By Jonathan Eida, researcher
Over the last few months several councils have gone bust. In this year alone, Birmingham, Nottingham and Woking councils have joined a growing list of local authorities that have issued Section 114 notices.
Our research this week sheds light on the potential impact of councils going bust for taxpayers in these areas.. In the last financial year,councils that went bankrupt were allowed to increase council tax by 10 per cent as seen in Slough or 15 per cent in Croydon. If this repeats itself, average band D council taxpayers in Nottingham could be paying an extra £362. In Birmingham this would mean an extra £286.
This week, cabinet minister Michael Gove appeared in front of the Levelling Up, Housing and Communities Committee to discuss this emerging trend.
Gove acknowledged that councils are facing serious financial pressures.. Persistent inflation and high interest rates are causing problems, while pressures on services are growing. This is undeniably true but councils must have the right management to brave macro pressures.
It was reassuring to hear Gove highlight the serious mismanagement involved in each of the individual examples. While we often hear shrill warnings of financial distress, Section 114 councils all have one thing in common: shocking examples of financial mismanagement. These are stories that simply have to be told. Otherwise, it is too easy for council bosses to cover up their own incompetence with complaints about central government funding. The buck never stops with them.
In Nottingham’s case, the town hall decided to set up its own energy company, Robin Hood Energy. Whilst the writing might have been on the wall from the beginning, we will tell you how the story ends. The firm collapsed, costing the council millions. By March 2019, Robin Hood energy made losses of over £34 million. As a result, it was reported that the council would overspend by £23 million in the financial year 2023-24.
Another council that has been careless with their spending is Birmingham city council. An IT project is suffering enormous cost overruns, whilst accumulating equal pay claims of £760 million. Birmingham city council knew about the growing number of claims for many years and yet failed to act responsibly to mitigate losses
Earlier this year, Woking council declared bankruptcy after its £2 billion debt-fuelled foray into commercial property speculation went horribly wrong.
Taxpayers will be increasingly worried that Mr Gove did not reject the possibility that councils could be allowed to raise council tax by more than the current maximum increase threshold. At present, if councils wish to increase council tax above a certain threshold (5 per cent for top tier councils and 3 per cent for district councils) they have to hold a referendum. Any attempt to weaken this stance will present a threat to taxpayers who are already facing the highest tax burden in 70 years, and who will not take kindly to being forced to cough up to pay for the incompetence of their local council.