Birmingham city council has followed to the letter Ernest Hemingway’s famous two-speed formula for bankruptcy – “gradually, then suddenly”. A funding crisis has been looming for years as shrinking government grants combined with rising costs. But there have also been recent demands on the budget that speak to a record of poor judgment by local leaders, notably a £760m bill to settle historic equal pay claims and vast cost overruns in implementing a new IT system.
Downing Street has tried to score party political points from Birmingham’s woes by suggesting that fiscal deficiency is intrinsic to the Labour party, which controls the council. It is a lazy attack line that fails to explain why several councils currently or recently run by Conservatives have also issued section 114 notices – the mechanism for seeking emergency help from central government when there is no money left locally.
Earlier this year it happened in Woking. The Surrey town is now run by Liberal Democrats, but it was under Tory leadership when risky property investments were made that later turned sour, effectively bankrupting the council. Thurrock, Slough, Croydon and Northamptonshire – under a mix of Labour and Conservative leadership – have hit financial buffers in recent years. Many others are struggling to contain deficits and teetering on the brink of insolvency. The problem is not party-specific, at least not at a local level.
Nationally, however, many of the problems have their origin in decisions made when George Osborne was chancellor. Local government spending was not one of the politically sensitive areas ringfenced from the ravages of austerity and, as a consequence, councils absorbed some of the most swingeing cuts. Their funding fell in real terms by 50% in the decade after the Conservatives came to power in 2010.
Local authorities have a legal obligation to balance their books, so shrinking central grants led with brutal efficiency to the evisceration of services. There is a social impact from those cuts that then raises public demand for help from local government, increasing the burden of costs in a vicious cycle. Councils have been forced to sell assets and engage in complex financial engineering to generate cash and manage debts. Many have failed to get their accounts audited. And that was before the additional pressure of inflation and rising energy costs were fed into the equation.
There is a ticking timebomb under the economic foundations of local government across the country. The fuse was lit by Conservative economic policies, but the device was embedded in a dysfunctional constitution that denies local government significant fiscal autonomy, while also heaping it with responsibility for dealing with problems that originate in Whitehall. The Treasury always resists devolution of revenue-raising power for fear that councils will get themselves into financial difficulty and come to central government for bailouts. But that is happening anyway, as a function of overcentralisation.
There is a growing consensus, made more urgent with each report of local financial meltdown, that the status quo cannot be sustained. But reform is one of many hard tasks that Rishi Sunak’s crumbling government has neither the will nor the capacity to undertake. The Tories might try to eke some political advantage out of a Labour council going bust, but the financial crisis in local government illustrates better the intellectual bankruptcy of the party in charge at Westminster.
