Will Northamptonshire be the last council to go bankrupt? We’ve crunched the numbers

Birmingham Town Hall. Image: Very Quiet/Wikipedia Commons.

In two months’ time the UK will hit the 8th anniversary of the Conservative’s austerity programme – an economic strategy that has survived three elections, two Prime Ministers, and several missed deficit elimination deadlines.

Much of that burden has fallen on England’s councils. In early March, the National Audit Office released a report which showed that government funding for local authorities has dropped by 49 per cent in real-terms since 2010, resulting in a 29 per cent drop in spending power.

Since austerity began, councils have been protesting the squeeze in funding from central government – and in February, the first domino finally fell.  By enforcing a section 114 notice, Northamptonshire County Council became the first local authority in over 20 years to effectively declare itself bankrupt, banning all new expenditure in order to hit its legally required balanced budget.  Now, the question may not be if more councils may follow suit, but when.

Austerity may not be on everybody’s lips anymore, but its effects are still rippling throughout the country. Future reductions in funding have led the Local Government Association to project an overall spending gap of over £5bn by 2020, meaning councils will be scrambling to cut costs and generate additional income in order to fulfil their services. Rob Whiteman, chief executive of the Chartered Institute of Public Finance and Accountancy, has given a bleak warning: “Through my own conversations with chief financial officers, I have heard a number of warnings that councils may soon face untenable budget positions…The warning signs have been plain to see for a number of years.”

Future cuts come at a time when council services face enormous demographic pressures resulting in increased demand. There were 1.8m new requests for adult social care in 2015-16. Meanwhile 23.1 per cent of children are expected to be living in absolute poverty by the end of the decade, a rise from 17 per cent in 2009.

Without an increase in funding, it is difficult to see how councils will be able to meet these demands. Both the adult social care and children’s services departments take up huge portions of a council’s yearly budget. Research from the Bureau of Investigative Journalism has found that over 100 councils in England are known to have overspent on their Children’s Services budget this year. Add to the mix the slowdown in projected GDP growth, due to the uncertainty surrounding Brexit, and councils are facing a difficult task to cover financial gaps in their medium term financial planning.

So how big is the gap? The effect on some of England’s cities is as follows:

  • Manchester City Council identified a funding gap of £60m between 2017 and 2020, due to be eliminated through savings, a large part coming out of the adult social care budget.
  • Liverpool has identified a budget gap of £90.3m up to 2020, proposing more cuts which will help bring its overall budget savings to £420m between 2011 and 2020.
  • Bristol has identified a £46.7m gap which will require further savings on top of £33m in cuts this year.
  • Birmingham has already accumulated budget savings of nearly £650m since 2010. and has identified a further £123m in cost-cutting measures needed by 2022. The city’s financial report warned, "Consequently Birmingham City Council of the future will look very different from the one we had before austerity began." Worryingly, the council arrived at this figure after taking into account a plunge into budget reserves by £30m next year, and has admitted that future savings are becoming harder and harder to identify. Most ominously of all, the report announced, "the City Council has also had to consider whether, in some instances, it can no longer afford to provide its current level of service."

The problem is not just isolated to England: the devolved governments also have councils struggling to balance future budgets. Cardiff City Council is facing a £73.5m gap between 2018 and 2021, to be partially offset by £52m in savings. Edinburgh has identified £151m in savings to be found by 2023.

Then we come to Leeds City Council. In July last year the council produced a report projecting a £30.5m spending gap between 2019 and 2021. After planning future council tax increases up to the maximum cap limit, as well as millions in savings, the council stated: “At this stage it has not been possible to identify sufficient savings or income generation opportunities with which to entirely close the gap in the Council’s finances over the next three years.”

Since then, the Council has not come up with any fresh ideas, and the gap has more than doubled. It now stands at £71.9m.  A Leeds Council spokesperson said:

“We are absolutely committed to protecting frontline services, particularly for those who need our support most. To balance those burgeoning costs, we continue to look at ways to make the most of our limited funds and our investment in staff.  

“By targeting resources at preventative services, the council has ensured that the impact of changing demand and demography (which has resulted in significant cost pressures in many other councils) has been contained, for instance within children’s services and adult social care.”

It is worth noting that the council has managed to keep every single children’s centre in Leeds operating, with a commitment to carry on with no closures. That comes in stark contrast to the national picture: over 500 centres have closed in the UK since 2010.


In facing these budget pressures, one alarming trend has emerged: the NAO revealed that one in 10 local authorities could run out of reserves within the next three years, after dipping into their reserves to cover spending. In response, Meg Hillier, MP for Hackney South & Shoreditch and chair of the Public Accounts Committee, said many councils were relying on “rainy day funds” to pay for vital services. The Bureau of Investigative Journalism also found that 22 councils had reduced these reserves by more than 50 per cent in the last five years.

As well as dipping into reserves, councils also have to come up with ways to increase their income. Last month the LGiU found that 95 per cent of councils were hiking council tax, and 93 per cent were raising charges.

Whether these changes will be enough to prove Northamptonshire to be an isolated case remains to be seen. But for now, the warning signs could not be clearer.

Reporting on this story was aided by The Bureau of Investigative Journalism.

Nathan Fogg is a freelance investigative journalist.

 
 
 
 

What’s the constitutional status of the Isle of Man, then?

...what? Image: Google Maps/CityMetric.

Amidst the tumult of Brexit negotiations, away from questions about the integrity of the Union itself being asked by wearied bureaucrats in Edinburgh, Belfast, Brussels and London, the constitutional uncertainty of our times has washed up on the shores of the Isle of Man. Now it threatens the slumber of policymakers in Douglas, too.

The ten-by-forty mile island in the Irish Sea is best known internationally for its annual TT motorcycle races and tax haven status. If you haven’t been you should go: the variety of scenery is breath taking, as are the economics. Lamborghinis emerge from the back of slate cottages, a seaside dwelling can set you back more than an Edinburgh duplex, and the gilet prevalence index is off the charts in certain localities.

The reason for the disconnect is the constitutional relationship between the Isle of Man and the UK. For centuries the island supplemented threadbare revenue streams from subsistence farming and fishing with a robust smuggling sector. The IoM government homepage clearly, maybe even proudly, states that it has never been part of the UK: in the 1700s plans to buy it out and make it part of England were shelved after local unrest, while the current arrangement of Home Rule dates to the early 1800s.

Today the IoM government is based in Douglas, the island’s largest town. Its funding comes through a revenue sharing agreement, the “common purse”, with tax gathered locally on behalf of London and returned to the island according to an unpublicised formula. The agreement has been a source of contention for about as long as it’s existed, but ire has grown proportionally with the island’s pre-eminence as a tax haven. Its detractors point out that the UK consistently gives back to the IoM government more than it gathers, effectively subsidising the island’s status as a tax haven; while its supporters are wealthy.

A map of the Isle of Man. Image: Eric Gaba/Wikimedia Commons.

In a world gripped by economic injustice, the IoM drives social change with a programme of support to welcome the huddled masses of oligarchs yearning for freedom from autocratic tax regimes. Income tax tops out at 20 per cent but, fear not, it’s capped at £150,000. Corporation tax is nil, until your firm earns £500,000 a year; then it has to pay 10 per cent on everything over that. For mega-wealthy émigrés forced to flee odious obligations like capital gains, inheritance or wealth tax, there are opportunities to invest in local property, to get back on your feet: proceeds are taxed at 20 per cent.

The Isle of Man enjoys the same constitutional status as the Channel Islands: the UK handles its accountancy and defence, but aside from the constant vigilance required to keep Dublin at bay the only international hassle comes from Brexit. In the same way as the IoM has never been part of the UK, it’s never been part of the EU – it enjoys all the benefits (or unconscionable infringements) of membership by virtue of a legal protocol which doesn’t bestow membership. Crucially, the IoM doesn’t have any representation with the EU – it can’t, being the kind of Schrödinger jurisdiction which is neither part of the UK nor its own recognised area.


That distinction brings other problems. Regardless of how Brexit pans out, the EU has shown signs of going to war on tax avoidance – a rare political argument which unites populists and progressives. The EU now maintains lists of high risk money-laundering and tax compliance jurisdictions, and the IoM’s prominence in the international sector was part of the reason some MEPs have pushed for including the UK as a whole.

The IoM experiences the paradox of autonomy without representation. Its relationship with the UK has often been hamstrung, too, such as in 2009 when the Treasury slashed common purse funding in an attempt to nudge Douglas away from its tax avoidance platform.

Domestically, the distance between the plutocracy and everyday islanders is stark. Most people on the island are not wealthy: they rely on public services and work jobs like anywhere else. After the IoM’s funding was cut by London at the height of the financial crisis, lower and middle income earners were worst hit. Now the island has to maintain a favourable tax code for plutocrats while supporting public services used by the people who need them. It’s a difficult balance to strike, and likely to become more so if the EU pursues its anti-tax avoidance agenda post-Brexit.

Simon Jones is a writer based in Glasgow.