Current financial pressures

In a letter to Chancellor Jeremy Hunt ahead of the March 2024 budget, the Local Government Association (LGA) said that councils were facing significant shortfalls because of cost and demand pressures:

“Our analysis shows that by 2024/25 cost and demand pressures will have added £15bn (28.6%) to the cost of delivering council services since 2021/22. Despite increased funding in both 2023/24 and 2024/25 we estimated in October 2023 that the sector was facing a funding gap of £2.4bn in 2023/24 and £1.6bn in 2024/25.”

The letter went on to warn that the funding gap for 2024/25 might well be higher than £1.6bn because wages and inflation are now predicted to be greater than the assumptions used in the October 2023 LGA financial model.

This funding gap is also a significant issue for Scottish local authorities, as The Local Government Information Unit (LGIU) for Scotland recently reported that nearly a quarter of Scottish LAs fear they will not be able to balance their budgets in the 2024/25 financial year.

Historic funding cuts

A House of Lords report published in March 2024 revealed that the amount local authorities spent on all services combined fell 10.4% between 2010/11 and 2019/20. A breakdown of where the spending cuts had fallen shows that the areas worst affected were:

• cultural and related services (–36.8%)
• planning and development services (–35.7%)
• non-schools education (–31.6%)
• housing services (–25.7%)
• highways and transport services (–23.6%)
• central services (–16.4%)
• environmental and regulatory services (–10.5%)

A significant proportion of these spending reductions will have fallen on local businesses and, especially in the cultural and housing services sectors, on local charities.

Insolvency of local authorities – Section 114 notices

Under the Local Government Finance Act 1988, a local authority must issue a section 114 notice if it believes that the authority has taken, or is about to take, a course of action that would be unlawful, which crucially includes being unable to meet its spending commitments from its available sources of funding.

Once a council has issued a section 114 notice it cannot incur any new expenditure until an amended and balanced budget is passed. Balancing the budget is likely to involve imposing spending cuts, asset sales, increased council tax and other fees and charges it makes. Independent Commissioners can be appointed by central government to oversee this process and its implementation.

Fourteen councils have issued section 114 notices since the Act became law. Since 2018, eight different councils have issued at least one section 114 notice; a total of 12 were issued in this period. All but two have been because an authority has not been able to balance its books.

In December 2023, the LGA reported that one in five council leaders and chief executives surveyed said it was very or fairly likely that their council would need to issue a section 114 notice in 2023/24 or 2024/25 due to a lack of funding for key services. The House of Commons Levelling Up, Housing and Communities Committee confirmed in February 2024 that there was evidence for “a likely further increase in local authorities issuing section 114 notices”.

Implications for local businesses and charities

Those organizations with active commercial relationships with local authorities have become accustomed over the past few years to the reduction of funding critical for the services they provide, or its withdrawal altogether. Because some funding streams are multi-year, the impact of cuts agreed in earlier years may only be biting now.

In the voluntary sector, many charities are struggling to maintain services which are fully or partially funded by local authorities, or else battling to meet demands to do not just the same but more for less money, as other voluntary sector providers fall by the wayside. For commercial entities, existing contracts have been cancelled and pricing for what little new work there is has to be ever keener to fit with councils’ shrinking resources.

All of this has been against a background of the succession of financial shocks, which have hit the economy generally and individual businesses and charities since 2020. First the pandemic disrupted them, rapidly followed by the ripple effect of the Ukraine conflict and most recently by rampant input cost inflation and soaring interest rates. 

Being realistic about the future

Can these organizations see a safe and secure way forward, given the certainty of further spending cuts by local authorities for at least the next two years? If they have any doubt about their future viability and survival, owners, managers and trustees have a fiduciary obligation to protect their stakeholders from losses by switching their focus from generating profits or surpluses to mitigating the potential shortfalls. There is no upside and considerable downside to continuing to operate or trade in the hope that matters will improve, without a credible basis for that strategy.

But equally, there may be other options to secure the future of the organization through merging with competitors, introducing additional funding or slimming down the extent of activities undertaken. These should not be overlooked.

Consulting with independent experts

Crisis management and both identifying and implementing the restructuring options described above are likely to test the bandwidth of most organisations, which may already be firefighting day-to-day.  There is no shame in calling outside professionals to assist. Constructive engagement with them can be highly beneficial for businesses facing difficulties, and the earlier they can be bought in, the more options there are likely to be on the table. 

If you are seeking professional advice for your business, Opus is here to help. You can speak to one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.