Why Nottingham and Birmingham will be followed by more cities running out of money

Almost a fifth of England’s council bosses have warned they are running out of money so badly that they will become effectively bankrupt this year or next. A report by the Local Government Association also indicates that nearly half think they will not be able to ensure the delivery of essential services from 2024 to 2025.

Some councils have already run out of funds. Nottingham and Birmingham councils were the latest to issue what are known as “section 114 notices”. These notices mean a council’s expected income is not enough to cover what it plans to spend – and that it cannot find a solution by itself.

And while councils cannot actually go bankrupt in the same way that a person or private business can, the act of issuing a section 114 is a very serious issue. It means all spending, other than providing statutory services such as adult and children’s social services, is immediately suspended.

This means no money for new contracts or projects on transport, waste, planning, leisure or culture.

As a result, the council is placed into a relationship with the government which is something more akin to a company going into administration. The organisation is effectively led and managed by commissioners appointed by the government.

In the most serious cases, these commissioners can end up taking over all responsibility for an authority. In Northamptonshire in 2018, they recommended the abolition of the county council and a complete overhaul of local government in the county, with eight councils being replaced by two new ones.

Notice period

Reasons for issuing a section 114 notice can vary. In Croydon, Slough, Thurrock and Woking, they came after commercial investments went wrong, leaving these councils with insurmountable debts and liabilities. (The government had previously encouraged local authorities to innovate their revenue streams.)

Meanwhile, the large councils of Birmingham and Nottingham appear to have been the victims of longer-term issues. Worryingly, these are problems experienced by local authorities across the country, which may be why so many council leaders have been telling the Local Government Association that they are pessimistic about their financial futures.

All have been subjected to policies of austerity since 2010, meaning major revenue losses from central government. At the same time, their ability to raise local income through council tax has repeatedly been capped.

Meanwhile, rising inequality in income and health mean demand for services – particularly from the poor and vulnerable – have persistently increased.

Our own research shows that demand on local authorities for social care, welfare, housing support and homelessness services has consistently increased since 2010. At the same time, expenditure on all other services has decreased.

Add to this the recent unprecedented rises in interest rates and inflation, and you have the fundamental factors behind what has happened in Birmingham and Nottingham.

While there were other specific financial challenges in both cities, it is the impact of these fundamentals that suggests the inevitably of more section 114 notices coming soon.

Yet, concerns about the financial sustainability and organisational resilience of local authorities are not new. There have been independent reviews, government select committee reports, and the creation of a “financial resilience index” – all of which have alluded to growing problems.

The international accountancy firm Ernst & Young, which carries out local government audits, recently established a “confidence barometer” that showed 72% of local authorities are “reducing funding in areas that are long-term priorities, to meet short-term budget pressures”.

Selling up

Back in 2001, when monitoring of local authorities was introduced, the UK government’s express objective was “turnaround and recovery”. The clear aim was returning a struggling local authority to a sustainable financial position, while keeping service provision intact. This happened through working constructively with those authorities, and commissioning help from national improvement agencies and other councils.

Since 2019, however, a change in the law meant many local authorities were able to fund frontline services by selling land and buildings – a plan reportedly adopted by dozens of councils.

We have also seen reductions in the quality and quantity of services, raising of council taxes, and – as a last resort – borrowing from central government.

The UK response to local authorities in financial distress has in effect moved from strategic turnaround and continuously improving public services to imposing fire sales, asset stripping, and reducing services. This is clearly not a sustainable solution to an issue that needs to be addressed urgently.

Peter Murphy is affiliated with Nottingham Trent University and has previously been a CEO of a local authority and a Senior Civil Servant between 2000 and 2009.