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The worst of the Tory-created council cash crisis is yet to come

Easy to criticise and burden with blame, local government is the perfect scapegoat for the Tories

Local council finances: like a game of Jenga. Photo: Getty

For the past 14 years the Tory government has played a cynical game of Jenga with local council finances, pulling just enough money out of the foundations to create structures that are both fragile and hollow. In 2024 the structure is falling apart.

After 18 years in which no council declared bankruptcy, over the past two years eight councils have done so, and more look set to follow. In a survey before Christmas, one in five local government chiefs said they feared having to issue a so-called Section 114 notice, which in effect triggers a government bailout and ends local democratic control.

More than half of all councils fear they cannot meet their statutory duties, to provide social care for example, during the next financial year. And that’s despite the government allowing them to raise council tax by 5% this year.

At the root of the problem is a decade of fiscal austerity, which has cut the spending power of local councils by 27%. It is compounded by rising need and a period of double-digit inflation, which saw charges for heavily outsourced local services and energy bills go through the roof. And beneath all that lies a government strategy of loading service obligations on to councils, while removing them from itself.

Take the most recent statistics for “looked after children” – ie those who are in council care for more than 24 hours. There are 80,000 children in the care of councils, up from 64,000 when the Tories took office. Around 7,290 of those are unaccompanied asylum seekers – a figure up 29% year on year.

In 2022 an independent review recommended injecting a further £2bn a year into this one local government service alone – yet the sums invested so far fall way short of that.

But wherever you look across council services you see the same mixture of rising need, reduced central government funding, ring-fencing to protect the absolute essentials, and resulting budget sclerosis and fragility.

And because councils are forbidden by law from running an annual deficit, the moment they hit one they have to go for Section 114 and hand control of all spending to central government.

The system is now so fragile that even small events can lead to sudden collapse. In Nottingham, for example, the budget looked under control until June last year, when its bosses found “small changes in demand disproportionately materialising in large financial pressures, particularly in social care and homelessness”. On top of that, the national pay agreements won by council workers were beyond what Nottingham had budgeted for, and drawing down further reserves to pay for current shortfalls suddenly became impossible. It filed for Section 114 in November.

Part of the answer lies in the reform of council tax. It was designed on the back of an envelope when Margaret Thatcher’s hated poll tax plan collapsed. It is distributionally unfair: the owner of a house in Hartlepool worth £150,000 would pay more council tax than someone with an £8m house in Westminster. On top of that, there are now massive arrears building up – around £4.4bn uncollected at the last count.

Anecdotally it seems that, as the cost of living crisis eats into wages, families under pressure are paying their council tax bills last, or not at all, secure in the knowledge that the enforcement options are ineffective.

But until the UK gets real about using the nationwide taxation system to redistribute wealth, even the reform of council tax won’t work. Because if you raise local taxation, in an economy blighted by large tracts of poverty alongside concentrations of wealth, you will doom many towns and suburbs to a future of permanent depression.

If we want a local government system where democracy is real, there has to be room for choices: right now, for the eight councils under Section 114 there are few effective democratic choices, because central government is in control. For real choice to happen, centralised funding for councils has to be bigger, and government has to find a way to sustainably tax both businesses and consumers. That way we enable the poorest areas to invest in levelling up, and the hardest-pressed councils to meet their acute social needs.

Since the local business tax system is also in crisis, the most obvious solution consists of four broad measures: central government should fully fund every council to meet its statutory duties; it should allow councils to remove exemptions from council tax – including the single-person exemption; it should allow councils to raise the tax by more than 5% a year; and it should re-band every property in Britain, so that those with the highest valuations start paying at a commensurate rate. If, on top of that, you imposed an online sales tax on to the tech firms that have replaced the high street, you might begin to solve the problem.

This crisis is only going to worsen. For some of the councils that have already fallen over, there were obviously rash investment decisions feeding into the crisis. But in the next phase, we’ll see councils confronting situations over which they had no control – such as historic equal pay claims from women, or national pay awards they did not budget for.

But local government is the perfect scapegoat: easy to criticise, because it employs no flash PR firms and has no friends in Fleet Street; easy to burden with blame that should rest elsewhere.

The only real question for 2024 is whether the council crisis happens fast, making it an election issue, or unfolds slowly enough for the whole Jenga tower to come crashing on to the desk of Labour’s Angela Rayner within weeks of taking office.

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