Explainer: The Woking case, and what happens when councils go bust
This week, Woking Council declared effective bankruptcy with a deficit of £1.2bn. It is only the latest in a string of councils going bust, a result of the chronic local government underfunding that took place over the past decade.
The Woking case is one of misguided investments. The council, which was controlled by the Conservatives for 14 years before the Lib Dems won the local elections last year, jumped into the property market in a bid to make money. It bought expensive hotels and skyscrapers, intending to turn the Surrey town into an attractive mini-city.
The problem is that these investments didn’t pay off in the way the council expected them to. After the pandemic, the value of many of these properties shrunk. The money they should have brought in didn’t arrive, and the council found itself in huge debt. Or actually, in what is reported to be the biggest financial failure in local government history.
So yesterday, the council issued a section 114 notice – which is effectively the way for councils to declare bankruptcy. They can’t go bust in the same way a business does, as they make money from things like taxes and services, as well as getting money from central government. When they issue a 114 notice, they’re basically telling the government it needs to intervene. It means they have to stop all but essential spending – which impacts the services the local community relies upon.
Although in this case the size of the deficit is exponential, this is far from the first council to go bankrupt. Croydon, in south London, declared bankruptcy for the third time in two years in November of last year. It was spending a sixth of its annual budget just on debt repayment. Thurrock and Slough are also on the list.
Part of the money councils spend is financed by government borrowing – and like in Woking’s case, many are unable to repay it. They need the money for regeneration projects, and to ensure their centres and towns remain good places to live in. This is money that would have previously come from central government, but because of the above-mentioned cuts, councils have had to try and diversify, sometimes with unintended consequences.
A survey by the Local Government Association has warned that 90 per cent of councils are using slumping finances to keep operating. Against this backdrop, the list of bankruptcies might be getting just a little longer fairly soon.