UK councils have been declaring bankruptcy, with seven local councils issuing Section 114 notices since 2018.
The bankruptcies follow extreme budget cuts that have seen services pared back to their bare minimum, meaning local councils struggling to provide adequate social care, transport, education and housing to their constituents.
But how does a local council go bankrupt? What happens to the services that they provide to residents? And what happens when a local council misuses taxpayer's money?
This is Decomplicated.
The bankruptcies follow extreme budget cuts that have seen services pared back to their bare minimum, meaning local councils struggling to provide adequate social care, transport, education and housing to their constituents.
But how does a local council go bankrupt? What happens to the services that they provide to residents? And what happens when a local council misuses taxpayer's money?
This is Decomplicated.
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NewsTranscript
00:00 [CHEERING]
00:03 Local government councils in England, Scotland, and Wales
00:06 are responsible for providing social care, transport,
00:10 education, and housing to their voting constituents.
00:14 Birmingham is officially broke.
00:16 The city council, the largest local authority in Europe,
00:20 is effectively bankrupt.
00:22 Services for more than 1.1 million people
00:25 are now under threat.
00:27 The announcement is one of several by local councils hit
00:30 by financial troubles in recent years.
00:33 I think it's devastating, not only for me,
00:35 but for everybody from every political party that
00:40 has become a councillor.
00:41 But how does a local council go bankrupt?
00:44 What happens to the services that they provide to residents?
00:48 And what happens when a local council misuses taxpayers'
00:52 money?
00:53 This is Decomplicated.
00:56 How do local councils fund services?
00:59 Local governments in Britain are formed of elected councillors
01:02 that are voted in by their local residents
01:05 and are each tasked with looking after specific areas
01:08 for the period that they are elected, usually
01:10 around four years.
01:12 70% of our budget gets spent on adult and social care,
01:15 and 30% gets spent on the highways, library services,
01:20 all the things that residents really value.
01:23 Since the 1980s, UK councils aren't
01:26 allowed to run a deficit budget, meaning
01:29 that they have to balance the entirety of their budget
01:31 over the course of a year.
01:34 Their local funding comes from a multitude
01:36 of sources that aren't just limited to taxpayer funds.
01:39 These include central government grants, business fees,
01:42 investments like renewable energy or high street
01:45 properties, council fees, and services such as parking.
01:50 70% of our net funding now comes from the local taxpayer,
01:54 with government only providing 30% through grants.
01:57 One of the big challenges we have
01:59 is that they're reducing those grants every year.
02:01 As a final resort, the government
02:03 allows a council to sell off its local assets
02:06 as a means of supporting its annual revenue budget.
02:09 Services such as leisure centres and libraries
02:12 are also heavily cut back to meet rising costs,
02:15 as these are considered less critical operations.
02:19 Why does a council go bankrupt?
02:23 The past decade has seen UK councils straining
02:26 under increasing financial pressure,
02:28 as local budgets have been hit by cuts implemented
02:30 by austerity measures from central government.
02:34 Growing costs, particularly housing and social care,
02:37 mean the budgets have been stretched beyond
02:40 their operational capabilities.
02:42 I'm not comfortable criticising other local authorities,
02:46 but I think some of the reason is that maybe there
02:50 were some decisions that were made in the past
02:52 when money was good and we all had strong finances
02:56 and they invested in some property deals
02:58 or some solar farm deals or whatever they were,
03:02 which were outside the normal remit of a council.
03:05 These gambles have led to multiple councils
03:07 getting themselves into debt
03:08 they cannot work their way out of,
03:10 eventually leading to a unique form of declared bankruptcy
03:14 known as a Section 114.
03:17 What does it mean if a council goes bankrupt?
03:21 Councils aren't subject to the conventional means
03:23 of bankruptcies as other businesses would be
03:26 and therefore cannot avoid repaying any previous debts
03:30 through this route.
03:31 During the financial year,
03:33 should the chief financial office declare
03:35 that the council does not have the funds
03:37 to meet its spending commitments
03:39 and they cannot cut anything to balance their budget,
03:42 then they will issue a Section 114 notice
03:46 instead of bankruptcy,
03:48 effectively freezing all of their spending
03:50 and reducing their required services,
03:52 such as water and sewage,
03:53 to their most cost-effective minimum
03:56 without fully shutting.
03:58 Upon issuing a Section 114,
04:00 the council must meet within 21 days
04:03 and discuss what their next course of action will be.
04:06 If they can, at this time,
04:08 they will decide on how to amend the budget
04:10 to reduce spending on services.
04:13 First thing that would happen is that
04:16 all the spending that is non-essential
04:18 would stop overnight.
04:20 They would then look at some of the areas
04:21 that we deliver that are non-statutory.
04:24 We would have to stop delivering
04:25 those non-statutory services
04:27 and that would probably be overnight.
04:29 We would no longer be running the council.
04:32 The officers would no longer be running the council.
04:34 It would be run directly by central government
04:37 through their commissioners
04:38 who would be making those tough decisions.
04:40 So it would be an unelected body
04:43 that are making the decisions
04:45 that impact the residents of our county.
04:48 So, which councils have gone bankrupt?
04:51 According to a 2020 study by the think tank
04:54 the Centre for Progressive Policy,
04:56 more than eight out of 10 English councils
04:59 are technically at risk of bankruptcy
05:01 due to the financial pressures
05:03 of the rising cost of living
05:05 and the fallout from the coronavirus pandemic.
05:08 But local councils going bankrupt
05:11 isn't a new issue.
05:12 In 2000, London's Hackney Council
05:15 was the first in history to issue
05:17 a Section 114 notice.
05:19 It wasn't until 2018 that another council,
05:22 this time Northamptonshire, did so again.
05:25 Northamptonshire has, however,
05:27 narrowly avoided two further liquidations since.
05:30 In 2021, Slough Local Council
05:33 attributed poor management
05:34 for having a £100m deficit in their budget
05:38 and in 2022, Croydon and Thurrock councils
05:41 declared bankruptcy.
05:43 Woking was the first to issue a Section 114 in 2023
05:48 with a deficit of £1.2bn,
05:51 followed by Birmingham with a £760m debt.
05:57 A group representing 47 councils
05:59 in the north, midlands and south coast of England
06:02 released a recent study that said 14 councils
06:05 are considering the move of issuing a Section 114 by 2024.
06:11 Other councils not represented in this group
06:14 that are considering the move include
06:15 Bournemouth, Somerset, Hampshire, Guildford,
06:19 Hastings, Middlesbrough and Kent County Council.
06:22 I can assure everybody that we are not in that area
06:26 of a Section 114 notice.
06:28 When we have a total budget of about £1.3bn,
06:31 £23m is a substantial number,
06:35 or it would be if it was in my bank account,
06:36 but in the finances of the council,
06:39 it's still substantial,
06:40 but it is something that we can control.
06:43 And the actions that we're taking,
06:45 we are fairly sure that we will have that under control
06:49 over the next 12 months.
06:50 Today, nearly a third of UK councils in the poorest areas
06:54 are considering a Section 114 as their only means of survival,
06:59 as their budgets are further stripped back.
07:02 At the end of the day,
07:03 you become a councillor to improve your local communities,
07:06 to support your local residents,
07:08 and to work with people to help those
07:10 that are more vulnerable.
07:11 I believe that if government don't start looking at funding
07:15 in this area,
07:16 then an awful lot of upper-tier authorities
07:19 throughout the United Kingdom will be into a death spiral.
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