Local Authority Financing for the Year Ahead
The news in September that Birmingham City Council (‘Europe’s largest local authority’) had been forced to issue a Section 114 notice sent out a message that resonated far beyond the West Midlands: that local authority financing was in serious trouble.
Birmingham’s finances were shown to reveal a projected gap of £87m between income and expenditure for the 2024/25 financial year and the Section 114 notice (a reference to the section of Local Government Finance Act 1988) effectively declared bankruptcy. Birmingham can no longer afford to service the significant debt that it owes and it is clear that the businesses that it had created to generate financial security had not only failed to do so, but contributed to its financial downfall. Sadly a similar situation occurred more recently in Nottingham.
And this is not uncommon. In November the County Councils Network and Society of County Treasurers conducted a survey of 41 of county and unitary authorities which found that 10% are not confident that they can balance their budget in 2023. The figure increased to 40% in 2024 and 60% in 2025, due to combination of stubbornly high inflation, rising demand and ‘broken’ provider markets for children in care. This is despite councils planning to make over £2bn worth of ‘challenging’ savings and service cuts over the three-year period.
Furthermore, in June the Chartered Institute of Housing warned that 44% of local authorities were reducing housing programmes, while a quarter had already halted development – with a devastating impact on the supply of social and affordable housing.
Many local authorities are also opting to dispose of failing commercial property investments, with some even selling their own workspaces. Kent County Council put the county hall in Maidstone up for sale earlier this year and prior to that Wakefield Council had temporarily closed its county hall in a bid to save on rising energy costs.
The means by which the Government hopes to address the financial issues facing local authorities is a new Infrastructure Levy. It is proposed that the Infrastructure Levy would replace both the Community Infrastructure Levy (CIL) and Section 106 payments, to be calculated on the Gross Development Value (GDV) of a scheme on completion.
The rationale for the new levy is the Government’s stated objective in the context of levelling up: ‘ensuring local communities can take back control’. Central to this is additional borrowing and budgeting powers: a new ‘Right to Require’ aims to strengthen local government’s powers in the negotiation process and through the Infrastructure Levy it is intended that developers pay more (a ‘fairer share’) which can help fund affordable housing and local infrastructure including transport, healthcare and education. With much of the levy payable on completion rather than throughout development, the change (to be implemented through secondary legislation attached to the Levelling Up and Regeneration Act) would give local authorities additional borrowing powers.
However, I question whether these extended powers will ultimately benefit local authorities, which are already almost universally under-resourced and whose circumstances have, in some cases, been worsened as a result of bad investments and poor commercial decisions. My concern is that enabling local authorities to borrow against future receipts opens up the potential for yet more Section 114s.
Furthermore, from there is concern in the industry that, unlike CIL / Section 106, the Infrastructure Levy funds may be spent on cost not associated with infrastructure. Therefore there is an increased likelihood that the funding will be used for other requirements, rather than specifically for the new communities that are being created. As we have already seen, this is exacerbated as demands – from social care to meeting net zero - increase.
Under Section 106 and CIL, funding may not be used by local authorities to fund in a commercially and speculative manner. While this limits the opportunity for smart investments, it also reduces risk and ring-fences the funds for community infrastructure and provision of housing and services associated with the new development.
The downside of the ‘flexibility’ brought about by the Infrastructure Levy is that more mistakes culd be made in public expenditure.
Financial decision-making by locally elected politicians will invariably be compromised by the fact that politicians, understandably, are motivated by achieving and electoral support within a specific political cycle. This tends to be achieved through short-term successes, rather than the longer-term approach that strategic investment requires. Changes in leadership, policy priorities and political agendas will inevitably compromise long term success.
Rather than councils taking on an increasing responsibility for commercial and investment decisions directly, while having increased responsibilities for budget allocation (compromised further by diminishing resources) I propose greater collaboration with the private sector.
There are many instances in which public/private partnerships have created successful housing and regeneration bodies, and where the private sector has provided resources – such as to planning teams to help local authorities as a means of addressing nutrient neutrality or working on the busier stages of a local plan. In these arrangements, both parties can play to their strengths and the council is freed up to make decisions that only the council can make – such as budgeting.
Like many in the development sector I have reservations about the Infrastructure Levy. Most importantly, the increased flexibility that it offers local authorities should not be regarded an advantage. If the Infrastructure Levy to be implemented I would suggest that the greater flexibility (or responsibility) that it bestows on the public sector should be supported by greater flexibility to pursue public/private working arrangements.