade of austerity, local councils have had to intensify their efforts to close funding gaps amidst myriad growing service demands and higher costs generated by rising inflation.

By late summer 2023, the strategies local councils have been following seem to be running out of road as they continue to struggle to balance the books and manage greater risks.

Risks have multiplied since 2010 following the implementation of cuts and depletion of reserves. Local councils have had to develop new, untried initiatives, buy in external advice, and effectively learn by doing. Margins for error have been reduced, increasing the possibilities of failure. The section 114 notices being discussed among a growing number of councils include even those considered cautious, and well led and governed.

Multiplying and increasing risks are derailing some vanguard approaches as rising interest rates increase the costs of debt-based investment strategies, commercial property portfolios confront post-pandemic shifts in working patterns, housing companies struggle with debt and risk management and market changes, and energy companies are buffeted in a volatile market further destabilised by war in Ukraine.

Intermediate approaches among local councils face similar hazards but at much lesser magnitude within their overall finances.

Even local councils following more cautious approaches confront financial peril through the lack of funding to meet their statutory service responsibilities and increasing rate of available reserves depletion.

All local councils are focusing on further rounds of asset disposal, reducing and/or refinancing capital programmes, reserve use, spending moratoria, vacancy controls, and voluntary redundancies. Medium- and longer-term financial sustainability and resilience are being eroded by shorter-term patches.

Yet, despite this deepening local financial crisis and its damaging wider ramifications, the UK Government continues to see such financial difficulties as the result of locally particular bad decisions, poor culture and weak governance and leadership rather than systemic dysfunction and failure.

After decades of centralisation and amidst enduring lack of trust, the UK Government will not bail out failing councils for fear of moral hazard and the creation of perverse incentives for profligacy.

Instead, the lengthening list of financially ‘at risk' local councils creates a complex and time consuming task for an intervention by national officials to negotiate bespoke fixes including external commissioner reviews, capitalisations, debt refinancing and temporary local tax increases.

Ultimately, it is local communities that are impacted most as the UK Government's management of the fallout from local councils failing to close funding gaps and manage increasing risks is ultimately displaced on to local residents through increased local taxes and reduced local services. Against such changes public protest has erupted in several places.

National management of local council finances now imperils local democracy as local residents and taxpayers become further disengaged and distrustful of their councils.

A growing consensus is evident that the complex and highly centralised local government funding system in England is broken and needs long overdue fixing.

Even the Office for Budget Responsibility notes the ‘de facto insolvencies' of local councils are resulting from national fiscal management.

But the UK Government is avoiding any wide-ranging but politically difficult reform including a long-delayed fair funding review, multi-year settlements, and local commercial and residential property tax revaluations.

Amidst continued fiscal stress, financial failure, unfunded mandates to provide statutory services without commensurate funding, and repeated calls for emergency financial injections, local councils have continually to ask national Government what local government is for and how can it be funded?

Andy Pike is Henry Daysh professor of regional development studies at Newcastle University's Centre for Urban and Regional Development Studies (CURDS)

•-Financialization and Local Statecraft is published by Oxford University Press

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