Councils Going Broke Because of Bad Management, Watchdog Says

Undated file photo of a smashed piggy bank. (Anthony Devlin/PA)

Bad management, rather than a shortage of money, is the reason why councils have been effectively going bust, according to the local government watchdog.

Lord Morse, chairman of the Office for Local Government (Oflog) said on Wednesday that councils “have to be realistic” about how much support they can expect to get from Westminster.

The remarks came after three councils issue section 114 notices this year, with more councils warning they may have to do so within one or two years.

Local authorities can’t go bankrupt the way a company can, but a council’s chief financial officer is legally required to issue a section 114 notice if they believe the council’s spending will exceed its income in a given year.

A section 114 notice halts all expenditure except essential spending, such as salaries and pensions for existing staff and fundings for delivering a minimum level of statutory services or protecting vulnerable people.

Associations representing the councils have called for more central government funding, blaming the financial difficulties on inflation and growing demand.

But Lord Morse said bad management is to be blamed for the effective bankruptcies.

Speaking to The Times of London on Wednesday, he said, “All of the failures that we’ve seen so far—all of the authorities that are in special measures—are not primarily attributable to a shortage of money. They’re to do with failures in management or failures in governance.”

The watchdog said he “really can say that quite definitely.”

“So, while I listen respectfully to the concerns about money, and I’m not surprised that people feel that way, our actual experience is there’s a lot to be done in improving the quality of management and oversight,” he said, warning councils to adjust their expectations.

“There have been substantial economic pressures that have affected everyone in the country, including local government,” he said. “They all say they feel some degree of pressure [and] I recognise there’s a fair amount of reason for it at the present time. So we’re not unsympathetic to that—but you have to be realistic. There’s a limited amount of support that they can expect to get from the centre,” he said.

Since the Local Government Finance Act 1988 became law, 10 councils have issued a total of 14 section 114 notices, and 12 of them were issued because the councils couldn’t balance the books. Most of them—ten notices from seven councils—were issued in the past three years, according to the Institute for Government’s tally.

London’s Croydon has issued three notices between December 2020 and November 2022, and Woking, Birmingham, and Nottingham are the latest councils taking the step.

Labour-run Nottingham City council, which issued its second section 114 notice last month, blamed increased demand for services including children’s social care packages, inflation, and income shortfalls, although the council has had financial problems for years. The council’s first notice was issued in 2021 because of “unlawful” misappropriation of funds from its housing revenue account.

Labour-run Birmingham City council issued a section 114 notice in September after it failed to settle a £760 million bill on equal pay claims.

Woking Borough Council issued a section 114 notice in June, saying it would not be able to balance its budget for a number of years with a debt portfolio was £1.8 billion.

The Liberal Democrats running the council inherited much of the debt from a borrowing spree between 2016 and 2019 under the Conservatives to fund property development projects that ended up losing value since the COVID-19 pandemic.

According to Oflog, as of financial year 2021/2022, Nottingham’s debt was 441.3 percent of the council’s core spending power, and almost a third (31.3 percent) of its core spending power was used on debt servicing.

The size of Birmingham’s debt was 435.8 percent of the council’s core spending power, but the council used less (18.9 percent) of its core spending power to service the debt.

Croydon’s debt was 478.6 percent of the council’s core spending power, with 16 percent of its core spending power used on debt servicing.

Woking’s debt was over 146 times (14,643 percent) its core spending power.

Croydon, Slough, and Thurrock, which issued section 114 notices last year, were allowed to put up their council taxes by 15 percent, 10 percent, and 10 percent respectively for the financial year 2023/2024 while the limits were generally between 2 to 5 percent.

According to The Times of London, Lord Morse said Oflog was starting to collect data from councils in areas including senior staff turnover and the drawing down of reserves.

“If we’re seeing some of these concerning indicators, we want to start having an engaged discussion about what’s going on,” he said.

In a letter to local authorities last week, Josh Goodman, Oflog’s chief executive, said the watchdog plans to set up an early warning system  that involves data collection and analysis, and conversations with local authorities that are identified as potentially at risk.

Oflog also began publishing new metrics on its Data Explorer website and is considering other proposed metrics.

“Our approach will be to have discussions about the differentiating data, and ask the questions,” Lord Morse said. “But it’s still the responsibility of local government to do something about it.”