A couple of weeks ago,
I wrote about the case of West Somerset, England’s smallest District Council
which, an LGA report says, will inevitably become financially unviable within a few
years.
The problem for West
Somerset is that its capacity to raise additional cash in the teeth of further
funding cuts is not sufficient to meet the growing costs of services. No doubt there are people at CLG
who would call this ‘apocalyptic’ but every time one picks up a paper these
days, the end of austerity seems to be another year away. In those circumstances, sooner or later
an authority is going to run out of wriggle room.
It begs an interesting
question that we may need to broach more than once over the coming years; what
happens if a local authority goes bust?
This is my view – and
the disclaimer is that I am not a lawyer, and neither have I had the time to
research the law at length, just to confirm one or two things I thought I
already knew. This is what I
think.
The most likely way
for a Council to get into financial hot water is to be unable to set a balanced
budget. Unless an
unforeseen disaster occurs which leaves a local authority with unaffordable additional
costs (in which case the emergency funding arrangements called the Bellwin
scheme may well kick in), local
authorities are unlikely to become insolvent in the way businesses do.
There is no such thing
as bankruptcy or administration for local authorities but if authorities get to
the stage where they start to run out of cash and are sued by their
creditors, things will have gone
seriously wrong with the alarm system. It’s much more likely that
officers of the Council or its auditors will see the situation coming and warn
that the Council is unable to set a legal budget. The threat should normally be visible at least a year or
two ahead.
If that happens, the
chief finance officer is duty bound to issue a warning notice to the Council
and for a period, until that warning notice is dealt with, all major spending
decisions are on hold.
Imagining a situation
in which the authority is unable to solve the problem itself, the threat of the
commissioners is a sanction that gets mentioned from time to time. As far as I
can see, Eric Pickles has no power to take over an authority just because it is
in financial difficulties. Indeed,
this is a sensible way for the law to be framed because it could become an easy
way out for local authorities to spend all the money and then throw the problem
at Minsters to sort out.
The Secretary of State
does have powers, on the other hand, to take over the running of services if
the Council is failing to perform. But is it sensible to wait for the impact of
financial ruin to bite before intervening?
If there is nothing
the Council can do within the law to correct the financial position, which would be the case if the authority is financially unviable, then it probably
won’t be long before everybody ends up in a room at the Department for
Communities and Local Government, and the solution will come down to good old realpolitik- the English constitution at
its best.
But even this would be
a failure in relation to authorities like West Somerset, whose problems have
been highlighted several years in advance of impending doom, with plenty of
time for Government – and it does come down to Government - to address the
problem.
If the past is
anything to go by, perhaps the answer for authorities like West Somerset lies
in the local government finance system, with its seemingly endless capacity for tweaking, to produce the desired outcome. The Isles of Scilly and the Corporation of London already
have special grant arrangements because of their challenging size. One possible solution is that small
Councils will be given extra funding in some way, and that could likely be
linked to some strings, such as a requirement to share certain costs with
neighbouring authorities.
Of course, this
interesting thought experiment leaves out several important groups of
stakeholders, the authority’s staff, its contractors, and last but far from
least, its residents and service users. The potential impact on these largely innocent
bystanders underlines the importance of forward planning and West Somerset should
be praised for doing its job in that respect.
