New and untried strategies

The UK government introduced austerity from 2010, reducing expenditure and introducing local financial self-sufficiency that forced local councils to find savings and new income sources to close funding gaps.

As new and often untried financial strategies and practices were devised, ‘councillors at the casino’ have been characterised as taking risks with local taxpayers’ money and jeopardising essential local public service provision.

In recent years this financial squeeze has led to several high-profile cases of local councils such as Woking, Croydon, Slough, and more recently Birmingham, having to declare themselves unable to balance their budgets and become effectively bankrupt. A growing number of others including Hastings, Kent, and Hampshire are threatened with insolvency and are on the brink of issuing a Section 114 notice legally required in such situations.

In a new book, Financialization and Local Statecraft, Professor Andy Pike, Henry Daysh Professor of Regional Development Studies, Newcastle University, looks beyond the high-profile councils hitting the headlines to examine the wider local government landscape in England since 2010.

Financialisaton is the growing role, power and influence of external financial actors, innovations, and markets in local councils and local public service provision. Local statecraft is the work of local politicians and officials in leading and managing local councils and their finances.

Based on research including over 50 interviews with national and local politicians, officials and finance executives, the study finds local councils have had to engage in more active and integrated financial and risk management strategies since 2010 amidst austerity, centralisation, and heightened risk.

Instead of a wholesale shift to ‘councillors at the casino’ and gambling with local service provision, the research reveals a differentiated landscape with overall limited engagements with financial innovations and risk taking.

Different approaches are being followed by local councils, from the handful of leading edge councils at the vanguard taking greater risks, to the intermediate councils who are active but less engaged, and the remaining long tail of most councils where such riskier activities are limited or non-existent.

Professor Pike said: “The greater risks some local councils have been forced to take and the often innovative and untried financial arrangements they have become involved with may end up further undermining their financial sustainability and resilience and eroding local accountability.

“Instead of relying on and adapting tried and tested strategies, the failure of many of these new and much riskier vanguard approaches to balance budgets raises important questions about what local government is for and how it should be funded.”

Greater risks

Professor Pike has found that across the 300 plus local councils in England, approaches vary depending on local council type and size, capacities and capabilities, risk appetite, openness to commercial finance, and economic and financial conditions.

Following over a decade of austerity and including the pandemic which saw some additional financial resources provided to the sector, local councils have continued their efforts to close funding gaps amidst growing service demands and higher costs due to rising inflation.

But these different coping strategies now appear to be running out of road as they reveal growing struggles across England to manage the greater risks they have been forced to take in dealing with national government austerity.

These greater risks have multiplied since 2010, reducing margins for error, and increasing the possibilities of failure. Impending or potential Section 114 notices are being discussed amongst a growing number of councils.

Local councils in England receive their funding from the UK government on an annual basis and are legally bound to balance their books and maintain reserves. However, the rising demand for local services such as social care, and the capped amount that can be charged in council tax, mean that the gap between revenue and expenditure is getting wider.

“A small minority of councils have followed vanguard approaches involving innovations, greater risks, and taking on ambitious schemes often supported by high levels of borrowing especially from the Treasury’s Public Works Loan Board,” explains Professor Pike.

“However, these new and greater risks need to be mitigated and managed properly. If they’re not, and that may be because of relatively limited commercial or legal experience or unforeseen factors, then it’s more likely that a vanguard council may find itself financially very vulnerable.

“In the end, it is local communities who are impacted most as the costs of failing to manage the greater risks ultimately fall back onto local residents through increased local taxes and reduced local services. This risks local residents and taxpayers becoming further disengaged and distrustful of their local councils with worrying implications for local democracy.”

’Financialization and Local Statecraft’ is published by Oxford University Press.