Britain's council debt crisis is metastasizing

Cash-strapped councils are stepping up waste-collection fees. (Source: Bloomberg/Getty Images Europe)

To gauge the health of Britain’s local government finances, keep an eye on the gardens of England. Barnet Council in north London is raising the price of its green waste-bin collections by 39 percent starting next month, more than six times the average inflation rate in the past year. A neighbourhood chat app seethes with residents grumbling about the increase and vowing not to pay. The result may be a rise in the number of overgrown lawns and hedges; some predict a surge in backyard garden-waste bonfires and a consequent deterioration in air quality.

The words “financial crisis” conjure up images of collapsing bond and stock prices, threats to the stability of banks and mass job cuts. No such drama is visible in the distress spreading through UK local authorities. Britain’s municipal debt market is tiny and councils technically cannot go bankrupt, so the crisis lacks the transmission mechanisms to cause wider financial market contagion. It’s no less real for that — and no less of a problem for the economy.

Since 2018, at least eight councils have issued so-called Section 114 notices that signal severe financial distress, compared with zero in the preceding 18 years. They include Birmingham, the UK’s second-largest city, which made its declaration in September. Four in 10 authorities are at risk of financial failure over the next five years, with councils in England facing a £9 billion ($11.4 billion) funding black hole, according to Grant Thornton UK LLP.  A tipping point is approaching as councils reach the limits of their ability to cut costs, says Paul Dossett, head of the accounting firm’s local-government sector team. That echoes the conclusion of a parliamentary committee that in February called the situation a “severe crisis.”

The first wave of councils to sink into trouble featured an idiosyncratic array of drivers — unwise property investments in Woking, a bizarre bet on solar power in Thurrock, mishandling of an historical equal-pay claim in Birmingham. We’re now moving into the second phase, where even financially healthy and well-managed authorities may struggle to keep themselves from sliding into distress.  Councils are constrained in their ability to raise revenue, with their principal sources all controlled by the central government, and so must look for extra income where they can find it. Hence: green bins becoming more costly.

Collecting the bins, which are designed for grass cuttings and other garden waste, isn’t part of the statutory services that local authorities are required by law to provide and which are funded by council tax. That makes them fair game for a cash grab. Barnet (where this correspondent resides) is a leafy and relatively affluent borough, albeit with some pockets of deprivation. For such an area to push through an inflation-busting fee increase of this magnitude is a measure of how serious the local government funding squeeze has become.

The council, which has projected a £45 million budget deficit for the coming year, cited “unprecedented financial challenges” for the proposed hike. An online consultation showed 93 percent of respondents were opposed to the change; it went ahead and imposed it anyway, raising the annual charge to £97 from £70, where it had been fixed in 2020. Such opportunistic revenue-raising tactics provoke the ire of local taxpayers, but the council’s predicament is easy to appreciate. It isn’t alone: Collection charges are rising around the country.

It’s important to delineate the chain of causality. The symptoms of local government distress may vary from place to place, but the underlying condition is the same. The key source of financial pain is deep cuts in central government funding: Councils’ spending power financed from Westminster fell by 52 percent in real terms in the decade through 2021, according to the National Audit Office. This squeeze has coincided with exponential growth in demand for children’s services and adult social care — the two biggest expenditure items for most councils.

A complicating condition is Britain’s approach to housing and planning, which runs through so many of the country’s economic ailments. One reason that councils spend so much on children’s services is that there aren’t enough children’s homes. And one reason there aren’t more is that property owners, particularly in wealthier areas, don’t want to live near children’s homes — so they wield the UK’s famously slow and pernickety planning system to frustrate development. The lack of supply elevates prices for private providers and pads the profit margins of private equity firms that have moved into the business. The numbers can be staggering: Some children cost local authorities between £250,000 and £750,000 each per year, a councilor from Nottingham in the English midlands told a parliamentary inquiry last year.

At a deeper level, the core syndrome is a corrosive and self-defeating short-termism. Britain’s post-2010 coalition government cut funding for local authorities as part of a policy of austerity that sought to spur economic recovery by eliminating waste and putting the national finances on a sounder footing. In practice, this strategy can now be seen to have pushed problems down the pyramid, temporarily out of sight, rather than fixing them.

Councils got less money, but without an accompanying reduction in the services they were legally required to provide. There are numerous examples of how this has rebounded to cost the public purse even more. Take, for example, a low-paid single mother on housing benefit who has her allowance cut. She can no longer afford the rent and becomes homeless. But the council still has a legal obligation to house the homeless, so the family are placed in short-term bed-and-breakfast hotel accommodation — a vastly more expensive yet socially inferior solution.

The metastasizing local government debt crisis is a legacy of this type of thinking. If there’s a silver lining, it’s that more financial failures may create the impetus to rethink a funding model which is clearly in need of radical overhaul. That, though, will depend on a political consensus developing, which won’t happen until after the next election at the earliest. Don’t be surprised if politicians kick the can down the road again — into the long grass.

Matthew Brooker is a Bloomberg Opinion columnist covering business and infrastructure. Views are personal and do not represent the stand of this publication.

Credit: Bloomberg