Local councils are having to deal with the cost of living crisis along with everyone else. Anything that affects local councils is likely to end up affecting their residents. With that in mind, here is a quick guide to what the cost of living crisis means for local councils. This could give you an indication of what it could mean for you.
How local councils are funded
There are three main sources of funding for local councils. These are council tax/business rates, government funding and direct charges to service users.
Council tax, business rates and government funding are both subject to a high level of central government control. Government funding is, of course, completely subject to central government control. This means that, in reality, councils often really only control the direct charges they make for their services.
Council funding and the broader economy
Just about all of a council’s income can be heavily influenced by the wider economy. For example, many taxes are based on income. This includes council tax. People on lower incomes can be exempted from paying it. It, therefore, follows that lower incomes (e.g. in a recession) lead to lower tax receipts and hence lower council funding.
Alternatively, if incomes remain stable but costs rise due to inflation, councils could still find themselves in a difficult situation. Increasing taxes during these periods is politically very sensitive. It also has a high potential to backfire. For example, it may lead to people defaulting. It may also lead to people needing to make greater use of council-funded support services.
Likewise, it can be challenging for councils to increase any direct charges they make for services. If councils do increase them, it can result in fewer people using the services. This can have all kinds of direct and indirect consequences. These range from higher charges for the remaining users to closure of the service.
How councils run out of money
In principle, local councils should never run out of money. This is because they are legally obliged to create budgets that they can afford with the income they have. In practice, however, there are many ways councils can end up accidentally overspending. What’s more, these are not necessarily due to poor management.
For example, local councils often have to manage significant infrastructure. This means that sometimes they have to commit to multi-year projects. The finances for these projects inevitably have to be based on estimates. If these estimates turn out to be incorrect, councils may end up exceeding their budgets.
There are many reasons why estimates may turn out to be incorrect. Ultimately, however, many of them boil down to the effects of inflation and/or interest rates. Theoretically, councils could mitigate their effects by maintaining reserves. In practice, their finances are often stretched too thin for this to be practical.
What happens when councils run out of money
In principle, there are essentially two ways councils can deal with running out of money. They can cut their spending or increase their available funds.
In practice, councils often have very little scope for cutting services. Over recent years, especially since COVID19, many councils have all but abandoned non-essential services. They may also have little scope for raising income locally. This effectively means that they either need to get additional support from the central government or sell any assets they have.
If none of these options resolves their financial difficulties, they can issue a Section 114 notice. Some media outlets refer to this as going bankrupt. Technically, however, this is not true. There is no mechanism by which local councils can go bankrupt. S114 notices essentially place them under central government administration.
Realistically, no matter which of these scenarios occurs, the end goal of the council management is likely to be the same. They will simply wish to restore a basic level of functionality. Residents should therefore expect council services to be kept to a bare minimum for the foreseeable future.
