Bristol City Council is nearly skint: the local government financial crisis explained

The council’s budget black hole will rise to £32m in years to come. But as local authorities reach the brink of bankruptcy elsewhere in England, something needs to give.

Reports 2nd November, 2023

Matty Edwards

“We cannot come through 13 years of austerity without it having an impact on people’s lives.”

This is what Bristol Mayor Marvin Rees said this week as the council discussed its bleak financial forecast for the next five years. 

Amid dwindling funding from the government and spiralling costs and pressures, Bristol City Council is facing a budget hole of £17m next year, and this will rise to £32m in years to come. 

This has been a national crisis that has been bubbling away since the funding cuts began under the Tory-Lib Dem coalition government of the early 2010s. But recently it has fully boiled over – councils up and down the country have revealed they’re on the brink of bankruptcy and need urgent help.

With more cuts to services on the horizon next year for Bristol to balance the books, we thought it was important to explain the mess our council and others are in. 

How are councils funded, anyway?

Local government has three main sources of income. First, grants from central government, including some that have to be spent on particular services, such as schools. The other two ways councils raise money are council tax and business rates. 

The levels of funding from government grants fell by 40% in real terms (if you take into account inflation) between 2010 and 2020. Overall, the spending power of councils reduced by 17.5% in this period, despite local authorities steadily increasing council tax levels. 

While there was a temporary local government funding boost to help councils get through the pandemic, the inflation crisis has made this crisis even worse. The Local Government Association said last month that councils in England face a funding gap of £4 billion over the next two years if the government doesn’t intervene.

What is Bristol’s situation?

This week, Bristol City Council released its Medium Term Financial Plan (MTFP) a five-year forecast of the authority’s wallet. It says that the most likely scenario based on factors including forecast inflation, service pressures, funding and staff pay would see a budget deficit of £17.8million next year. Because the council has to set a balanced budget, it will have to work out where to cut spending by February next year. 

While this shortfall would drop to £8.5m in 2025/26 it then rockets to about £32m over each of the next three years up to 2028/29, peaking at £32.1million in 2026/27.

The report says that even in a best-case situation, the funding gap would be £6.5million in 2026/27 and £4.7million two years later, with a worst-case scenario of £40.1million next year rising to £81.2million by 2028/29.

The cost of services such as adult social care, the needs of children with SEND and temporary accommodation placements are putting particular strain on the council’s coffers. 

In July, a report by external auditor Grant Thornton, said Bristol City Council “may not be financially sustainable” because of spiralling social care and special needs education costs. It criticised the council for failing to deliver enough savings and using too much money from reserves.

The annual deficit in the schools budget is expected to be £58m by the end of this financial year but could even grow to £128m by 2028 if action isn’t taken. The council is working on a plan to reduce this overspend, which is being driven by the rising number of children with special educational needs, but auditors said the council is not doing enough to reduce spending. 

This gradual reduction to the deficit over a number of years is only possible because the council has been allowed to do so by the government until 2026. Auditors said that if this arrangement comes to an end, “it would leave the council with significant challenges to its financial sustainability”. 

How does Bristol compare to elsewhere?

Things are pretty bad in Bristol, but it’s important to remember it could be even worse.

In September, Birmingham City Council, the largest local authority in Europe, made headlines by declaring it was effectively bankrupt. Birmingham issued a Section 114 notice, which means that it won’t be able to balance its budget. The cause was the discovery that equal pay claims going back years would cost up to £1bn. 

Five other local councils have had to do this since 2018. Restrictions are placed on the council’s spending, and often the government has had to intervene to sort things out. 

In some cases, councils faced financial ruin because of reckless decision making. One was Thurrock Council, which loaned hundreds of millions of pounds to a businessman to buy up dozens of solar farms in order to generate income through the interest. A three-year investigation by the Bureau of Investigative Journalism revealed gaping holes in the investments that threaten to cost the public hundreds of millions of pounds.

But the pressures on council purses are so severe that others are now warning they may have to issue section 114 notices too. At least 26 councils are considering doing so this year or next, according to the Special Interest Group of Municipal authorities. Councils that have made warnings in recent months that they may have to do things include Coventry, Bradford, Middlesbrough Kirklees, Guildford, Hastings, Kent, and Southampton.

What is driving local government pressures?

As well as things like rising costs due to inflation and cuts to funding, there are common trends around what is putting further strain on council spending. 

The LGA highlighted increased demand for children’s services and special educational needs, the growing cost of adult social care and temporary accommodation for people at risk of homelessness.

Government data published in July shows that more than 104,000 households were in temporary accommodation at the end of March 2023 – the highest figures since records began in 1998.

This week, more than 100 councils wrote to the government about this crisis to demand reforms that would ease the pressure, including raising the levels of benefits people can claim towards their housing and providing more funding for homelessness prevention schemes.

Bristol City Council’s housing chief Tom Renhard said: “Nationally, the annual bill for temporary accommodation stands at £1.7bn. It is a national scandal that has got to crisis point due to the many failings of this national government, mainly the impact of welfare reform and a continued failure to protect renters. 

“Yet again, it’s local government picking up the pieces and the tab for issues that the national government could have avoided by now,” he added.

Hasn’t the council wasted loads of money already?

When the council announces cuts to services in order to balance its budget – a recent example being cutting £3m from the council tax reduction scheme that gives poorer households a discount on their council tax – people often mention famous cases of the council wasting vast sums of cash.

The biggest one recently was the cost of refurbishing Bristol Beacon, which has just reopened. The council initially was meant to stump up only £10m but this spiralled to £84m, prompting criticism from external auditors that the council underestimated the complexity and difficulty of the project and failed to have effective arrangements in place to prevent the bill spiralling.

This follows the saga of Bristol Energy, an energy company set up by the council that means £36.5m of public money went down the drain. The council’s arrangements for making decisions about Bristol Energy were condemned as “inadequate” by auditors.

The projects are capital projects, which are one-off and funded through borrowing, so are different to the budget the council sets every year to deliver services. But these cases do show the importance of scrutinising financial decision making by cash-strapped councils. 

What can be done about all this?

Green councillor for Hotwells and Harbourside Patrick McAllister told this week’s full council meeting: “We still face a £20 million budget gap next year, rising to nearly £32 million by [2029].” 

Without central government intervention, “the day will soon come where Bristol City Council is no longer able to meet its statutory service levels”, he warned.

“The primary cause of this is 13 cruel years of austerity from Westminster, starving public services of funding,” McAllister said. “This has been worsened by financial mismanagement at Bristol City Council. The human cost is obvious but dig a little deeper and the false economics of austerity are clear.”

The Lib Dem leader Andrew Brown said: “We desperately need a new funding settlement, this is unsustainable.”

Tory councillor Geoff Gollop, speaking on behalf of a cross-party group of councillors tasked with scrutinising the council’s financial outlook, said: “We want to see greater emphasis on innovating with invest to save. 

By way of example, Gollop suggested “reducing the financial impact of emergency temporary accommodation by using our surplus property, and alleviating financial pressures with out-of-authority children’s care placements being brought within authority”. 

Councils up and down the country are demanding more funding from the government. But we’ve been here before, and anything major is unlikely in the upcoming Autumn Statement on 22 November. 

Despite some promises at this year’s Labour conference on granting local authorities in England greater powers over housing and planning, skills, energy and transport, as well as commitments to enable councillors to build more affordable housing, there hasn’t been any detailed reforms announced on funding for local government. 

Sir Stephen Houghton, the leader of Barnsley Council and chair of the Special Interest Group of Municipal Authorities, has called on Labour to design a new funding formula for local councils if it wins next year’s general election, based on local needs for services.

Bristol City Council will set its budget for the next financial year in early 2024, which as it stands will include a further £17m of cuts to balance the budget. 

Marvin Rees said: ”The scale of challenge facing local authorities financially is clearly illustrated by places like Wokingham and Birmingham. Local authorities could end up as places that simply provide adult social care and some children’s services, with no capacity to do anything else.”

Local government elections in May 2024 may mean a different party is in power. But it’s really the general election that will decide whether council funding is sustainable in the future.