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What happens when the money runs out?

We have now experienced four years of cuts to local government funding. The signs are that austerity is here to stay for the foreseeable future.

We have now experienced four years of cuts to local government funding.  The signs are that whatever the outcome of the general election next May austerity in some shape or form is here to stay for the foreseeable future.  So what would happen to a local authority if the money really did run out?

The City of Detroit famously filed for bankruptcy in 2013 in a bid to rid itself of liabilities totalling $19 billion.  After protracted legal proceedings and reportedly legal fees of $11 million it seems that a brighter future is emerging for the city which is being held up as a positive model that English cities should seek to emulate.

There have been a series of dire warnings from local government that, if the cuts continue as envisaged, authorities will reach the point where they have insufficient resources to meet their obligations.  In 2012, West Somerset approved plans to explore the feasibility of becoming a virtual council after a LGA report declared that it was unviable.  More recently, Great Yarmouth Council stated that it would need to use reserves to fund core services and would run out of money in 2015/16. 

There are always the options of reducing expenditure on discretionary services or increasing council tax.  However, the jaws of doom and other similar tools suggest that there could come a time quite soon when there is no money available to spend on discretionary services and any increase in council tax which is deemed to be excessive by reference to an amount set by government must be put to a referendum. 

The Detroit option is not available to authorities here, as for emanations of the state, insolvency is not an option.  All local authorities are required to set a balanced budget by the Local Government Finance Act 1992.  When budgets were set this year in Birmingham and Bristol, councillors were urged to set deficit budgets.  We have been here before.  In the 1980s a number of authorities adopted the tactic of resolving to set budgets where income did not meet proposed expenditure in an effort to put pressure on the then Conservative government to give them more money.

To an extent these tactics worked for Liverpool City Council in 1984 and 1985 as more money was found.  However, it was at a cost to the city’s councillors.  At that time the District Auditor had powers to levy a surcharge against councillors for “wilful misconduct”.   Following a special audit the District Auditor for Liverpool ordered the errant councillors to pay a total of £106,103.  This decision was upheld by the House of Lords in Lloyd v McMahon [1987] AC 625 and similar penalties were imposed on councillors in Hackney and Lambeth.

The power of surcharge was abolished by the Local Government Act 2000, so what would happen now if an authority adopted a similar approach and would not or could not set a balanced budget?

Initially the Chief Finance Officer and Monitoring Officer have statutory duties to report which would apply if no budget or a deficit budget were proposed.  If members failed to heed such reports it would probably amount to a breach of the code of conduct for members.  However, the sanctions which are available for such a breach are very limited.

The auditor still has powers other than surcharge to take action against authorities he considers to be acting unlawfully.   There is the power to issue advisory or prohibition notices supplemented by the power to apply for judicial review.  These powers are to be amended by provisions in the Local Audit and Accountability Act 2014 which are not yet in force.

The Secretary of State also has powers - under the Local Government Act 1999 as amended by section 34 and schedule 10 of the Local Audit and Accountability Act - to order an inspection of any authority in England if he believes that an authority has not acted in accordance with its best value duty.  The inspector appointed must issue a report and the Secretary of State may publish the report and its recommendations.   This power has recently been exercised in respect of the London Borough of Tower Hamlets albeit for other reasons.  The inspector’s report is imminent but Tower Hamlets have indicated that they intend to seek a judicial review of the Secretary of State’s decision.

The Secretary of State has power under section 15 of the 1999 Act to intervene by directing that specified functions be exercised by the Secretary of State himself or by a person nominated by him for “so long as the Secretary of State considers appropriate.”

So far authorities have shown a willingness and ability to meet the financial challenges of austerity and make the difficult choices required to balance the books.  If, as predicted, this becomes even harder to achieve, we may see the increased threat of intervention.  No doubt authorities and the LGA will strive to do all they possibly can to avoid this happening.  The LGA will continue to promote sector led improvement as a better alternative to central government intervention.  This has already occurred in Corby and Wirral and now seems likely in Thanet.  It remains to be seen whether this will provide the solution to the financial crisis which many believe is ahead for local government.  The battle lines being drawn between Tower Hamlets and the Secretary of State may be the first of many.