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In November 2023, Nottingham City Council declared it was effectively bankrupt, adding its name to a list of six local authorities that have already done so since 2018.
Given the role that local government services play in our lives, it’s important to understand what this could mean for you. Read on to learn why councils across the UK have declared bankruptcy and the possible implications for you.
When a local council goes bankrupt, all new spending must stop immediately
While a council can’t technically go bankrupt, they can issue a Section 114 notice, stating that they have insufficient funds to fulfil their duties for the year. When this happens, a new budget must be created within 21 days.
At this point, all new spending must stop except for protecting vulnerable people and statutory services, such as the emergency services. Often, when the council creates its new budget, they will commit to cutting spending in certain areas so that they can support the most essential services.
Sometimes the government may step in to help. For example, it might intervene to reassess the way that council services are run or reduce the number of duties that fall to the council.
Councils can look to raise more funds in other ways too. One way they can do this is by raising Council Tax, although there are limits to how much Council Tax can be increased each year. While this can be effective, different authorities would raise different amounts. More socially deprived areas would raise a lower amount than wealthier areas, since the latter will have more valuable properties to tax.
A mismanagement of spending is a common cause of local councils going bankrupt
Each authority that has experienced this may be slightly different, but there is one trend that can be seen in many of the cases of bankruptcy seen in recent years: the mismanagement of spending.
Sky News reports that Nottingham City Council used funds that were intended for housing in its general budget and was then unable to replace them.
Thurrock Council, which declared effective bankruptcy in 2022, admitted that a series of risky investments made in commercial projects such as solar power led to a financial loss of £275 million.
The report also shares that councils are encouraged to seek out innovative ways to raise funds for their services. So, where are councils going wrong?
A change to council funding in 2013 and higher costs may have led to the current challenges
Some believe that a change to the way the government provides funding to local councils in 2013 could be partly responsible.
Prior to this, the majority of councils received their funding from the government. Since a change made by then-chancellor George Osborne, funding is now primarily sourced locally.
According to the Sky News report, between 2010/11 and 2020/21, councils’ spending power fell by more than 50% in real terms on a like-for-like basis.
A drop in funding isn’t the only pressure that local councils have faced in that time, though. Demand for services has also soared in recent years. The BBC reports that the demand for adult social care is at a record high, meaning that councils must make cuts elsewhere in order to provide this vital service.
In addition, councils are also experiencing the effects of the cost of living crisis, so the rising cost of energy is also likely to affect their bottom line.
If your local council goes bankrupt, it could affect the provision of services in your area
When a council is unable to fulfil its spending commitments, it can affect the provision of local services.
Adult social care is one of the biggest spending commitments for local councils, so it could lead to delays in providing the care that many local residents need.
One of the ways you can prepare for this is to include the cost of later-life care in your financial plan. By setting aside funds that are ringfenced for this purpose, you can be confident that you will be able to pay for any care you may need.
Your financial planner can help you assess the most sensible way to use your wealth so you can meet your current and possible future needs.
Get in touch
If you’d like to learn more about how you can use your wealth to prepare for the future, we can help. Email enquiries@metiswealth.co.uk or call 0345 450 5670 today to find out what we can do for you.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
