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Councils in financial distress: income-generation through a commitment to economic development must be explored


Since 2018, eight English local authorities have issued Section 114 notices which indicate that the council’s forecast income is insufficient to meet its forecast expenditure for the next year, as the sector’s coffers reach breaking point.

More worrying, but not surprising, is that almost one in five council leaders and chief executives in England surveyed by the Local Government Association (LGA) last year think it is very or fairly likely that their chief finance officer will need to issue such a notice this year or next due to a lack of funding to keep key services running.

The magnitude of this issue, most notably at Birmingham City Council, has made front-page news. In fact, four councils in the past 12 months have declared themselves in effect bankrupt, while many more have signalled drastic spending cuts as they attempt to avoid potential insolvency.

Now, this is attracting political attention at the highest level, including through the Levelling Up, Housing and Communities Committee report on Financial distress in local authorities, published on 1st February. In this report, the cross-party committee said that Ministers must urgently inject £4 billion into English town hall budgets to head off an “out of control” financial crisis that threatens to drag well-run councils into bankruptcy and put local services at risk. 

The MPs said their report points to a “systemic underfunding of local councils in England”, and they have called on the next government to reform council tax and the wider funding system for local authorities “to ensure council finances are put on a sustainable footing”. It also stated that the current local government funding system was “broken” and that the next UK government must conduct an urgent review of what councils do and how local services are paid for, including local authority funding and taxation.

For now, following the initial Local Government Financial Settlement, councils In England have been handed an extra £600 million in funding to tackle the worsening financial crises, with £500 million available for social care, alongside a further £100 million in other funding guarantees and grants. Taking into account this new funding, Levelling Up Secretary Michael Gove reported that the top-up in the financial package for English councils meant an overall increase in their budgets of up to £4.5 billion next year.

In return for the final Local Government Financial Settlement, councils need to set out how they will “improve service performance and reduce wasteful expenditure” in productivity plans. This has not gone down especially well in the sector.

Whilst the LGA has said that it will “continue to work with Government to achieve a sustainable long-term funding settlement and updated distribution mechanisms, as well as legislative reform where needed, so that local government can play its full part in delivering inclusive prosperity and growth through investment to support people, places, and the planet”, we need to think bigger about our collective approach to council income-generation activity. 

The Institute of Economic Development, the UK’s leading independent professional body representing economic development and regeneration practitioners working for local and regional communities, has recently published its Grow Local, Grow National manifesto. 

At its heart is a call for prioritising local economic growth, via councils having new statutory powers over economic development, which we believe will support the efforts of all parties to grow the economy and bring in much-needed finance.

In the manifesto, we ask for local authorities to develop an accountable five-year economic strategy/strategic economic plan – led by upper tier authorities but taking into account function economic areas, supported by capacity funding, a single settlement funding pot approach built on “trailblazer” devolution deals, and multi-year settlement approach, rather than annual spending reviews, shifting the dial on where we are today.

We also outline the need for a more stable and long-term funding landscape to underpin all economic development and supporting projects, including an end to the micro competition for capital funding as part of the single settlement funding pot approach, with any funding settlement with government and wider government programmes, such as the UK Shared Prosperity Fund, operating over a longer timeframe and coinciding with a five-year economic strategy horizon. It is also recognised that enhanced devolution could also include greater freedoms for local authorities in raising their own revenues through different means.

This, in turn, we think can deliver a more sustainable approach to money coming into local government, and ultimately places and communities.

In summary, we are calling on all parties to recognise the critically important role that economic development practitioners have in delivering levelling up and place-based economic transformation, and being part of a proactive solution to local government finances.

Having already discussed our manifesto with key decision-makers, and with more Westminster meetings held or scheduled, we welcome further engagement with all parties to improve decisions around economic and industrial strategy development, leveraging the unique experience that the economic development profession has of delivery.

The pace of devolution should be increased, we feel, and by recognising economic development as a statutory function provided by local authorities to make sure no place is left behind in future. Co-investing in upskilling our profession, and ensuring that delivery aligns with other national strategic priorities, is also a must.

Nigel Wilcock is Executive Director of the Institute of Economic Development. A version of this article was published by The MJ.