Understanding Local Council Insolvency: Croydon and the Broader UK Context

The recent financial struggles of UK local councils have been a significant topic of concern, particularly in areas such as Croydon. This article explores the process of local council insolvency, delving into the unique circumstances faced by Croydon and the broader implications for local governance in the UK.

What Happens When a Local Council Goes Bust?

In the UK, local councils can go bankrupt when they cannot balance their books according to the law. This financial issue arises specifically when a council is unable to maintain a balanced budget, predominantly due to increasing costs and reduced funding. For example, Bradford Council, one of the most deprived authorities in England, is currently facing a substantial deficit of ￡73 million that needs to be addressed by March 2024.

The Process of Declaring Bankruptcy

When a council anticipates breaching its lawful income and expenditure, it issues a section 114 bankruptcy notice under the Local Government Act 1988. This process limits the council's ability to incur new costs, forcing it to prioritize existing commitments rather than introducing new spending. Councillors then meet to evaluate potential solutions, such as cutting budgets, increasing council tax, or reallocating funds. Historically, only a few councils issued section 114 notices, but this trend has recently shifted.

Casu?les and Concerns Across the UK

Notably, several London boroughs including Hillingdon and Hackney issued section 114 notices in 2000. However, since 2018, the number of councils issuing these notices has increased, with notable cases in Birmingham, Croydon, Nottingham, Thurrock, Slough, and Northumberland. Kent and Hampshire councils have even warned the government about considering such notices, while another nine councils, including Guildford, Kirklees, Southampton, Coventry, and Somerset, are at risk of insolvency.

Alternative Solutions

Central government can intervene by issuing a capitalization directive, which allows councils to sell assets to cover daily expenses. This alternative approach has been adopted by neighboring Leeds council, which is selling land to fund essential services. Some affected councils like Bradford are considering requesting a capitalization directive as an alternative to issuing a section 114 bankruptcy notice.

National Context and Austerity Measures

Nationwide, the UK government's austerity measures since 2011 have led to real terms funding cuts for all councils. This reduction in funding has resulted in some local authorities being forced to reduce their scope of services, especially in areas such as adult social care and children's services. Bradford Council, for instance, has made over ￡350 million in savings, but still struggles with a ￡73 million deficit.

Implications and Outlook

The risk of a wave of council bankruptcy notices in 2024, just ahead of the general election, poses a significant challenge. This scenario could leave many voters feeling either angered or bewildered. The current situation highlights the pressing need for reform in local governance and funding structures to ensure that local councils can provide essential services to their communities effectively.