Inflationary pressures, speculative financial investments and an increased demand for welfare services are bringing down several councils across the UK

Earlier this week, Rt Hon Michael Gove, Secretary of State for Levelling Up, Housing and Communities and Minister for Intergovernmental Relations, appointed a financial commissioner at Liverpool to oversee the council’s dire financial situation. This appointment follows a second critical commissioners' report. These commissioners were appointed in 2021 after an emergency inspection found a “serious breakdown of governance” and multiple failures to provide best value to taxpayers in the city. The inspection was triggered by the arrest of the city mayor and other top civil officers as part of a police investigation into allegations of fraud, bribery, corruption and misconduct in public office. Yet, despite the changes and investigations triggered by this scandal, it seems that the city is still bound to experience a £100 million budget gap by 2025-26.

Unfortunately, Liverpool is not the only financially distressed local entity in the UK. In recent years, councils like Northamptonshire, Croydon, and Slough had to issue section 114 notices, effectively declaring themselves bankrupt. More recently, counties like Thurrock needed government bailouts to stay afloat. This week, in a letter to the Prime Minister, the Tory-run Kent and Hampshire councils warned that they may be forced to declare bankruptcy in the coming weeks if they do not receive emergency financial support from the government.

Some of these councils are struggling because of inflationary pressures and increased welfare demands from their citizens. However, a significant portion of them is also struggling to repay loans from high-risk commercial investments and property development projects designed to counter the impact of years of funding cuts – see here a recent investigation from The Times.

Together with Professors Laura N Coordes (Arizona State University) and Yseult Marique (University of Essex), Dr Eugenio Vaccari published a blog post on the Oxford Business Law Blog. Their blog post argues that the situation in the UK is particularly concerning as the law is ill-equipped for dealing with councils in financial distress in a timely and effective manner.

Building on the results of their global research on local public entities in distress published by INSOL International (access restricted to INSOL members), Dr Eugenio Vaccari and his co-investigators made some suggestions on ways to: (i) improve the regulatory framework; (ii) increase transparency and accountability; (iii) enhance governance practices; and (iv) ultimately, ensure that councils make good use of taxpayers’ money.