Max Mosley, senior economist at NIESR, explores the origins of the local government funding crisis and warns the next government will have to act quickly to address it.

Find me one person in the UK who doesn’t think local government finances are in a crisis. It’s become one of the many public sector disaster cases that make up the wider ‘permacrisis’ period we’re living through. But do we really know what caused it?

We can probably all offer a few thoughts on the topic and throw around words like ‘under-funding’ or ‘pandemic’. Although all of which would be true, these naturally only offer a shallow understanding of what has really been going on in our local authorities for years. The reason we keep reading stories of the next local authority to declare bankruptcy is down to a perfect storm over a decade in the making. This is the story of falling funding, rising demand, and filling the shortfall with debt and risky investments.

During the 2010 Spending Review that ushered in the austerity era, then Chancellor George Osborne announced that ‘today is the day when Britain steps back from the brink, when we confront the bills from a decade of debt. It is a hard road, but it leads to a better future.’ Now 14 years later, I’m sure many in local government would question what better future he had in mind. This spending review announced a 7.1% fall in funding for local authorities, which became the first of many consecutive funding cuts resulting in an over 60% cumulative fall in funding between 2010 and 2019. Taking into account other sources of funding like council tax, overall spending power fell by 25% on average over the same period.

Part of this was driven by a restraint placed on local government that limited the amount each local authority could raise council tax by. This meant that the government was constraining the ability for local government to raise council tax to meet the shortfall in government funding. Over the same period, the population increased, aged, and naturally demanded even more services from their local authorities.

A near perfect illustration of what local authorities have been experiencing over the past decade is in the provision of support for children with Special Educational Needs and Disabilities (SEND). Since 2010, the number of children with an Education, Health and Care (EHC) Plan (a formal process by which children are identified as needing SEND support) rose by 64%. As the responsibility for providing this support is laid on local authorities, this meant a steady rise in demand on the allocated funding, which couldn’t keep up with increased demand.

Our latest NIESR analysis found that many local authorities entered into risky property investments to fill financial deficits like these. Since 2010, with borrowing becoming easier to finance such projects, the debt pile doubled by 2020, increasing from £60bn to £120bn. Some councils went too fast, with Croydon Council being blamed for trying to ‘invest its way out of a problem’ during an audit of its then very troubled accounts.

This switch to a more self-sustainable funding model was also made possible by historically cheap interest rates, with an average 10-year loan from the Public Works Loans Board (PWLB) being around 2% over this period. However, those days are firmly over. Today, those same interest rates are well over double what they were before at around 5%.

Today, we find that across all council budgets in England, around 15% on average is being spent just on servicing debt. Some authorities like North East Derbyshire, Ipswich or Exeter are spending more than half their budget on debt service costs, and Spelthorne Council spending well over their entire budget.

The next Government will have a significant number of funding crises to address, with many departments vying for increasingly limited financial resources. Given this perfect storm of funding constraints and increasingly costly debt, those in local government could argue to have the most compelling case to be first in the queue for more funding. After all, a newly elected government will want to avoid the image of local authorities going bust so soon after they’re sworn in.

If they don’t, the debt once used to alleviate the financial strains in the 2010s could now be the source of the financial strains in the 2020s.