Why councils can spend millions on big projects but still say they have no money

In five years time many councils across the country could go bankrupt, according to local government experts who believe funding reform is desperately needed to stop this.

Every single local authority in Greater Manchester has raised council tax – with rises to kick in in April – and claimed they are fighting to stay financially secure – although none admitted any risk of going bust.
 

Read more: Council tax rise confirmed for Rochdale but residents will get a 2% reduction againPublished: 23 February 2024

This has led to many readers asking ‘why, if they are so cash-strapped, can Rochdale and Manchester councils afford to spend millions on their town hall renovations’.

The simple answer is that funding public services and spending on capital projects comes from two pots of money that cannot cross over.

Although councils like Manchester may be able to spend £300m on renovating their town hall, that same money cannot be spent on providing services such as waste collection, social care or libraries.

The money that can be spent on big projects is called capital funding and money spent on services is from the revenue account.

The main reason councils need to raise council tax is because it is one of the few ways in which they can generate income for the revenue account to fund services. The other funding avenues are through business rate collection, charging for services and government grants.

Capital funding is not as strict and councils can take out loans in order to improve infrastructure in their areas. The reason for this is that these projects are seen as investments in the council area and add value – so the £20m that has gone into Rochdale Town Hall is adding £20m of value to the council asset.

In comparison, money spent on children’s services for example is money that will not see a return on investment – but it is an essential service that needs to be funded.

Dr Jonathan Carr-West, chief executive at the Local Government Information Unit (LGIU), believes this method of funding is outdated and will lead to disaster – something the government would have to clean up.

He said: “We only have four per cent of council leaders that think this current system (of council funding) is sustainable, which is essentially universal agreement that it is not sustainable. We are staring down a cliff edge at the moment.

“Of all councils, 50 per cent say they will go bust in the next five years. I think that councils that are banking that the next government are going to have to do something about this otherwise things are going to become a complete catastrophe.

“We are saying to the government, the opposition and anyone that will listen that something needs to change or we will see very many more councils going bankrupt soon and that will be catastrophic.”

The LGIU believe it is better to act now, rather than wait for councils to go into financial meltdown. Councils’ costs in recent years have gone up due to inflation and pay rises, and with that additional pressure, six local authorities across the country have declared bankruptcy since 2020 in the form of “Section 114 notices”. Some of these councils have been given permission from the government to cross over between capital and revenue budget as they are allowed to sell off assets.

A recent example of this is Birmingham City Council who are set to sell off £750m of assets and cut spending on services by £300m in order to break even. This is on top of a council tax rise of 21 per cent over the next two years.

Unlike central government, local authorities cannot borrow to finance day-to-day spending, and so they must either run balanced budgets or draw down reserves – money built up by underspending in earlier years – so as not to exceed their annual revenue.

According to the Institute for Government, local authority ‘spending power’ fell by 17.5 per cent between 2009/10 and 2019/20, before partially recovering. However, their data states that in 2021/22 it was still 10.2 per cent below 2009/10 levels.

The fall in spending power is largely because of reductions in central government grants. These grants were cut by 40 per cent in real terms between 2009/10 and 2019/20, from £46.5bn to £28.0bn (2023/24 prices), IFG data suggests.

 

 

Mark Robinson, director of economy and place at Rochdale Borough Council, said: “The restoration of Rochdale Town Hall was supported by a large contribution from the National Lottery Heritage Fund, and one of the conditions of us receiving this grant was that it was match funded by council capital funding. In addition to the lottery investment, we also received grants from the Towns Fund, Salix and UK Shared Prosperity Funding, which has further reduced the cost to the council.

“The council’s capital programme is set annually with the revenue budget and aligns with the council’s investment strategies and borough plan. Capital funds cannot be used to bridge any shortfall in funding for the revenue budget.

“The work to restore the building has included vital work to ensure the building’s future, including extensive roof repairs. Had this work not taken place, it would have led to the building falling further into a state of disrepair, which would have cost substantially more to fix at a future date.

“Other work has included the addition of a number of eco measures in the building, which, once completed, will make the town hall one of the most sustainable Grade I listed buildings in the country. This will reduce the building’s ongoing running costs.

“In addition, the work will have substantial long term benefits. In the first week alone, over 5,000 visitors came to see the newly reopened town hall, including a number of people from outside the borough, some of whom had never visited Rochdale before.

“All these visits generate additional footfall into the borough, which benefits the local economy, including borough businesses and our other heritage and cultural attractions.

“A number of volunteering and job opportunities were also created as part of the project, equipping residents with vital skills to help them progress in their careers. This includes heritage skills training, which will help us maintain both the town hall and other heritage assets across the borough in the future, using local skills and knowledge.”

George Lythgoe, Local Democracy Reporter