Local GovernmentSpeeches

Clive Betts – 2024 Speech on Financial Distress in Local Authorities

The speech made by Clive Betts, the Chair of the Levelling Up, Housing and Communities Select Committee, in the House of Commons on 1 February 2024.

It is a great pleasure to make this statement on behalf of the Levelling Up, Housing and Communities Committee about its report “Financial distress in local authorities”. Let me first thank the Leader of the House for tabling the business motion that has allowed the statement to be made. Our Committee Clerk is excited about the fact that we have apparently set a procedural precedent today; I was certainly not aware of that, but I am now. Let me also thank the Backbench Business Committee for originally providing the time for the statement.

Our inquiry looked into the extent of the funding gap in local authorities’ finances, and some of the main spending challenges that they face: social care, special educational needs and homelessness. The report brings attention to key issues ahead of the upcoming local government financial settlement. It makes recommendations not only for urgent action to resolve the immediate crisis, but larger reforms for the Government to consider after the next election.

Everyone recognises that the financial crisis in local authorities across England is out of control. In recent months an alarming number of them have issued section 114 notices—admissions that their spending is exceeding their income—thus effectively declaring bankruptcy. In the last six years, eight authorities have issued such notices; in the previous 18 years, none did. It is no longer the case that a small number of individual councils with particular issues are in financial distress. We are now seeing widespread financial distress across large parts of local government, and the situation is only getting worse. The Committee has heard evidence from the Local Government Association that one fifth of councils may be in financial distress within the next year.

At the heart of this crisis is a multi-billion-pound funding gap. The income available to local authorities from council tax, retained business rates and government grants has not kept pace with the increased demand for their services and the effect of inflation. As a result, the Local Government Association estimates that authorities face a funding gap of £4 billion over the next two years to maintain services at their current levels.

Witnesses have told us that the current funding system is “broken” and “not fit for purpose”. Successive Governments since 2010 have reduced the level of central Government grants awarded to local authorities by about 50%. This has been partly offset by a 20% increase in council tax, which has therefore led to an overall reduction in local authority core spending power of 26% in real terms between 2010 and 2021.

In the short term, local authorities need immediate additional funding. Our report recommends that the Government must include additional funding in the local government finance settlement for 2024-25 to fill the gap. Last week the Government announced £600 million of extra funding, and I give credit to the Minister, who has been assiduous in listening to the views of Members on this subject. However, although those measures are welcome, they are not sufficient.

Our report recognises that the Government have recently begun consultations on other methods of increasing the funds available to local authorities. We have cautiously welcomed the fact that they are considering giving authorities additional capital flexibilities to fund day-to-day costs, but we have recommended that those additional flexibilities should be considered carefully and limited to extending flexibilities over invest-to-save activity. We do not want to store up problems for future years.

Our report also recommends other ways in which the Government can improve funding for local authorities in the medium term. We have repeated the recommendation, which our Committee first made in 2021, that the Government must urgently reform council tax. This would involve undertaking a revaluation of properties and introducing additional council tax bands. Finally, we have once again called for the Government to implement the business rates reset and fair funding review, to which they committed themselves in 2016 but which they have yet to deliver, and to reintroduce multi-year settlements.

Our inquiry asked witnesses what had caused the sharp rise in council expenditures. It identified three particular areas where costs have risen significantly: adults’ and children’s social care, special educational needs, and homelessness. On adults’ social care, the increasingly complex needs of a changing population continue to drive up costs, and long-term workforce shortages and inflationary pressures have made the position worse. As the Committee recommended back in 2022, the Government need to recognise that local authorities will need several billion pounds of additional funding each year to continue to deliver and improve adult social care, and should plan a sustainable mechanism to deliver this funding that does not simply rely on increasing council tax.

On children’s social care, our inquiry found that councils are facing rising demand for residential care placements and a poorly functioning market for providing them. That has driven significant cost increases. Our report recommends an urgent comprehensive reform of the children’s social care system. As part of that, the Government should help local authorities consider greater collaboration so that between them they can deliver more children’s care services directly, instead of through private suppliers. Our inquiry also found that local authorities face significant financial pressures in providing services for children and young people with special educational needs and disabilities—SEND. The number of education, health and care plans has “skyrocketed” since they were introduced in 2014, which has significantly increased demand for more expensive forms of SEND provision and home-to-school transport. Funding is provided to local authorities through the dedicated schools grant, but it is not enough to meet the demand and does not cover home-to-school transport.

The Government have already been forced to take temporary measures to prevent SEND costs from forcing a large number of councils into bankruptcy. In 2020, the Government introduced a “statutory override”, allowing local authorities to exclude any deficits on their DSG spending from their main revenue budgets. Local government faces a potential cliff edge of section 114 notices whenever the statutory override comes to an end. The question is: will the Treasury write off that extra borrowing when the time comes? Our report recommends, therefore, that in the short term the Government should provide additional funding for home-to-school transport. In the long term, there needs to be a fundamental reform of the EHCPs, based on a cross-Government review.

Finally, our report makes it clear that rising homelessness has increased costs for councils. A big cause of the increase has been the Government’s decision to freeze local housing allowance rates in April 2020, so our report welcomes the Government’s recent announcement that they will increase local housing allowance rates from April 2024. However, it also raises concerns about the Government’s decision to then re-freeze the rates in 2026. Instead, we recommend that local housing allowance should be retained at at least the 30th percentile of local market rents. In the longer term, the best solution, as the Committee has recommended repeatedly, is to build more social housing, which will always be cheaper than paying for temporary accommodation.

These problems require a long-term solution. That is why the Committee has made recommendations in this report for whichever Government are elected after the next election. The next Government, regardless of their political persuasion, must embark on a fundamental review of the systems of local authority funding and local taxation, both council tax and business rates. In doing so, they must be clear about what local authorities are for and how they can best co-ordinate with delivery of the Government’s wider objectives. We have recommended that the next Government should consider many options, which may include land value taxes and others, and wider fiscal devolution. They must also explore all options for reforming the funding and delivery of social care services, to address the underlying causes of the acute funding and delivery pressures currently faced by local authorities. It is my hope that the need we have identified for additional funding will be properly reflected in the local government financial settlement we will debate next week, and that our other recommendations will be carefully considered by this Government and whoever form the Government after the next election. I commend this report to the House.