At least 12 English councils have been in rescue talks with the government, in what could be the “tip of the iceberg”, according to experts, as the Covid-19 pandemic lays waste to local authority finances.
Croydon council in November became only the second local authority in 20 years to issue a “section 114 notice” — equivalent to bankruptcy for a local authority — following its use by Northamptonshire county council in 2018.
But Rob Whiteman, chief executive of the Chartered Institute of Public Finance and Accountancy, on Monday said 12 authorities are in talks with the Ministry of Housing, Communities and Local Government “in or around a section 114 position”.
Of those, six have agreed terms with the government, he added, employing so-called “capitalisation orders” from ministers to allow greater flexibility to use capital funds for day-to-day spending — in order to prevent entering a section 114.
“I think personally there are more than 12,” Whiteman said in a hearing by the MHCLG select committee. “I think 12 probably is the tip of the iceberg.”
Whiteman told MPs that the sector had entered the Covid-19 crisis having endured “significant cutbacks” during the past decade of public spending cuts.
Richard Watts, chair of the resources board of the Local Government Association, said councils had seen a £15bn cumulative cut in their Whitehall grants since 2010.
Now they are battling a “double whammy” of a decline in revenue streams because of the pandemic, ranging from lost business rates to a fall in payments such as parking charges and fines. If there is a rise in unemployment after the pandemic it could leave councils facing further shortfalls for months beyond, experts have warned.
“The sector was extremely challenged going into this Covid crisis,” Watts said.
Some councils had then endured specific problems, citing how Manchester and Luton had both been damaged by their investments in local airports, whose passenger numbers have fallen because of lockdowns.
The public accounts committee recently warned that many councils were in a “precarious financial position” because of the wider crisis, predicting an increase in authorities issuing section 114 notices to suspend their non-essential expenditure.
The committee also criticised some councils for taking on “extremely risky levels of debt” to shore up their dwindling finances, often investing it in commercial property, which has suffered from declining rents over the past year.
Central government has provided local authorities with £3.6bn of additional grant funding during the pandemic and some councils have been able to secure other central government support. But that would still leave local councils £2bn short of an expected £7.2bn hit to their finances in 2020-21 from the coronavirus crisis, according to research from the Institute for Fiscal Studies.