The local council finance system in England is creaking and misfiring. National government has been forced into an increasing number of fixes to keep the system functioning. Such incrementalism and pragmatism reflect the veritable history of ‘muddling through' rather than structural reform in the British state tradition for national and local government. In some ways, this approach has worked. It has avoided any further councils being unable to balance their annual budgets following the rash of Section 114 (3) notices between 2018 and 2023. This contemporary form of ‘muddling through' certainly demonstrates the admirable creativity and ingenuity of national civil servants and ministers as well as local political leaders and officers.
Yet, as the number of fixes, their complexity, cost, and legacies as well as their extension to growing numbers of councils continue to rise it is appropriate to ask whether the limits of such an approach are being reached or even exceeded? Is now the time for a more fundamental and thorough overhaul of the system?
Uncertainty about the extent and nature of the fixes makes it hard for councils strategically to plan their finances over the medium to longer term. Apart from council tax hikes, the fixes are largely invisible to local residents and doing little – or even in some cases aggravating – public discontent with the perceived mismatch between what they are paying for and receiving in local services.
A range of fixes has been evident and widening for almost the last decade. The fixes have a mix of characteristics. Some are ad hoc, temporary, and short-term, while others are somewhat more planned, enduring, and longer-term. All are increasingly complex, time consuming for national and local governments to negotiate and agree, and are embedding legacies in council finances. Familiar to many in the sector, the fixes include, first, one-off and unplanned funding injections which have been both sector-wide as well as targeted at specific councils categorised into particular types such those struggling with ‘high cost' services. Second is ‘exceptional financial support' currently manifest as capitalisation directions from the Ministry of Housing, Communities and Local Government (MHCLG) that authorise councils to use capital from asset sales and borrowing to plug revenue gaps. Third, mirroring the world of commercial finance, off balance sheet arrangements have allowed councils to keep deficits from unbalancing their annual budgets most notably the ‘statutory override' for SEND services. Fourth is the allowance of temporary council tax increases above the current referendum threshold. Partial debt write-offs for highly indebted councils linked to local government reorganisation is the latest fix. Others may be in use but less visible to external scrutiny.
Such fixes are increasingly problematic for national and local government. Their costs are rising. An increasing number of councils are involved, with many engaged in repeated use of measures described as ‘exceptional' and ‘temporary'. The fixes are breaking formal rules of municipal accounting in the use of capital and revenue resources, ‘overriding' legal and regulatory frameworks, and creating the ‘moral hazard' of perverse incentives for local actors. Pressure continues on MHCLG to expand access to the fixes and invent new ones, while the existing array is being tested possibly to destruction with the 100%-plus council tax increases and legal challenges currently being pursued by some councils. Uncertainty about the extent and nature of the fixes makes it hard for councils strategically to plan their finances over the medium to longer term. Apart from council tax hikes, the fixes are largely invisible to local residents and doing little – or even in some cases aggravating – public discontent with the perceived mismatch between what they are paying for and receiving in local services. In sum, we appear to have reached the point where the role of such fixes in building more financially sustainable let alone resilient council finances must be questioned.
Such a dialogue is timely given national government's ‘rewiring the state' and devolution agendas in which local councils are integral and vitally important. Incremental changes are already in motion including multi-year settlements, Fair Funding, and fiscal devolution while other more structural issues remain off limits especially council tax. How such reforms all fit together to overhaul the system and clarify what local government is for and how it can be funded remain unclear. If the opportunity for thoroughgoing change is again deferred then expect the need for even more inventive, novel, and costly fixes for more councils across England.
Andy Pike is Henry Daysh Professor of Regional Development Studies, Centre for Urban and Regional Development Studies (CURDS), Newcastle University
andy.pike@ncl.ac.uk
