On 24 October 2023, the City Mayor wrote to the Secretary of State for Levelling Up, Housing and Communities to bring the council’s severe budgetary problems to his attention. The letter highlighted our external auditor’s opinion that the council has “a strong record of financial and budgetary management” and that the auditor had “not identified any significant weaknesses in arrangements to secure financial sustainability”.
Local authorities across the UK are facing extreme budget difficulties, so the city council is not alone.
We want to be open about our financial position, so we have answered some common questions below.
Is the council going to go bankrupt?
No. Local authorities cannot go bankrupt. However, we are being open about what could happen over the next year or two.
So what is the council’s current financial situation?
We have controlled our spending well: between 2010 and 2020 we reduced costs by 50% in services other than social care. Until the pandemic, we did not have trouble keeping to our budgets. Nonetheless, due to rising costs, an increased demand for social care and expected cuts to our funding from central government, our budgets are under extreme pressure.
What is the council doing to manage this?
We continue to make savings wherever we can and have recently introduced restrictions on non-essential spending. Ultimately, we believe that the local authority sector needs significant additional funding to meet growing pressures. As well as social care, we are facing increased costs due to recent high inflation, more families facing homelessness, and the rising costs of transport for children with special needs. We also believe the local government funding system needs to be reformed to better reflect need and recent changes in population. We are highlighting these issues and petitioning for reform.
If you have no money, why are you still spending on regeneration and transport schemes?
Council spending is divided up into different pots:
- The capital budget pays for land, buildings and roads.
- The general fund revenue budget pays for day-to-day services such as waste collection, street lighting and care for children and older people.
- The housing revenue account covers council housing, and is met from tenants’ rents.
- Maintained schools are funded by a separate grant.
It is the general fund revenue budget which is under extreme pressure – and the majority has to be spent on social care.
In recent years we have been very successful in applying for external funding to pay for infrastructure projects such as the railway station and cycle lanes. But we are not allowed to use these external capital grants to cover shortfalls in the revenue budget.
What might happen next?
Without increased funding, more and more councils will struggle to meet the requirement to set a balanced budget. This means they may have to write a section 114 report.
Whilst we can probably avoid a section 114 report in 2024/25, such a report is becoming almost inevitable before we set the 2025/26 budget.
What is a Section 114 report?
All councils are required by law to set a balanced budget. Each council’s director of finance is obliged to issue a Section 114 report if they believe the council’s spending is going to exceed its resources (including reserves). The report must be sent to every member of the council and to its auditors.
What happens after a Section 114 report has been issued?
The council must meet within 21 days to consider the report and decide what action to take.
During that period, no new spending can take place without the written approval of the director of finance. Existing commitments must still be honoured and we would still need to provide statutory services.
What happens after the 21 days?
If the council is still unable to set a balanced budget, a new Section 114 report must be written and submitted.
Why are you telling us all this now, as the council hasn’t issued a Section 114 report?
The council is highlighting the financial pressures we are facing, like a growing number of local authorities of different political affiliations. We are being open and transparent on the matter.
Can the council ask for help from central government?
Local authorities in trouble can ask the Government for “exceptional financial support”.
What exceptional financial support might be offered?
If support is offered, it is likely to be in the form of permission to use capital resources to fund revenue spending. For practical purposes, this would mean selling assets to cover the cost of services. However, the proceeds can only be used once.
Central government may also allow a council tax rise in excess of the limit which applies to other authorities.
To obtain exceptional financial support, the Government would expect our governance arrangements to be reviewed.
The Government has never provided cash support to an authority in financial trouble.
Can central government intervene in the running of the council?
Central government can intervene if it believes we cannot deliver a balanced budget.
What might intervention mean?
The most extreme intervention used so far is the appointment of commissioners who are given control over some of a council’s functions. This typically includes governance, strategic decision making, appointment of senior staff, and advice and challenge to budget setting.
Would central government commissioners set our budget?
No. The job of preparing budgets and a financial sustainability plan would be left with us, overseen by the commissioners. If we are allowed to set a high council tax increase, it will be up to us whether we make the increase or not.