Beyond the sticking plaster: Introducing Demos’s new project on local government finances

The new government has a daunting set of issues to deal with, but one of the most important is the ongoing crisis in the finances of England’s local authorities. Reforming finances may not make for exciting headlines, but it is necessary to avoid the opposite – terrible headlines as local authorities declare effective bankruptcy (technically, issuing section 114 notices). 

Birmingham City Council is the largest and most high-profile council to declare effective bankruptcy, but it is one of seven different local authorities (LAs) to issue a section 114 notice since 2018, compared to just two LAs in the thirty-year period from 1988 to 2017. Many more LAs are precariously close to the edge of financial sustainability: a recent survey of chief executives, council leaders and other senior staff found that one in ten (9%) thought that, without changes to local government funding, they would have to issue a section 114 notice relating to the current financial year (2024-25).

The consequences for people and communities can be dire. Earlier this year, Birmingham City Council approved a budget which included cuts to almost every service including adult social care, transport for children and young people with disabilities, libraries and bin collections – the budget even included dimming streetlights to save money. At the same time, Birmingham’s council tax will increase by 10% in both 2024-25 and 2025-26.

At Demos, we are starting a new project exploring how to move towards longer-term solutions to this crisis. ‘Sticking plaster’ solutions – like selling assets, using emergency reserves or receiving last-minute bailouts from central government – are not going to work for much longer.

Without changes more LAs are heading for a similar fate to Birmingham – affecting not just those who rely on social care services, but everyone who uses the roads, libraries and community centres managed by councils. We are currently in a ‘lose-lose-lose’ situation: adult and children’s social care services are often poor quality and difficult to access; LAs can’t afford to spend money on other services, like fixing potholes in roads; and most LAs are essentially forced to raise council tax every year.

The cause of the crisis which has received the most attention is the reduction in central government grants to local government since 2010. There is no doubt this has made a significant contribution to the crisis: councils’ core budgets are 18% lower per person in real terms this year than in 2010.

But this is far from the only cause of the crisis. The situation demands a wider conversation, to include:

• How money flows through the system, not just how much local government receives altogether, such as inequities in the current funding formula and a lack of sharing risk across local authorities and between local government and central government.
• Getting a grip on rising costs, seen most acutely in provision for children in the care system (as highlighted by the Competition and Markets Authority)
• Reducing demand for services, crucial to putting local government on a stronger long-term financial footing (such as rising spending due to the rising number of people who are homeless)

Demos is currently conducting this research and policy project, and will publish a report later this year. Our research questions include:

1. Does England’s current approach to local government responsibilities appropriately balance and pool risks? 
2. Does England’s local government funding formula need to change?
3. How can we reduce demand for local government services? 
4. How can we reduce costs for local government services? 
5. What role, if any, should fiscal devolution play?

The new government knows that local government finance is a pressing issue. The initial steps announced so far – including commitments to multi-year funding settlements and an end to competitive bidding – are welcome, but will not solve the underlying structural problems. There is, however, an opportunity for the new government to commit to longer-term change. A number of new ministers have significant experience of local government, including Jim McMahon and Georgia Gould, formerly leaders of Oldham and Camden Councils respectively. Through the project, we will be urging the new government to move beyond ‘sticking plaster’ solutions and to focus on the long-term changes which are needed.

We are delighted to have a brilliant Advisory Group who will be supporting us throughout the project. (All the views in this article, and in all outputs related to the project, are those of Demos alone, and not endorsed by the Advisory Group.)

• Baroness Armstrong of Hill Top, House of Lords
• Andrew Blake-Herbert, Havering Council
• Julia Goldsworthy, Legal and General
• Dr Kevin Muldoon-Smith, Northumbria University
• Gwen Nightingale and Katherine Merrifield, Health Foundation
• Joanne Pitt, CIPFA
• Lord Porter of Spalding CBE, House of Lords
• Jack Shaw, Labour Together
• Jessica Studdert, New Local
• Phil Woolas, Wellington Street Partners

If you’re interested in receiving updates about the project, get in touch with Andrew Phillips, Senior Researcher at Demos: andrew.phillips@demos.co.uk.