Groucho Marxism

Local elections are taking place across the UK on the 7th May. Where I live in Surrey these will be to elect councillors for two new ‘unitary authorities’: East Surrey and West Surrey. I live in the latter, which is an amalgamation of six previously separate borough councils in the western half of the county. All operations, services, and existing debts associated with these borough councils will be merged under this new unitary authority. The key challenge facing West Surrey is that it will start life with debts exceeding £4.5 billion (!). The debt was created in boroughs under the control of the Conservatives and Liberal Democrats – specifically Woking and Spelthorne – and equates to around £7,000 per resident. This will be the largest local authority debt per head of population in the country.

It is often said that as a result of this £4.5 billion debt, West Surrey will start life effectively bankrupt. The claim is based on the fact that Woking Borough Council, which accounts for £2.6 billion of the £4.5 billion, supposedly declared bankruptcy in 2023 when it issued something called a Section 114 notice. This is a formal report issued by a UK local council’s Chief Financial Officer (under the Local Government Finance Act 1988) indicating that the authority cannot balance its budget and faces unlawful expenditure. Such notices are issued when expenditures are expected to exceed income. As a result, all new spending is banned, except for statutory services (e.g., social care, child protection) and essential safeguarding.

However, this does not mean that Woking Council is bankrupt, contrary to popular belief. As I explained in a previous blog post, a council in Britain cannot go bust in the same way that an individual or private company can. Because only an act of parliament can dissolve a local authority, council services and the financing to provide them are implicitly underpinned by central government. To declare that a local authority is bankrupt is therefore to commit a category error. Actually the claim usually made is that Woking Council is ‘effectively’ bankrupt. Note the weasel word ‘effectively’. Those making the claim know that they cannot remove this word and simply say that Woking Council is bankrupt because this isn’t really true.

The claim that Woking Council is bankrupt unravels further once you discover that the borough’s debt is owed almost entirely to central government. Originally the debt was to the Public Works Loan Board (PWLB), which provided funding to local authorities; in 2020, the PWLB was abolished as a statutory organisation and its functions were allocated to HM Treasury, which is presumably now who Woking Council owes the £2.6 billion to. The same goes for the rest of the £4.5 billion debt that West Surrey will inherit. This means that the entire debt could be written off by the UK government at the press of a button. In fact central government has already agreed to write off £500 million, which raises the question of why it doesn’t just write off the rest if it.

This state of affairs seems even more ludicrous when you consider that one of the functions of central government is to provide funding for local authorities for necessary public services. Not only is the UK government not providing adequate funding; by refusing to write off the debt, it is effectively demanding that West Surrey provides money to the UK government! This is a crime against logic. The UK government is monetarily sovereign and can create money by fiat; it doesn’t need anyone to provide it money. The sensible thing to do would be to use the consolidation of the boroughs of West Surrey as an opportunity to write off the debt and begin again with a clean slate. But since when did common sense ever factor into decisions made by our political class?!

The real reason the debt is being enforced has nothing to do with economics and everything to do with politics. The UK government knows that writing off the debt would create a precedent and encourage other local authorities to go into debt as well. They must therefore enforce the debt to ensure that other local authorities don’t step out of line and continue to pursue the austerity agenda. Viewed in that light, things seem rather bleak; but there is a more optimistic take on the situation. Woking Council has demonstrated that it is possible for a local authority to go into debt. Although it did that through speculative investments, there is no reason a local authority couldn’t go into debt for other reasons.

In particular, there is nothing to stop a local authority going into debt to properly fund public services or build affordable housing. Indeed, this is precisely what Liverpool’s 1983-1987 socialist council did. As long as that debt is denominated in pound sterling – as almost all local authority spending is – it would be implicitly underpinned by central government, who would have the power to write off the debt at any time with the press of a button. The whole idea that a local authority can be in debt to central government is nonsense. It is a bourgeois conception to provide justification for policies designed to discipline the working class. The only thing preventing local authorities from properly funding public services is a lack of political will.