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What happens when a council runs out of money

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Published: 13 Sep 2020

local warrior

More than eight out of 10 English councils providing adult social care services are at technical risk of bankruptcy, reports Rachel Willcox

More than eight out of 10 English councils providing adult social care services are at technical risk of bankruptcy – or face fresh cuts to services – because they cannot meet the financial pressures caused by the coronavirus pandemic, according to a study by thinktank the Centre for Progressive Policy .

The study estimates that COVID-19-related costs and income losses in 131 out of England’s 151 upper-tier councils this year will exceed both the levels of their available financial reserves and the support so far provided by central government.

Data collected by the Ministry for Housing, Communities & Local Government (MHCLG) from 339 local authorities in England had already indicated that councils expect lost income and additional expenditure as a consequence of the coronavirus pandemic to amount to a total of £9.4bn. But the Centre for Progressive Policy study highlights that the financial pressures created by the spread of COVID-19 are pushing many local authorities to breaking point.

Income from local taxes – council tax and business rates – and especially sales, fees and charges and commercial activities, will all be hit by the economic effects of lockdown and social distancing, the Institute for Fiscal Studies warns. 

Set against higher demand for public services, procurement of personal protective equipment (PPE) and mounting care costs, many authorities face a very serious financial situation. To date, central government has released £3.7bn in coronavirus-related support for local government, but councils have warned a further £6bn may be required. 

Councils are required by law to have balanced budgets. If the council is deemed “unsustainable” by chief finance officers, as a last resort a section 114 order can be issued, which bans all new expenditure, with the exception of safeguarding vulnerable people and statutory services.

Once the section 114 order is in place, councils then have a 21-day breathing period, during which all current services continue as normal. Within that time, the council must come up with an alternative budget. Depending on the problems the council is facing, this could involve redundancies, selling off valuable assets, or renegotiating contracts and reductions in services. If the council still can’t make the budget balance, external auditors will try to find a viable budget. At this point, central government will get more heavily involved.