Barry Mason
Labour Party-run Croydon Council in south London has effectively declared bankruptcy. On November 11, it issued a Section 114 notice under the 1988 Local Government Finance Act, which councils are required to do if it appears they do not to have sufficient financial resources to be able to carry on.
Consequently, all spending must cease, apart from for statutory services and to safeguard vulnerable people. In addition, existing commitments and contracts continue to be honoured. Following the announcement, the council must meet within 21 days and draw up proposals to cut non-essential spending and balance the books. Unlike central government, local authorities are not permitted to borrow to fund their day-to-day running costs and must keep to balanced budgets or use reserves.
Following a report by its own auditors, Grant Thornton, the council was placed under a government review in October. The report highlighted, “collective corporate blindness to both the seriousness of the financial position and the urgency with which actions needed to be taken” and further noted that financial problems dating back to 2017/18 had not been addressed.
According to the Evening Standard , “In her letter issuing the Section 114 notice, the council’s director of finance Lisa Taylor warned of a £66 million budget black hole for the current financial year. This includes £36 million in ‘undeliverable’ income from the council’s in-house property developer, Brick by Brick.”
This is only the second use of a Section 114 notice in recent times since Conservative-run Northamptonshire County Council (NCC) issued one in 2018. NCC, which serves a population of nearly three quarters of a million people, effectively declared bankruptcy in February that year when it disclosed a £70 million budget shortfall. At the time, NCC was the first local authority to issue a Section 114 notice for 20 years.
The Local Government Association (LGA)—the national membership body for local authorities—is to investigate the actions of senior management at Croydon Council to see if there is any justification for disciplinary action.
A Local Government Chronicle article November 16 reported that the investigation would look at the period from April 2017 to September 2020 covered by the recent public interest report on the council. “This criticised the council for failing to act to bring spending under control over a number of years while borrowing and investing large amounts of money without proper scrutiny from councillors,” the paper said.
On November 18, independent news website insidecroydon quoted a council insider saying, “If it wasn’t for the fact that those councillors involved have such little understanding of business and economics, it would be a case of corruption and a referral to the Director of Public Prosecutions.”
Both council leader Tony Newman and Labour cabinet member for finance Simon Hall stood down before the issue of the Section 114 notice. In August, the former Croydon Council Chief Executive Jo Negrini left the council after allegedly negotiating a £440,000 severance package.
As with every other local authority, Croydon’s financial fragility has been exacerbated by the COVID-19 crisis. An article in the Guardian November 13, noted that although bankruptcy “came suddenly” the origins of the council’s plight went back years. The article pointed to “heady dreams of making Croydon a major housing developer”, and “a culture of lax financial controls and poor governance”. This had resulted in a budget shortfall of £67 million and a £47 million projected overspend in 2021. With only £10 million in reserves, the council has almost £2 billion in capital loans, “many tied up in risky property investments.”
“The final straw seems to have been the coronavirus pandemic. As costs spiraled, Croydon’s income from council tax and business rates collapsed. Government compensation schemes failed to cover outgoings.”
Following the financial crisis of 2008, the incoming Conservative/Liberal Democrat government elected in 2010 imposed massive austerity measures, including severely cutting central government financing of local government. This now means that local authorities are almost entirely dependent on council taxes raised on residents, business rates and other local charges, compared to 2010 when central government funding provided 80 percent of local authority income.
Like Croydon, many Labour-led councils resorted to property investments to try and make up for revenue losses, doing risky deals with property developers. Often, this meant public housing being cleared to make way for expensive private residences, pushing lower-income working class families out in social cleansing operations.
As reported by the World Socialist Web Site, Labour-run Haringey council in London planned to hive off £2 billion in council assets to property developer Lendlease. “London’s Labour-controlled boroughs are a battleground because council estates and social housing exist side by side with some of the most expensive property in the country.
“According to a London Assembly report in 2015, 50 previous council regeneration schemes resulted in a loss—estimated at more than a quarter—in the number of homes for social rent, despite an increase in the overall number of homes.” In 2015, it was estimated that more than 50,000 families had been silently shipped out of London due to welfare cuts and soaring rents.
Just months after his election as Labour Leader in September 2015, Jeremy Corbyn and his closest political ally, Shadow Chancellor John McDonnell, sent a letter to all Labour councils demanding they abide by the law and impose the Tories’ austerity cuts. They have followed his instruction to the letter.
Government changes to planning legislation, known as “ permitted development ” (PD), enable developers to turn redundant office and commercial properties into substandard “rabbit hutch” housing.
Hypocritically, Croydon Central Labour MP Sarah Jones called on the government to scrap PD, despite Croydon having the largest number of office-to-residential conversions in the country, some of which have been commissioned by the council itself. Cabinet member for housing Alison Butler said the council was considering further such conversions.
Many other local authorities are in a similar precarious financial position as Croydon. In June, a study by the Centre for Progressive Policy thinktank calculated that 80 percent of English councils were at risk of bankruptcy, with the majority in the so-called “red wall” in northern England and the Midlands, which went to the Conservatives in the 2019 general election.
“Leeds city council said it faced a… shortfall, forcing it to freeze vacancies and all non-essential spending. Manchester Liverpool, Luton and Wiltshire have also signaled that they face serious difficulties,” it reported.
On Thursday, Leeds City Council announced it was cutting 200 jobs on top of the 600 revealed in October and declared it would have to sell off £18 million worth of council property and land. The council faces a shortfall of nearly £120 million over the next two year. While half was due to the impact of COVID-19, half had accrued prior to the pandemic.
It is not only metropolitan local authorities that are in danger of bankruptcy. A survey by the County Councils Network shows increasing concern over financial difficulties, with only 22 percent confident they can deliver a balanced budget next year. More than 50 percent said reductions in services would adversely affect efforts to tackle the coronavirus pandemic, and 60 percent stating financial difficulties would result in a “fundamental reduction” in frontline services.
Writing in the Local Government Chronicle November 6, Professor Tony Travers, a local government expert at the London School of Economics, warned that the pandemic would lead to deeper austerity. “The (significantly smaller) impact on the economy of the 2008-09 banking crisis took a decade to get over. COVID-19 will affect GDP, borrowing, taxation and public spending for 15 to 20 years into the future.”
With local government revenue spending still 20-25 percent below 2010 levels, “Any return to austerity will mean further reductions to provisions such as children’s services, roads, planning, libraries, culture and leisure,” Travers said.
“It is hard to exaggerate the gravity of the situation now facing the UK government: the public borrowing and debt situation is far worse than in 2010, while the economy may not return to 2019 levels of output for three or more years. Councils should prepare for another decade of cuts.”
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