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England’s Collapsing Local Government

As council after council declares bankruptcy, the media treats them as isolated scandals — but the reality is a system buckling under the weight of rising costs and funding cuts.

Underfunding is causing the collapse of social infrastructure which councils maintain. (Photo by Christopher Furlong/Getty Images)

In September this year, the largest unitary local authority in Europe effectively declared bankruptcy. Birmingham Council, which serves over a million people, issued a Section 114 notice on 5 September, meaning it can’t fund its forecast spending for the next twelve months.

The consequences for the residents of England’s second city are dire — the council legally can’t make any new spending commitments and has to cut existing spending as fast and as deeply as possible. Local and national Conservatives are pushing for the council to sell off the large amount of land it owns, and its chief executive has pledged to consider disposing of the companies it controls. Council tax will have to be raised, putting further pressure on struggling local residents.

In such cases, the national government usually appoints external commissioners to take charge, halting all but essential spending. Local elected politicians are sidelined, and voters have no say in policymaking. Of course, the impacts of reaching this tipping point start well before a formal declaration of financial difficulty. Non-essential spending is limited, research is stunted, and new programmes of work are prohibited.

Beyond Birmingham

Birmingham’s crisis arises from a historic pay equality claim against the council, after it failed to pay bonuses to thousands of female workers while giving them to departments staffed mostly by men. The city now owes at least £760 million to its former employees, a figure which is only growing, while the procurement of a faulty IT system from technology company Oracle has seen costs rise from £19 million to £100 million.

But Birmingham isn’t alone. A survey conducted at the end of August of members of the Special Interest Group of Municipal Authorities (SIGOMA) has shown that at least twenty-six English councils, many in the poorest areas of the country, are at risk of bankruptcy in the next two years. What’s more, the Local Government Association has warned that around 90 percent of councils are using dwindling financial reserves to keep themselves running; many authorities simply have ‘nothing left’.

This news comes after a handful of councils have already filed for bankruptcy. Over the past five years, we’ve seen a series of failed risky investments in property by Woking’s Tory council and ‘unprecedented risks’ taken by Conservative-run Thurrock, which borrowed ten times its annual spending budget for investments. We’ve also seen Labour-run Slough reveal a ‘catastrophic’ £100 million black hole in its budget in 2021, while Croydon, which recently switched from Labour to Tory control, announced its third bankruptcy in two years in late 2022.

So, why is this happening now?

Though many of the first councils to hit the rocks have suffered from bad management or risky investments, these disasters aren’t just the result of poor local governance.

Local authorities across the country are in a financial crisis, due to years of underfunding and the increasing costs of ‘statutory’ services, like social care for the elderly and vulnerable children, which they are legally required to provide. And it is a cycle that shows little sign of abating.

Strangling Services

To put this picture into context, local government in England has had its funding cut by £15 billion between 2010 and 2020. That’s a real-terms cut of 20 percent. And to make matters worse, cuts hit deprived urban authorities the hardest.

With England’s population increasingly ageing and unwell amid the NHS’ slow-motion fiscal catastrophe, the cost of those statutory services are ballooning just at the moment when funding has been slashed. All discretionary spending, whether on libraries, economic development, or local public services like bin collection, has been squeezed.

The costs of temporary accommodation, statutorily required for housing those declared homeless in the absence of sufficient social housing or Housing Benefit rates, are soaring, reaching at least £1.6 billion i n 2021–22. This year, local authorities in England will spend nearly a third of their budgets on social care, but we are still far from meeting the cost of future demand, let alone improving service quality or covering its full cost.

The pandemic only accelerated this trend, reducing councils’ incomes from their wholly owned companies and facilities, and worsening the health of vulnerable and elderly people across the country, further increasing social care bills. The Johnson administration’s increase in national insurance to fund NHS and social care costs was insufficient, but reversing even this measure during Liz Truss’ abortive ‘Growth Plan’ left a gaping hole in councils’ budgets.

While most of Truss’ policies were binned even before she departed office, the national insurance reversal remained as the only major policy from the mini-budget to survive into the Sunak administration. This, in itself, tells a story. Making matters worse, any additional revenue that might have been expected from Covid-era increases to social care grants have been largely swallowed up by inflation.

Consequences of Centralisation

But although the crisis is in part a product of Conservative policy towards local government, its roots lie in a much older trend of centralisation in the UK.

The UK is one of the most centralised countries in Western Europe, in terms of legislative devolution, revenue-raising powers, and agency afforded to local government. This contributes to stunting progress across a multitude of areas of our economy and worsening regional divides in health, productivity, jobs, and disposable income, which are deeper than in any comparable country.

The former senior civil servant, Sharon White, who oversaw the UK’s spending cuts in her role as second permanent secretary at the Treasury has said that ‘[D]ecentralisation tends on average to be more closely associated with both stronger growth and better public service.’

Public money is unusually concentrated within the central government in the UK. In 2017–18, 95 pence out of every £1 paid in tax was taken by the central government (compared to just 65 pence in Germany). Despite the ‘levelling up’ agenda, this has now increased to 96 pence. Even in London, where regional government is strongest, the mayor only controls 8 percent of revenue spending. Local governments have so little control that they were forced to competitively bid for funds to clean up chewing gum on their own streets from the so-called Chewing Gum Task Force.

In more decentralised countries like Germany, but also in France, the United States, and Japan, powerful city, state, and regional governments raise and spend much of their own tax revenues. That means they can design policy around local needs, focusing funding on their voters’ priorities. This builds governing capacity, creating a cadre of experienced administrators and policymakers who know their areas.

And this approach allows new ideas to be tested. Bilbao in Spain’s Basque Country survived deindustrialisation by building high-tech clusters to diversify its economy from heavy manufacturing. The city used its devolved powers and funding to build R&D technology centres around the cooperative Mondragon University. It went on to see the fastest economic growth in Spain between 2000 and 2018.

Devolved Alternative

Fiscal devolution doesn’t mean that economically successful areas, like London, should become better and better funded, while left-behind regions, suffering from the legacies of deindustrialisation, are left to fend for themselves. We will still need national redistribution, to make sure every place has the funding they need to succeed.

We will also still need national institutions, like the NHS, that provide the same services to everyone. There is, in fact, a strong argument for taking social care out of the hands of local government and placing it within the NHS or another national body, like the National Care Service proposed in the 2019 Labour manifesto.

Piling ever greater demands on local government while cutting their funding and refusing to allow them to raise new local taxes, such as workplace parking levies and tourist taxes, simply won’t cut it anymore.

French cities are able to raise local payroll taxes on employers to fund their transport systems — they have been able to build twenty- one tram systems since 2000, while Leeds has been waiting for a single tram line for decades. Similarly, Hong Kong was able to fund its rail system by capturing the increases in land and property values near its train tracks.

This August, the UK government decided centrally which local authorities would receive their share of 100 new chess boards in public parks. The contrast, put simply, could not be starker.

Local government urgently needs more funding from Westminster. But we will see only more and more Birminghams, Wokings, and Thurrocks if we continue down the path of ‘begging bowl’ funding pots controlled by the central government.

There is a belief on the part of the Left that centralising power and resources in national government will make it easier to deliver radical change. This belief is matched by an understandable fear that further devolution will create a postcode lottery, where some residents live with poor quality public services because of the choices of their local authorities.

But it doesn’t need to be that way. We could ensure that all areas receive the same basic level of essential public services with national redistribution and regulated minimum levels of service quality.

At the same time, local governments could build the trams, rail lines, and bus systems they need to grow in a sustainable and fair way by capturing the value in their land. Councils could license their landlords without being blocked by national government.

Devolution opens space for more radicalism, not less. But we have to be willing to let go and let local government control local policies.