Birmingham City Council is the largest and most high profile of the six local authorities to have issued a section 114 notice since 2018. Perhaps unsurprisingly, there is now some speculation in the national press over who will be next. Some recent articles, for example those in the Mirror and Guardian, even provide lists of authorities ordered by their level of debt. Then we have an abundance of stories in local papers and the trade press about councils that are “close to” issuing a section 114 notice. How much store should we put in these articles?
Rankings of local authorities by absolute or relative levels of debt can be pretty misleading. While some attempt is usually made to account for the relative size of the authority, net expenditure or core spending power aren’t great measures of the need to borrow, or the ability to service debt. Local public services that are partly or fully self-funding may contribute nothing or even a negative amount to those measures of size, but can need debt. Council housing is the most obvious example, others include leisure centres, theatres and car parks. No wonder district councils, especially those with housing revenue accounts, tend to feature highly on some lists.
To be fair, it can be difficult to find simple metrics that can be applied universally; DLUHC has proposed using “total service expenditure” as a measure of the resources available to service debt in its recent capital risk metrics consultation. Despite what the name suggests, this is calculated net of fees and charges income, and completely excludes council housing. And the newly created OfLog shows charts comparing local authorities by their level of debt and their cost of servicing debt divided by core spending power, which is general government grants, council tax and business rates, excluding all other sources of income.
Don’t forget that a section 114 notice is a statement that, without remedial action, the authority will have insufficient revenue income and reserves to cover its revenue expenditure. So, although there is a revenue cost to servicing debt, recent notices have been driven by impaired investments and backdated accounting adjustments rather than the level of debt itself. Any analysis of local authorities should include a look at their levels of reserves and how quickly these are being used up.
Meanwhile, threats to issue section 114 notices should be taken with a huge pinch of salt. They are more likely to be either a negotiating position to request extra funding from central government, or a warning from officers that elected members need to take their budget setting responsibilities seriously. Authorities that are in genuine financial distress don’t often publicise the matter.
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