Two Tory-run councils warn PM of possible bankruptcy

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Two of England’s largest Tory-run local authorities have warned the prime minister, Rishi Sunak, that they will be forced to declare bankruptcy within the next few months because of the unprecedented financial crisis enveloping both councils.

The leaders of Kent and Hampshire county councils said even “drastic cuts” to current services would not be enough to patch up the huge holes in their budgets created by soaring inflation and rising pressures in adult and children’s social care.

In a strongly worded joint letter to Sunak, Kent leader, Roger Gough, and Hampshire leader, Rob Humby, said while they recognised the difficult national economic circumstances, “we cannot sit by and let two great counties sleepwalk into a financial disaster”.

Ministers effectively had a choice, the letter said: to fund councils properly or change the law to remove the “outdated and under-resourced” legal obligation on town halls to provide services such as libraries and home-to-school transport.

Both councils faced budget deficits over the next few years “of a scale that has never been seen before”, they said, and unless ministers stepped in with emergency help and a long-term funding plan, they would be “likely to be considering section 114 [effective bankruptcy] notices in the next year or so”.

The letter said: “The problem is simple: the additional money that we can raise from council tax and business rates barely covers the normal inflationary pressures that we face each year. This leaves significant growth, particularly in adults’ and children’s social care, totally unfunded.

“Without a fundamental change either in the way in which these two services are funded, or in our statutory obligations, all of upper-tier local government will soon go over the cliff edge.”

Although bankruptcy will not result in councils stopping core services, issuing a section 114 notice formally obliges them to formulate drastic cuts to services, make job cuts and announce fire sales of assets such as social housing, development sites and office buildings.

The letter reflects alarm across the sector about the long-term viability of local government, which has been battered by a decade of austerity cuts, followed by the pandemic, and now rampaging inflation. Several councils have announced that they will unexpectedly have to cut services this year to balance the books.

The Conservative-run County Councils Network said at the weekend that only one in five of their members were confident of avoiding having to issue a section 114 notice this year. To stave off bankruptcy, they were cutting social care services as well as bus route subsidies, waste services and street lighting.

Reports in the Times on Monday suggested ministers were considering scrapping the cap limiting annual council tax rises to 2.99% plus 1% for social care in Thursday’s budget. But there is little confidence in the sector that this will provide a fair or viable answer to the financial pressures facing town halls.

A handful of councils have gone bankrupt in recent years – Northamptonshire, Croydon, and Slough – while several others needed government bailouts to stay afloat – most recently Thurrock – because of financial chaos stemming from commercial investments designed to counter the impact of years of funding cuts.

Others have avoided bankruptcy only through dramatic cuts to services, while local government sector surveys suggest many councils will manage to balance the books this year by only draining their already depleted financial reserves – which will leave them brutally exposed in the coming years.

A spokesperson for the Department for Levelling Up, Housing and Communities said:”We understand that councils are concerned about the impact of inflation and we are working with them to understand how this will affect their budgets. This year, we have made available an additional ?3.7bn to councils to ensure they have the resources to deliver vital services.”