Two Tory-Run Councils Warn PM of Possible Bankruptcy

Patrick Butler,

Social policy editor, The Guardian,

November, 2022.

Two of England’s largest Tory-run local authorities have warned the Prime Minister, Rishi Sunak, that they will be forced to declare bankruptcy within the next few months because of the unprecedented financial crisis enveloping both councils

The leaders of Kent and Hampshire county councils said even “drastic cuts” to current services would not be enough to patch up the huge holes in their budgets created by soaring inflation and rising pressures in adult and children’s social care.

In a strongly worded joint letter to Sunak, Kent leader Roger Gough, and Hampshire leader Rob Humby, said while they recognised the difficult national economic circumstances, “we cannot sit by and let two great counties sleepwalk into a financial disaster”.

Ministers effectively had a choice, the letter said: to fund councils properly or change the law to remove the “outdated and under-resourced” legal obligation on town halls to provide services such as libraries and home-to-school transport.

Both councils faced budget deficits over the next few years “of a scale that has never been seen before”, they said, and unless ministers stepped in with emergency help and a long-term funding plan, they would be “likely to be considering section 114 [effective bankruptcy] notices in the next year or so”.

The letter said: “The problem is simple: the additional money that we can raise from council tax and business rates barely covers the normal inflationary pressures that we face each year. This leaves significant growth, particularly in adults’ and children’s social care, totally unfunded.

“Without a fundamental change either in the way in which these two services are funded, or in our statutory obligations, all of upper-tier local government will soon go over the cliff edge.”

Although bankruptcy will not result in councils stopping core services, issuing a section 114 notice formally obliges them to formulate drastic cuts to services, make job cuts and announce fire sales of assets such as social housing, development sites and office buildings.

The letter reflects alarm across the sector about the long-term viability of local government, which has been battered by a decade of austerity cuts, followed by the pandemic and now rampaging inflation. Several councils have announced that they will unexpectedly have to cut services this year to balance the books.

The Conservative-run County Councils Network said at the weekend that only one if five of their members were confident of avoiding having to issue a section 114 notice this year. To stave off bankruptcy, they were cutting social care services as well as bus route subsidies, waste services and street lighting.

Reports in the Times suggested ministers were considering scrapping the cap limiting annual council tax rises to 2.99% plus 1% for social care in Thursday’s budget. But there is little confidence in the sector that this will provide a fair or viable answer to the financial pressures facing town halls.

A handful of councils have gone bankrupt in recent years – Northamptonshire, Croydon and Slough – while several others needed government bailouts to stay afloat – most recently Thurrock – because of financial chaos stemming from commercial investments designed to counter the impact of years of funding cuts.

Others have avoided bankruptcy only through dramatic cuts to services, while local government sector surveys suggest many councils will manage to balance the books this year by only draining their already depleted financial reserves – which will leave them brutally exposed in the coming years.

A spokesperson for the Department for Levelling Up, Housing and Communities said: “We understand that councils are concerned about the impact of inflation and we are working with them to understand how this will affect their budgets. This year, we have made available an additional £3.7bn to councils to ensure they have the resources to deliver vital services.”

© Patrick Butler / The Guardian 2022

Image: Kent County Council - Loop Images via The Guardian

The letter:

Roger Gough, Councillor Rob Humby

Leader’s Office, Leader of the County Council,

Sessions House, The Castle,

County Hall Winchester,

Maidstone Kent ME14 1XQ Hampshire SO23 8UJ

14 November 2022

Dear Prime Minister, Chancellor and Secretary of State,

Financial Crisis in Local Government

As the Leaders of two high performing, financially well run and long respected County Councils, we write jointly to you today to highlight in the strongest terms, the financial crisis facing upper tier local government over the next few years.

For both Hampshire and Kent we are facing budget deficits over the next few years of a scale that has never been seen before. We are writing to you now because without some immediate help and a clear plan for long term financial sustainability we are likely to be considering Section 114 notices within the next year or so.

The recent announcements of no changes to current settlements over the spending review period, no Fair Funding Review and the lack of a new two-year deal for local government only increases our concern, and we fully expect to see more failures in the sector over the coming year, unless there is legislative change to revise our statutory obligations to match the reduced level of resources, such as flexibilities.

County Councils carry out many important functions on behalf of Government (which both Covid and the Ukraine crisis have clearly demonstrated) and are well placed to help stimulate and grow the economy, particularly in the South-East where we already contribute significantly to the exchequer. Our ability to continue to do this will be severely limited if we are forced to move to a bare minimum provision across our vital services.

The problem is simple: the additional money that we can raise from council tax and business rates barely covers the normal inflationary pressures that we face each year. This leaves significant growth, particularly in adults’ and children’s social care, totally unfunded.

Without a fundamental change either in the way in which these two services are funded, or in our statutory obligations, all of upper tier local government will soon go over the cliff edge. Furthermore, this year’s inflation, as well as the forecast for next year, is well above normal levels. Legislative change is also long overdue to reform out-dated and under-resourced statutory obligations, such as the legislation from the 1940s to provide Home to School transport provision and the requirement on us to provide a comprehensive library service which is based on legislation from the 1960s.

You will no doubt argue that you have heard this from the sector before, but the current perfect financial storm, on top of 12 years of reductions in our core budgets, not to mention the crisis in Special Education Needs (SEN) and the potential added pressures of the Social Care Funding Reforms means that there is nowhere left to go, although we welcome the potential announcement to delay the reforms and hope this gives the Government time to better understand the implications for the sector.

We are both looking at how far we can go in closing our future budget deficits both revenue and capital; whilst there are some options for generating savings, most of these are going to be very unpalatable and will impact on some of the most vulnerable in our society.

However, even with these drastic cuts to services, we do not believe we can close our future budget gaps, based on current forecasts and will need to consider entering into formal talks with our auditors, DLUHC and Treasury over the coming months.

We believe that our common experience demonstrates that this is not an issue that can be resolved by one-off handouts that will keep the sector limping along; that offers only a recurring cycle of service cuts, and even that looks impossible to deliver beyond the shortest of horizons. Fundamental changes to the funding or expectations - or both – of local government are needed.

We have both consistently asked for the same things from Government for many years, in order to put us on a long term sustainable financial footing:

· Annual increases in funding that match the growth in adults and children’s social care services or legislative change to reduce the demands on the service

· Full funding of the Social Care Funding Reforms and Special Educational Needs growth, both of which are new burdens imposed by Government

· Freedoms and flexibilities around council tax setting and charging for services

· Legislative change that can help local government help itself.

Whilst we fully recognise the difficult national economic environment, we cannot sit by and let two great counties sleep-walk into a financial disaster and we would welcome discussions with Ministers, our MPs and Government officials as soon as practicable, as we have to finalise our budget by mid-December at the very latest. 3 We look forward to your response and for the opportunity for some meaningful dialogue in due course.

Yours sincerely

Roger Gough

Leader of Kent County Council

Member for Sevenoaks North and Darent Valley

Rob Humby

Leader of Hampshire County Council

Copy to: All Hampshire and Kent MPs