Cash-strapped councils to recoup record £1.4bn to avoid collapse

Cash-strapped councils to recoup record £1.4bn to avoid collapse

Cash-strapped councils to recoup record £1.4bn to avoid collapse

Birmingham Council, which effectively declared bankruptcy last year, will be allowed to release £685m in cash through assets sales – Mike Kemp/In Pictures via Getty Images

Britain’s councils are preparing a record £1.4bn fire sale in assets and cancelled investments as they scramble to plug a debt black hole ahead of the election.

The Government has given 18 councils the green light to sell off assets and mothball projects to release cash in a bid to avoid another wave of council bankruptcies before the nation heads to the polls on July 4.

In total, across 2024/25, councils will be allowed to release £1.4bn of their capital resources via land and property sales, redirecting their budgets, delaying maintenance spending and stopping other projects.

This will be 19 times the total given the go ahead in 2018/19, with prices adjusted for inflation to today’s prices

Use of so-called “capitalisation directions”, an emergency measure which allows councils to meet their day-to-day costs by using capital resources, has surged by 58pc since 2023/24, according to analysis by the Institute for Government (IFG).

Birmingham Council, which issued a Section 114 notice effectively declaring bankruptcy last year, will be allowed to release £685m in cash this year. In total, since 2020, it has released £1.26bn in capitalisation directions.

At the start of this year, Birmingham Council auctioned off a batch of 35 freehold properties, including a nursery, a former children’s centre, and industrial land.

Bradford and Southampton councils will be allowed to free up £140m and £122m this year respectively.

The Government has ramped up the use of capitalisation directions in recent years. Between 2018/19 and 2022/23, the number of councils allowed to use their resources in this way increased from just one, Slough, to six local authorities. In the last two years, the number has tripled to a total of 18.

Local authorities are grappling with a spiralling funding crisis as demands for services such as social care booms. Earlier this year, accountancy firm Grant Thornton warned that four in 10 local councils are at risk of going bust over the next five years.

Rachel Reeves, the shadow chancellor, warned on Sunday that Labour would not bail out bankrupt councils after the coming election, telling Sky News she was “not going to be able to fix all the problems straight away” and said she would focus on reforming the planning system.

She added: “I’m under no illusions about the scale of the challenge that I will inherit if I become chancellor later this year and I need to be honest with people.

“My focus is on reforming the planning system to get Britain building again… If we do those things, we will bring in the tax revenue and we will be able to invest in public services again. There’s no shortcuts. That is the way.”

IFG senior researcher Stuart Hoddinott warned that the Government is using short-term measures that will make the crisis worse in the long-term.

Mr Hoddinott said: “It’s another, quieter way of supporting local authorities that doesn’t make as big a headline as a local authority going bankrupt. The government decision to expand the use of exceptional financial support, not to be too cynical, but may be a way of trying to avoid those section 114 notices.”

More councils would likely have effectively declared themselves bankrupt if the Government had not increased use of exceptional financial support, Mr Hoddinott added.

He said: “But it is not a sustainable solution. Obviously you can only sell buildings once, but your pressures are ongoing.”

Analysts warned that councils are selling commercial property at the worst possible time, as the post-pandemic shift to homeworking has depressed prices of office buildings.

Matthew Oakeshott, chairman of OLIM Property, said: “At the moment what we are seeing in the market, which we recognise as council sales, tend to be better quality properties which still have tenants. They’ve lost a lot of money, but at least they are saleable.

“They are selling properties like retail warehouses and supermarkets, but that’s only what we’re seeing, that’s the tip of the iceberg.

“But a lot of what they have bought, department stores and shopping centres that are now empty, you can’t give away. So what we are seeing first of all is the better quality ones being billed at a loss.”

Mat Oakley, director of commercial research at Savills, warned that fire-sales will ultimately push more councils into bankruptcy because they will lose money on the sales and also lose vital sources of income.

Mr Oakley said: “By the sheer act of selling it, your income from it disappears, and they are no longer solvent and they have to go into the council equivalent of bankruptcy.”

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