Councils are facing bankruptcy – is this the end of public service? | Peter Wilby

Peter Wilby
‘In 2016, local authorities spent over £1bn on real estate. But what would happen if the property market were to crash?’ Photograph: Bloomberg/Bloomberg via Getty Images

The abiding problem of local government in Britain is that nobody wants to pay for it. When council taxes or business rates go up, outrage inevitably follows, as recent furores demonstrate. When councils try to make money from user charges or parking fines, they are accused of “fleecing” their residents. When they cut rubbish collections, they are blamed for spreading disease and endangering public health.

When they turn to central government for help, they find that, faced with a budget deficit, ministers are furiously cutting grants to local authorities, many of them for services the councils are required to provide according to standards laid down by Whitehall. Wednesday’s budget is unlikely to bring any real relief.

Local government, like the NHS, is the victim of a perfect storm: austerity combined with the rising demands of an ageing population have broken the system for financing it. Thanks to cuts in central government grants and Whitehall-imposed prohibitions on raising council tax, councils will spend 22% less on public services in 2016-17 than they did in 2009-10. By 2020, they estimate they will be short of £5.8bn, about half of it because of the rising costs of social care. The mayor of Liverpool says the city council could close all its libraries and sports centres, switch off all its street lights and stop all road repairs, street cleaning and park maintenance – and it still wouldn’t be able to balance its budget by the end of the decade.

The impact of local government cuts falls hardest on the poorest since they use public services most. But sooner or later they affect nearly all of us. It’s not just the potholes in the roads; it’s also the postponement of NHS operations because hospital beds are taken by people who can’t go home thanks to social care cuts.

Councils face a simple choice, as Tory ministers well know: go bankrupt or find new ways of raising money. Prepare for the rise of the entrepreneurial council, generating much of its revenue from trading. According to a report from the Localis thinktank in 2015, 58% of councils already own a trading company, and by 2020 almost a fifth of all local authority revenue will come from this source.

These council trading arms offer IT and legal services, maintenance and cleaning of buildings, pest control, waste disposal, tree inspection, energy management, staff recruitment, training in health and safety, landscape gardening and much else. They go far beyond charging local users for services. Kent county council’s commercial subsidiary, for example, has customers in the Channel Islands. And while a high proportion of customers are other public or quasi-public bodies, such as other councils or academies and free schools that are wholly financed by taxes, services are widely marketed to private sector firms.

If you didn’t know your local council had become a trader in gardening services, you may be even more surprised to learn it has turned into a property trader, buying up shopping centres, business parks, office blocks, hotels and garages. In 2016, local authorities spent over £1bn on real estate.

You may think this is a peculiar state of affairs when councils are simultaneously selling assets to mitigate budget shortfalls. But the arithmetic is simple. The Public Works Loan Board, a statutory body established in 1793, will lend at 2.5% interest. Property assets will yield at least 4.5% and often far more. The result is that local councils are becoming significant players in the UK property market, causing the Financial Times columnist John Plender to warn of its “creeping nationalisation”. Canterbury’s Whitefriars shopping centre (Kent), Sutton Coldfield’s Red Rose shopping centre (Birmingham) and Sunbury’s BP Business Park (Surrey) are all owned or partly owned by a local council.

Municipal enterprise is nothing new – councils sold local gas supplies in the Victorian era, and Joseph Chamberlain, Harold Macmillan and Anthony Crosland all proposed an expansion of municipal trading. But until recently, such opportunities were strictly limited by legislation that, for example, restricted them to trading only with each other. New Labour gave them explicit permission in 2003 to trade “ordinary functions” for a “commercial purpose”. In 2011, the coalition government’s Localism Act allowed them to do whatever they liked unless specifically prohibited by law. Now councils, having been forced to relinquish their roles as landlords of inexpensive housing for local people, re-emerge as landlords of multinational stores.

The dangers are obvious. If the property market were to crash, councils would be saddled with assets of dubious value. Moreover, it seems strange that, after deeming them incapable of running schools, Tory ministers are now happy for councils to manage investment portfolios covering areas of which they have little experience. But it is all part of the neoliberal vision for the world.

Boundaries between public and private sectors are being blurred. Since 1990 companies have been allowed, in effect, to bribe councils with payments for improved roads, new schools, high-street facelifts and affordable homes in return for planning permission. It is another step along the same road for the council itself to become a company and/or a property developer. Just as the state was omnipresent in the Soviet Union, stamping out entrepreneurial instincts, so the market becomes omnipresent in our society, sweeping away the ethos of public service.

But the USSR, with its armies of state planners, could not magic away the problems of matching the supply of goods with consumer demand. Nor can the Tories, with their armies of consultants advocating “efficiency”, “competitiveness” and “enterprise”, magic away the problems of matching the taxes people will pay with the public services they wish to receive. Trading services and property investments may temporarily mitigate the effects of a fiscal squeeze but councils cannot hope to meet all future spending needs, or even most of them, from such sources.

There are other solutions to the local government funding crisis. Domestic property could be revalued as it has not been since the early 1990s. The occupants of the most valuable houses could then pay substantially more council tax than the occupants of the least valuable, instead of just three times as much as they do now. Social care could be ringfenced from general council budgets and funded from the proceeds of an enhanced inheritance tax, levied nationally. Small supplements to income or sales taxes could be earmarked for local government. But politicians – with some justice, if the row over business rates is any guide – are now terrified merely of adjusting taxes, never mind raising them. The entrepreneurial council, I fear, is here to stay.

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