One in six councils could run out of money next year. That’s the warning from Grant Thornton UK who say that Councils in England face a £7.3bn financial black hole by 2025/26 and that in order to remain afloat, Councils will need to find savings of over £125 per head of population in the next 3 years.
The grave local government finance picture is now starting to turn into a matter of 'when' rather than 'if' a Council is on the precipice of issuing a Section 114 notice.
A Council already in dire straits is Thurrock, a unitary authority in Essex which has been put into special measures by the government who have appointed a commissioner from neighbouring Essex County Council to ensure Thurrock doesn’t fall further into debt.
Just a few years ago, Thurrock Council was boasting that they were the only Council in the UK running a budget surplus. It raised eyebrows at the time, and the Council is certainly raising more eyebrows now.
Last month it was revealed that many Councils across the country, including several neighbouring Councils, were owed large sums of money from Thurrock after lending more than £900m to invest in solar energy. Essex Council's Castle Point Council is owed £3m, Maldon £2m and Tendring £6m, all of which should be repaid by May 2023.
Colchester and Brentwood Councils have also told the local democracy reporting service that they have lent money to Thurrock, but have not disclosed how
much. In total, Thurrock Council has borrowed £1.5bn from Councils and private investors, mainly to invest in a solar farm business which has not produced the quick financial turnaround they were expecting.
At the end of the first quarter of this financial year, Thurrock owed £941m to other Councils, nearly three times more than any other Council in the UK, and the Essex County Council commissioner responsible for Thurrock’s finances intends to borrow £836m from the Public Works Loan Board (PWLB) to repay other Councils quickly.
Thurrock's example raises lots of questions.
How did the Council's auditors ever sign off the Thurrock Council accounts and budgets?
This week, the Council is reportedly set to borrow almost £1 billion from the PWLB - a government loan of £1 billion. With interest rates on the PWLB rising to over 5%, how will it cover the interest repayments, let alone the loan repayments?
Has the government set a new precedent? Will every Council that finds itself in financial hardship in the years to come be eligible for a taxpayer-funded bailout loan? It would make the Bank of England bailout for the pension funds last week look miniscule.
What did Councillors really know about what was happening and were they adequately trained to make these kinds of commercial decisions?
Is allowing the Conservative-controlled Essex County Council to mark the homework of the Conservative-controlled Thurrock Council really a recipe for success? What is the governance framework around this and are independent, expert commissioners now a thing of the past in local government?
With many Councils now facing bankruptcy in the coming years, recouping their loans from Thurrock will be a top priority, but they will also be looking inwards at what borrowing and investment they have made themselves in recent years and whether to continue pursuing ambitious projects or simply hunker down and prepare for the worst.
Lib Dem-run Cotswold District Council announced last week that it was looking to borrow £76.5m to invest in solar farm projects similar to Thurrock’s - a move that has been criticised by local Conservative MP Sir Geoffrey Clifton-Brown - who called it an"‘unsustainably large amount".
Although the sum is around 20 times smaller than that of Thurrock, Councils like Cotswold will need to demonstrate that their financial advisers have undertaken the required levels of due diligence on these schemes and that Councillors really understand the implications of these investments.. Cllr. Mike Evemy, Deputy Leader of Cotswold Council, says the Council is “looking for ways to tackle climate change and compensate for the reductions in funding from [the] government.”
As government funding for local Councils has fallen over the past 10 years, many local authorities are turning to investment projects such as green energy and property development to top up their balances and ensure more investment in their local areas. But just as with any business venture, if it isn’t a quick financial success then it can lead to debt problems which have a knock-on effect on day-to-day services provided by the Council.
Levelling Up funding will put government investment directly into local authorities (where it is really needed or money for the marginals remains a key question in the decision-making process), but this money is not designed to cover the day-to-day costs of the Council, but rather to invest in regeneration projects and boost local economies. As Councils make tough decisions between boosting their local economies through investment projects and hunkering down to prioritise day-to-day services, it is becoming apparent that Thurrock will not be the last Council to fall foul of inter-Council debt, but may serve as a cautionary tale to local authorities gambling all their chips on a single investment project, however noble the cause.