Which services get cut first? The dilemma facing UK local authorities on the verge of bankruptcy

By law councils must adhere to a balanced financial budget every year and provide “Best Value” services to the public. With the current squeeze on finances many councils are finding it nye on impossible to balance the books and provide all the services they currently do.

According to the LGA (Local Government Association) (Save local services: Council pressures explained | Local Government Association) Councils are facing “the perfect storm”. Despite additional funding from central government, council finances are under strain “like never before”. The pressure on budgets is mounting due to high inflation, high energy costs, increases to the National Living Wage whilst the demand for services continues to rise. Rising demand for statutory services like social care and homelessness support have added to the cost pressures faced by councils. By 2024/25 cost and demand pressures will add £15 billion (almost 29 per cent) to the cost of delivering council services since 2021/22.

Local authorities can’t technically go bankrupt. Instead they issue what’s called a Section 114 notice which means they can’t commit to any new spending. Twelve Section 114 notices have been issued since 2018 compared to just one before, in the year 2000. Will there be more in 2024?

Issuing a Section 114 notice has several significant implications for a local authority and its operations. The impact is substantial, as it is a formal recognition that the council’s expenditure is exceeding its available resources. Here are some key impacts:

1. Immediate Spending Restrictions: The primary impact of a Section 114 notice is the imposition of immediate spending restrictions. The notice prohibits the local authority from making any new expenditure commitments that are not deemed essential for protecting vulnerable individuals or maintaining statutory services. The key word here is ‘statutory’ as compared to ‘discretionary’ services.

2. Service Disruptions and Reductions: The spending restrictions usually leads to disruptions in the delivery of local services. A council typically makes rapid and substantial cuts to services to align its spending with available resources. This can affect a wide range of services including social care, library services and waste & recycling collections even though they are all statutory services as the law doesn’t state the frequency of the service that must be maintained. So, libraries closing for more days in the week or less frequent domestic waste collections are ways by which Councils can save money by reducing service levels while still maintaining the service obligation.

England’s local authorities will receive a £600m funding boost from the government following recent warnings of further bankruptcies. Communities Secretary Michael Gove said they would share £500m to help fund children’s and adult social care Councils to get extra funding to tackle cash crisis – BBC News

A recent survey by the Association for Public Sector Excellence (Over 80% of local councils expect cuts in their parks budgets – apse) on the state of local authority parks services found that 85% of those surveyed are expecting budgets cuts of at least 5%, with almost 30% expecting cuts of over 15%.

But discretionary services are typically the first to go especially any relating to culture such as the arts or leisure provision. One measure being proposed by Somerset Council, as it tries to save £100m, relates to Yeovil Recreation Centre – a sports facility used by athletics, hockey and football clubs – which could lose its council funding and face closure. The local community are putting up a fight to save it The tough choices facing cash-strapped councils – BBC News

3. Financial Reassessment, Financing Debt and Credit Rating Impact: The issuance of a Section 114 notice signals a need for the local authority to reassess its financial situation urgently. It requires a thorough review of the budget, identifying areas of overspending, and developing a plan to bring expenditures in line with available resources. The Section 114 notice can also have implications for the local authority’s credit rating. Credit agencies and investors may view it as a sign of financial instability, potentially affecting the council’s ability to borrow at favourable terms.

Many councils have large debt mountains from infrastructure projects that may need refinancing in the months ahead. UK councils owe a combined £97.8bn to lenders, equivalent to around £1,400 per person.

At Woking Council the debt figure was nearly £19,000 per person, the highest in the country (Councils in crisis: Town Hall debt levels staggering, MPs warn – BBC News). The council’s debt is expected to rise to £2.6bn having committed to spending £605m on the Victoria Square skyscrapers in its town centre and £495m on a failed 1,000 housing development scheme which was canned in October 2022. The council has proposed £12m in cuts next year, including the removal of all public toilets, a phased three-year closure of a swimming pool and the ending of funding for a theatre.

4. Recovery Plan: To lift the Section 114 notice and resume normal financial operations, the local authority must develop and implement a credible recovery plan. This plan outlines how the council intends to address its financial challenges, reduce expenditures, and ensure fiscal responsibility. Many council’s require external advice from financial experts to help them recover.

In summary, a Section 114 notice is a serious, last resort measure that signals financial distress and triggers immediate actions to address the situation. The impacts are broad, affecting services, finances, and the reputation of the local authority. Resolving the issues and lifting the notice typically requires a concerted effort and a well-defined recovery plan. When a council “goes bust” and makes cuts, it means prioritising services they’re required to provide by law, while other ‘discretionary’ services face the brunt of the cuts. And, to raise income, Councils facing financial difficulty raise Council Tax levels which means that the public have to pay more in local taxes but receive less services for their money.