More councils to file for bankruptcy as debts double

Councils have increased borrowing to offset funding cuts from Westminster. This has led to warnings about further council bankruptcy.

The research shared before the local elections in the country on Thursday showed the pressures that councils face amid rising interest rates and budget cuts by the central government, as well as the growing demand for services.

According to National Institute of Economic and Social Research, Britain’s oldest independent think tank on economics, local authorities have borrowed £52 billion from 2010 to 2023. This has increased the total debt burden to £119 billion. That is a 78% increase.

In the 2010s, the tightening of borrowing regulations and the lower central government funding to councils during austerity periods led local authorities to take on debt in order to fund capital investment, mainly residential or commercial property development, as a way to replenish their finances.

Westminster provides councils with a core grant, which they can supplement by collecting council tax.

Investment projects have not generated enough income to cover the rising debt burden. This has pushed local councils into a crisis.

Max Mosley is the author of the study and senior economist at NIESR. He said: “As Bank of England raised interest rates in 2021’s fourth quarter, local authorities that had borrowed money to cope with falling funding faced a new challenge.

Interest payments are doubling for authorities that need to renew debts (similar to homeowners refinancing their mortgages).

The impact of this dynamic on local government finances has been significant. Councils are now spending an average of 15 percent, or £3.2billion, a year servicing their debts. This is up from just 9 percent in 2015-16. The average net worth of councils, which is a measure of their balance sheet strength has fallen by £80 billion, the biggest drop ever recorded.

Mosley said: “A trend where local authorities declare bankruptcy as soon as a government is sworn into office [after the general elections] will make any government, in any country, look unenviable. It will take a lot of money and reform to ensure that this is not the case.

Croydon Council has declared bankruptcy multiple times in the last few years. Nottingham council filed for bankruptcy last year. Birmingham City Council has been forced to make drastic cuts in order to relieve pressure on its finances.

On Thursday, more than 100 local authorities will hold elections. Voters will choose the London Mayor and Assembly Members. The voters will also choose ten mayors from outside of the capital.

Shaun Davies, the chairman of the Local Government Association said that councils are continuing to transform their services, but it’s not sustainable to expect them do more with less, given the unprecedented cost and demand pressures.

Davies said that “keeping them on this financial drip-feed has led to a steady weakening” of local services.

Department for Levelling Up, Housing & Communities spokesperson: “Councils ultimately are responsible for their finances, but it is our firm belief that they shouldn’t put taxpayers money at risk when they take on excessive debt. The levelling-up and regeneration act gives the central government new powers to intervene when councils are taking excessive risks with their borrowing and investments.

We announced a £600 million additional support package for English councils, increasing their total funding for this fiscal year to £64.7 Billion — a 7.5% increase in cash terms compared to 2023-24. Local government will also see an increase in real terms in its core spending power from 2019-20 to 2020-25.

According to the Office for Budget Responsibility (OBR), unprotected departments – including local government – will see their funding in real terms cut by an average annual of 2.3% over the next four year.