PARLIAMENTARY DEBATE
Financial Distress in Local Authorities - 1 February 2024 (Commons/Commons Chamber)

It is a great pleasure to make this statement on behalf of the Levelling Up, Housing and Communities Committee about its report “Financial distress in local authorities”. Let me first thank the Leader of the House for tabling the business motion that has allowed the statement to be made. Our Committee Clerk is excited about the fact that we have apparently set a procedural precedent today; I was certainly not aware of that, but I am now. Let me also thank the Backbench Business Committee for originally providing the time for the statement.

Our inquiry looked into the extent of the funding gap in local authorities’ finances, and some of the main spending challenges that they face: social care, special educational needs and homelessness. The report brings attention to key issues ahead of the upcoming local government financial settlement. It makes recommendations not only for urgent action to resolve the immediate crisis, but larger reforms for the Government to consider after the next election.

Everyone recognises that the financial crisis in local authorities across England is out of control. In recent months an alarming number of them have issued section 114 notices—admissions that their spending is exceeding their income—thus effectively declaring bankruptcy. In the last six years, eight authorities have issued such notices; in the previous 18 years, none did. It is no longer the case that a small number of individual councils with particular issues are in financial distress. We are now seeing widespread financial distress across large parts of local government, and the situation is only getting worse. The Committee has heard evidence from the Local Government Association that one fifth of councils may be in financial distress within the next year.

At the heart of this crisis is a multi-billion-pound funding gap. The income available to local authorities from council tax, retained business rates and government grants has not kept pace with the increased demand for their services and the effect of inflation. As a result, the Local Government Association estimates that authorities face a funding gap of £4 billion over the next two years to maintain services at their current levels.

Witnesses have told us that the current funding system is “broken” and “not fit for purpose”. Successive Governments since 2010 have reduced the level of central Government grants awarded to local authorities by about 50%. This has been partly offset by a 20% increase in council tax, which has therefore led to an overall reduction in local authority core spending power of 26% in real terms between 2010 and 2021.

In the short term, local authorities need immediate additional funding. Our report recommends that the Government must include additional funding in the local government finance settlement for 2024-25 to fill the gap. Last week the Government announced £600 million of extra funding, and I give credit to the Minister, who has been assiduous in listening to the views of Members on this subject. However, although those measures are welcome, they are not sufficient.

Our report recognises that the Government have recently begun consultations on other methods of increasing the funds available to local authorities. We have cautiously welcomed the fact that they are considering giving authorities additional capital flexibilities to fund day-to-day costs, but we have recommended that those additional flexibilities should be considered carefully and limited to extending flexibilities over invest-to-save activity. We do not want to store up problems for future years.

Our report also recommends other ways in which the Government can improve funding for local authorities in the medium term. We have repeated the recommendation, which our Committee first made in 2021, that the Government must urgently reform council tax. This would involve undertaking a revaluation of properties and introducing additional council tax bands. Finally, we have once again called for the Government to implement the business rates reset and fair funding review, to which they committed themselves in 2016 but which they have yet to deliver, and to reintroduce multi-year settlements.

Our inquiry asked witnesses what had caused the sharp rise in council expenditures. It identified three particular areas where costs have risen significantly: adults’ and children’s social care, special educational needs, and homelessness. On adults’ social care, the increasingly complex needs of a changing population continue to drive up costs, and long-term workforce shortages and inflationary pressures have made the position worse. As the Committee recommended back in 2022, the Government need to recognise that local authorities will need several billion pounds of additional funding each year to continue to deliver and improve adult social care, and should plan a sustainable mechanism to deliver this funding that does not simply rely on increasing council tax.

On children’s social care, our inquiry found that councils are facing rising demand for residential care placements and a poorly functioning market for providing them. That has driven significant cost increases. Our report recommends an urgent comprehensive reform of the children’s social care system. As part of that, the Government should help local authorities consider greater collaboration so that between them they can deliver more children’s care services directly, instead of through private suppliers. Our inquiry also found that local authorities face significant financial pressures in providing services for children and young people with special educational needs and disabilities—SEND. The number of education, health and care plans has “skyrocketed” since they were introduced in 2014, which has significantly increased demand for more expensive forms of SEND provision and home-to-school transport. Funding is provided to local authorities through the dedicated schools grant, but it is not enough to meet the demand and does not cover home-to-school transport.

The Government have already been forced to take temporary measures to prevent SEND costs from forcing a large number of councils into bankruptcy. In 2020, the Government introduced a “statutory override”, allowing local authorities to exclude any deficits on their DSG spending from their main revenue budgets. Local government faces a potential cliff edge of section 114 notices whenever the statutory override comes to an end. The question is: will the Treasury write off that extra borrowing when the time comes? Our report recommends, therefore, that in the short term the Government should provide additional funding for home-to-school transport. In the long term, there needs to be a fundamental reform of the EHCPs, based on a cross-Government review.

Finally, our report makes it clear that rising homelessness has increased costs for councils. A big cause of the increase has been the Government’s decision to freeze local housing allowance rates in April 2020, so our report welcomes the Government’s recent announcement that they will increase local housing allowance rates from April 2024. However, it also raises concerns about the Government’s decision to then re-freeze the rates in 2026. Instead, we recommend that local housing allowance should be retained at at least the 30th percentile of local market rents. In the longer term, the best solution, as the Committee has recommended repeatedly, is to build more social housing, which will always be cheaper than paying for temporary accommodation.

These problems require a long-term solution. That is why the Committee has made recommendations in this report for whichever Government are elected after the next election. The next Government, regardless of their political persuasion, must embark on a fundamental review of the systems of local authority funding and local taxation, both council tax and business rates. In doing so, they must be clear about what local authorities are for and how they can best co-ordinate with delivery of the Government’s wider objectives. We have recommended that the next Government should consider many options, which may include land value taxes and others, and wider fiscal devolution. They must also explore all options for reforming the funding and delivery of social care services, to address the underlying causes of the acute funding and delivery pressures currently faced by local authorities. It is my hope that the need we have identified for additional funding will be properly reflected in the local government financial settlement we will debate next week, and that our other recommendations will be carefully considered by this Government and whoever form the Government after the next election. I commend this report to the House.

I thank the hon. Gentleman—I call him my Select Committee Friend—because he has been part of all these debates and always the Committee report was unanimous. He is absolutely right: we have to find a way of funding social care in the specific parts and for the general social care issues. Council tax simply cannot meet that burden; we cannot keep putting council tax up to cover it. That leads on to the additional challenge that most people do not receive social care and what they are seeing every year is their council tax going up but the services they do get—the libraries, parks, buses and road sweeping—being reduced. They are paying more and getting less, and that is not sustainable in the long term.

I recognise the particular problems in Birmingham. Some councils that have issued section 114 notices have specific problems; we know about the equal pay issues in Birmingham, for example. Some councils—I am referring generally—have perhaps brought those problems on themselves. However, as we say in the report, the challenge is no longer just individual councils with particular problems, but the generality of local government being under pressure, as set out by all our witnesses from the sector. In that situation, any challenging problem that comes to a council on top of a general problem can tip it over the edge.

If it was in my gift, of course I would give Barnsley the money it is asking for today, but unfortunately it is not. In another report, the Committee was fairly critical of the individual pots for levelling up, which are not joined up together. It is unsatisfactory that some councils can get bits of money from all these pots, while others get nothing at all. To address those problems, we have suggested a move towards single pots for local authorities, reflecting their needs and giving greater discretion and freedom to decide on spending at a local level. We are quite a long way off that at this stage. In principle, the Government recognise that is the way to travel, but they have not got a road map about how we are going to get there.

I completely agree that it should be made fairer. The only caveat I would add is that one authority’s system of fair funding is another authority’s unfair funding, which is always a challenge. Everyone accepts that the funding system must be brought up to date. The current funding system has data in it that goes back to the last century, which is not a reasonable way to allocate money in the current age, so yes, it needs to be revised.

On the funding cuts and the council tax increases, the biggest funding cuts have tended to be made to those councils that used to receive the most grant, which tend to be the poorer councils. The council tax increases have disadvantaged councils with a low council tax base, which tend to be those councils who received the biggest cuts. We have not gone into that in detail in this report, but I know we have had evidence to that effect in the past.

I thank my hon. Friend for his question. We clearly set out that the problem is due to a cut in funding. That is the result of a reduction in the central Government grant, with council tax increases only partly, but not wholly, replacing the funds. That issue needs addressing if we want councils to continue not only performing social care functions, but doing everything else that our communities rely on. We need fundamental reform; that is what we are calling for in the longer term. That is a challenge for any Government—I look at both Front Benches here—because if we reform local finance, some people will have to pay more and some will have to pay less. I always say that those people who pay more never forget about it and continue to blame the Government for years to come. Those who pay less will thank the Government and then forget about it next year. There is always a challenge when it comes to spreading the tax take around differently. But we will have to do it differently, because these council services—not just social care, but the parks, the buses, the libraries, the roads, the environmental services, the planning, and the economic development, which has almost fallen off the scale in some councils—are really important.

I thank my hon. Friend for his question. The report says that not every section 144 notice can be blamed on the Government. There will be circumstances in which councils get themselves into difficulty, but what we have said is that there are general problems coming down for councils, which have been created by a shortage of funding. We did make reference to Bradford. Bradford’s problem is the young age of its population—the number of children. Children services are run by trustees appointed by the Secretary of State for Education. That body has demanded from the council an amount equivalent to about 50% of its council budget. We could get the ridiculous situation in which the Secretary of State for Levelling Up, Housing and Communities sends in commissioners to run services to try to find the money to pay the trustees who are appointed by the Secretary of State for Education. That does not seem a great way for local government to operate.

I thank my hon. Friend for that question. Yes, it certainly is doing so. I have just produced a report about local government audit. There is a real problem there. If accounts have not been audited for three years, as in most cases, but probably longer in other cases, how on earth do we know what is happening in local council finances? Certainly, getting local audit on an even keel by the end of this year is very important, but where accounts are qualified, as they will be, councils should not be blamed for that; it is the problem of the local audit system, and we really must sort that out.

While I might not completely agree with the Minister’s prayers, I agree that if we are to sort this out for the long term, particularly social care funding, we need a system that has general support. The Committee has called for that in the past. What we did on pensions reform a few years ago, cross party, has stuck, so there is merit in that suggestion. Whether we can achieve it, I do not know, but we ought to try.