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View of Nottingham Council House, a grand columned building with a large dome, against a grey sky
Nottingham is one of the biggest councils to issue a section 114 notice. Peter James Sampson

One in five councils at risk of ‘bankruptcy’ – what happens after local authorities run out of money

Local councils in England are in trouble. The last few months have seen repeated cuts to essential services, increases to local taxes and calls for more help from the government. One in five councils are currently at risk of “bankruptcy” due to reductions in spending power and rising costs of essential services.

The law does not allow councils to technically go bankrupt. However, as we have written previously, they have to balance their books. If they are unable to do so, the council’s chief financial officer has to issue what is known as a section 114 notice. This bars all new spending for 21 days, except for statutory services such as education, child and adult social care, waste collection and planning and housing services.

In response to these financial challenges, the government has granted an additional £600 million to local authorities, mostly for adult and children’s social care. But this one-off payment is worth less than 1% of the annual funding package for councils.

Councils receive funding from a few sources. In 2019-20, local government in England received 17% of their funding from the general government grant, 34% from ring-fenced government grants, 32% through local council taxes and 17% from business rates. Each year, the government sets a threshold on how much local government can increase taxes.

Read more: Birmingham's bankruptcy is only the tip of the iceberg – local authorities across England are at risk

When costs exceed what councils are able to raise, they have to explore creative solutions to raise revenue, such as traffic fines. This basically means transferring the local crises onto citizens, who are already struggling under cost of living pressures and record-high taxation levels.

In England, 12 section 114 notices have been issued since 2018, compared to just one before, in 2000. Most of these “bankruptcies” were due to financial challenges. When councils run out of money, they have to cut discretionary services like art programmes and voluntary funding, and even reduce the provision of essential services.

The government has offered some help to struggling councils, but it is not enough to offset a decrease in real term funding that started in the early 2010s. According to the Local Government Association, councils have suffered a 27% real terms cut in core spending power since 2010-11.

The situation is equally bleak in Wales. While, like in England, councils are receiving more funds this year, it comes after years of real-term cuts. In response, Welsh councils have announced council tax hikes of up to 21%.

How councils deal with financial troubles

There is no prescribed approach as to what happens after a council issues a section 114 notice. Usually, local councillors have to adopt emergency measures. These may include staff redundancy, cuts to services and the sale of property and other assets.

Councils will also try to increase their revenue. One way is to ask for “exceptional financial support” from the Department of Levelling Up, Housing and Communities. This been agreed for some local authorities since 2020, sometimes repeatedly.

Photo of a bus stop temporarily closed sign against a blue sky
Struggling local councils may increase fares for public transport or reduce services in order to save money. Electric Egg/Shutterstock

Alternatively, councils can increase local taxes of up to 10% without calling for a local referendum. This is what happened to Thurrock, Slough, Croydon and Birmingham in 2023-24.

In some cases, local authorities may try to raise money through increasing prices of specific services. Nottingham has proposed raising prices of events, public toilets and transport.

If progress appears insufficient or too slow, the government may step in and appoint commissioners to run the authority. Such a decision may also be justified by political rivalry between central and local government. In the most extreme cases, allegations of negligent or criminal behaviour from previous executives may trigger a public inquiry.

The bigger picture

In addition to the one-off funding package, the government is now considering relaxing budget rules, allowing local councils to use funds from the sale of local assets to fund essential services. These funds are currently restricted to funding capital expenditure or paying off debt. This move tacitly recognises that the current level of government funding is insufficient.

These latest measures are a plaster on the wall of a dam about to burst. The government needs to take meaningful steps to address a decade of real-term cuts instead of tweaking funding at the margins. Failure to act will result in hundreds of “zombie” councils – staff stripped to minimum, able only to deliver essential services. Councils also need long-term plans to support vulnerable communities, as cuts to social care and social housing have increased homelessness.

We researched local authorities around the world. We’ve found that having strict accounting and reporting rules can guard against the kind of financial problems that so many local councils in England and Wales are facing. And we are currently looking into what needs to be done to protect vulnerable citizens when their council goes bust.

These “municipal bankruptcies” show that councils are in need of a structural makeover. Transparency and accountability need to be improved, and expert local staff need to be appointed and charged with financial decisions. Risky commercial ventures should be limited. And, most urgently, the central government must provide adequate funds to support essential services, which will be in even higher demand with an ageing and vulnerable population.

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