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Local Government Finance: Croydon

Volume 685: debated on Wednesday 9 December 2020

Motion made, and Question proposed, That this House do now adjourn.—(Maria Caulfield.)

The section 114 legal notice that halted all non-statutory expenditure in the London borough of Croydon was the first in the capital in 20 years. The previous two were in Hillingdon, where I serve, to this day, as a councillor—I draw the attention of the House to my entry in the Register of Members’ Financial Interests—and in Hackney. The circumstances today could not be more different, although they may have the eventual similarity of the need for a new Conservative administration to take office in Croydon to sort out the mess—a challenge that I know Councillor Jason Cummings and his opposition colleagues will rise to, and a challenge that was very familiar to us in Hillingdon.

A section 114 notice starts off as a sign of cash flow distress in a council. Income is insufficient for planned expenditure, so services have to be cut and expenditure halted until the budget is balanced again. We know that it has no direct private sector equivalent, but it has the effect of requiring the organisation’s management to demonstrate that it is a going concern. Today, with councillors and residents across the city seeing what is happening in Croydon with worry, it is important that we address here in Parliament the issues that have led to the situation. Given the unfortunate silence of some of the Labour Members representing them, this debate has the purpose of airing the financial challenges facing our London boroughs and providing some assurance to my constituents and others across our capital that the situation in Croydon will not be replicated elsewhere.

Local government financial management is a complex, some would say dull and, in many respects, unique process. It is unique in the public sector, in that councils have to balance their budgets every year. Clearly, constituents across the capital will want to know that there is effective governance and effective oversight of decision making. The consequences can be very serious. In Hillingdon, we faced a 14.8% council tax rise, tens of millions of pounds of unspecified cuts and a budget that had only been legal for the duration of the meeting at which it was agreed, as the legacy of a previous administration. Residents in Croydon and across the capital will want assurance that that is not the fate that awaits them.

Context, of course, is all-important here. Our councillors and constituents want to see evidence that what has happened in Croydon is unique. Further work is under way in the Ministry of Housing, Communities and Local Government and the wider local government sector to establish the detail of what has happened. Certain things are strikingly different about the situation facing Croydon, which should give some assurance to residents in my constituency and elsewhere.

First, looking at the picture across London, the House may wish to note that the finance report to the London Councils leaders committee of 8 December referenced an overall rise of 4.5% in local authority resources available to London as a result of the spending review. The House may also wish to note that the report highlights the additional resources from the Government to ameliorate the financial impact that covid has had on London’s councils. While that leaves an estimated funding gap in the next financial year, the broad picture from across London and the feedback from my local authorities is that the measures provided by the Ministry have met the costs of covid in terms of service delivery. We all recognise that councils in the capital have done an amazing job of rising to that challenge.

This adds up to a picture in which the serious impact of covid on the capital’s finances has been substantially mitigated, to the extent that councils’ financial resilience should not be compromised. Given that background, it is clear that the situation in Croydon is not a consequence of covid, so is it a consequence of austerity? Council budgets consist of a number of elements, some of which are ring-fenced, such as the dedicated schools grant, housing revenue account, parking revenue account and public health grant. The main part of the budget that is visible to residents—the general fund—is largely spent on the authority’s day-to-day statutory services, with the bulk of that on social care, but also on resident-visible services such as parks, libraries, waste collection and clearing up litter. The general fund also services any debt finance costs relating to general fund capital expenditure. Good practice and the expectation of auditors is that councils will retain a reserve—known in local authority accounting terms as “balances”—sufficient to cover likely risks in that budget. This is where we begin to see a divergence from the practices of other London councils.

Financial risk is a part of life for councils, and planning for it is a characteristic of all soundly financially managed authorities. Hillingdon, for example, faced the covid crisis with around £54 million in balances and reserves, sufficient to cover pretty much any financial challenge that the authority might face and ensuring the stable delivery of services to residents—ensuring that libraries, litter clearing, waste collection and potholes being filled would all carry on come what may. Harrow Council, which also serves my constituents, is more financially challenged, but from my regular briefings by its chief executive and finance team, it is clear that it remains on course for a stable and balanced budget. So we need to ask where we see a variance.

Councils’ involvement in housing development is an essential part of housing delivery in the capital, and it is welcome that council tax payers, rather than developers, will see the upside of the gain where developments take place. However, it is noteworthy in the case of Croydon that, unusually, the local authority has loaned a housing subsidiary of around £220 million of capital—borrowed money—of which a total of zero has been returned against a reported business plan to return £110 million by today.

Clearly, that knocks a very significant hole in its budgetary position. As it went into the covid crisis with a capital debt of £1.5 billion, by far the highest in London, it is clear that, although capital borrowing to invest in assets and services is no bad thing, it does impose borrowing costs on council tax payers—in this case, about £43 million each year. That is compounded if those business plans go wrong. Using those resources to fund what it appears since 2007 has essentially been a burst of speculative property investments, it is clear that diversion of resources into servicing debts that are not generating their planned returns on such a scale was a significant part of the problem and created a very weak financial position going into the covid outbreak.

The financial situation in Croydon is worrying to residents in Carshalton and Wallington, as the London Borough of Sutton sits directly next to the London Borough of Croydon. My hon. Friend mentioned the council’s housing development arm. Does he share my concern that the huge amount of money that has been wasted does not seem to be accepted by the council administration itself, and that the first step to recovery for Croydon will have to be the administration acknowledging the mistakes that were made in getting it to this point?

My hon. Friend is absolutely right to draw attention to that. Part of the reason for this debate is the frustration expressed by many that everyone—from the auditors, to local residents, to councillors in the opposition group, to Members of Parliament—was raising these concerns, but they seem to have fallen on deaf ears. There is an absolutely critical need for the assurance in other local authorities—not just Hillingdon and Harrow but Sutton and elsewhere—that a closer degree of attention is being paid to the finances.

The point that my hon. Friend draws attention to was compounded in the case of Croydon, where—as Grant Thornton, the auditor, has highlighted—there was a growing and unaddressed funding gap in the delivery of day-to-day services. These are the basics for a local authority, as opposed to extraordinary speculative business activity that is out of the norm. That prompted Grant Thornton to issue—an extraordinary step—a report in the public interest, given the scale of its concerns, highlighting a shortfall of about £60 million between the resources available and the budgeted expenditure. That is a cash-flow problem on a massive scale, distinctly out of proportion with anything that we have seen in any other London borough.

I should declare that I enjoyed a positive working relationship with the former Croydon leader, Councillor Tony Newman, in my local government days, and always found him a very passionate advocate for Croydon—somewhere that was clearly his place that he felt determined to improve. There is no suggestion that he or his colleagues have acted in anything other than good faith. However, with such a perilous financial position facing residents, and others across London asking what it means for them, it is important that the Department, the Government, the wider local government family and Croydon itself are clear about what has gone wrong and about the fact that this combination of failed commercial property speculation and, more importantly, the failure to address the fundamental management issues is out of step with what we see in other London boroughs. I want all residents in the capital to enjoy the stability, the residents-first attitude and sound financial management that is consistently highlighted by my constituents, because it is critical to the delivery of services on which our community depends.

It is clear that Hillingdon and Harrow, Barking and Bexley and Havering and Redbridge have all faced the financial challenges of austerity and of covid, and they have emerged with budgets that are robust. It is what some have described as disastrous failed commercial property speculation and a fundamental lack of grip on the finances that have unusually brought Croydon to this position. The local government sector is stepping in to help. I know that Ministers will be aware of the particular value of the Local Government Association-led and sector-led improvement teams, who are already beginning to help out. After all, why pay expensive consultancy firms when peers who have been through it are able to rally round and use their experience to help sort the situation out?

Although Labour representatives have sadly remained silent on these concerns—and, in the case of Mayor Khan, heaped praise on the administration for “perfect examples” of projects that even then were millions of pounds over budget—I am determined, and we should be determined, to provide other residents across London with an assurance that such failings are not common across London’s councils. I know that Ministers are equally determined that the success of our councils is not undermined by the reputational damage and what has happened in Croydon.

I am grateful to my hon. Friend the Member for Ruislip, Northwood and Pinner (David Simmonds) for securing this debate on such an important topic. I am pleased to respond on behalf of the Government. I thank my hon. Friend for highlighting his experience as a serving councillor in London, and agree that the mismanagement by the Labour-run Croydon Council, leading to the section 114 notices, damages the reputation of the excellent work that is carried out by local authorities up and down the country. He may know that I also served as a councillor and as a cabinet member on the Conservative-run Medway Council prior to being elected as an MP. It was well known then that Labour spent all the money when it was in control, and it was only when the Conservatives took control that fiscal prudence and oversight returned.

I will begin by talking about local government in general, and the steps that central Government have taken to support local councils nationwide, before looking at the issues in Croydon in isolation. The very first thing that I should say is how grateful the Government are to those who work for local councils up and down the country who have been tireless in helping our residents to meet the challenges of the pandemic. I am sure that Members on both sides of the House agree that the crucial role that local government plays in delivering the vital services on which we all depend will never be more evident than during this pandemic, and I thank everyone involved for their work.

As hon. Members will know, supporting councils to maintain critical services is a key priority for the Government. That is why, at last month’s spending review, my right hon. Friend the Chancellor of the Exchequer announced the key measures of income for local authorities’ core spending power to rise by 4.5% in cash terms next year. That equates to an additional £2.2 billion of funding for local government services. The Chancellor also announced estimated funding of around £3 billion in additional support for covid-19 pressures next year. This comes on top of the unprecedented support that the Government have committed this financial year, with over £7.2 billion for local authorities even before the extension of the contain outbreak management fund for local authorities under the highest level of restrictions that was announced as part of the covid-19 winter plan. This takes the total support committed to councils in England to tackling the impact of covid-19 to over £10 billion.

Councils also have access to the co-payment scheme, which has been extended to June 2021. Under this scheme, the Government will cover local councils for 75% of losses beyond the first 5% of previously planned income from sales, fees and charges. We recognise that, even with the considerable support already provided to local government, there may be individual authorities with unique circumstances. That is why we are encouraging them to approach my Department to discuss any concerns that they have about their future financial position. We remain committed to working closely with local authorities as they support their communities through the pandemic.

Let me turn to Croydon specifically. Since the start of the pandemic, the council has been allocated over £49.2 million in funding, including £33 million in un-ringfenced grants, £8.1 million through the infection control fund and £5.1 million through the contain outbreak management fund. That is on top of the £20.8 million increase in Croydon Council’s core spending power for 2021 that was announced on 6 February this year.

I turn to the current financial challenges in the London Borough of Croydon. As hon. Members are aware, the council’s financial director has now issued two section 114 notices: the first on Wednesday 11 November, and the second on Wednesday 2 December. Local authorities have a legal duty to balance their budgets, and section 114 notices are an important part of an accountability framework that guards against irresponsible or ineffective financial management. If a council judges that it is unable to set or maintain a balanced budget, the finance officer has a statutory responsibility to issue a notice. The council then has 21 days to consider what action it intends to take in response to that notice. Local government is independent of central Government, and the decision to issue a section 114 notice rests with the council at the local level. The Government have no role in the decision to issue a notice.

That said, the Government are well aware of the wider concerns around Croydon’s overall finances and governance. During the pandemic, my Department met with the council on multiple occasions to discuss its budgetary pressures. Croydon had publicly reported that there has been significant uncertainty around the council’s estimation of its budget gap throughout this period. On 23 October, the council’s auditors published a public interest report, which my hon. Friend alluded to, under the Local Audit and Accountability Act 2014. That report detailed serious concerns relating to governance, financial management and commercial investments. The report highlighted that the council had failed to recognise both the seriousness of the financial position and the urgency with which action needed to be taken.

Grant Thornton’s report suggested that there was little evidence of councillors holding officers to account or taking action to address the overspend reported in 2017-18, 2018-19 and 2019-20. The Labour-run council failed to address significant overspending, despite warnings before the covid pandemic. Sadly, the report lays bare the fact that Labour recklessly gambled hundreds of thousands, even millions, of pounds of taxpayers’ moneys on disastrous commercial property ventures. For example, it bought a hotel for £30 million—20% more than the asking price; this hotel has gone bankrupt—and a £50 million shopping centre, the value of which has crashed. Most damningly, it provided a loan of over £200 million to a developer, brick by brick, which is yet to make any payments, as my hon. Friend outlined. That has resulted in a staggering pre-covid £1.5 billion debt—larger than that of any other London borough.

Local authorities are independent of national Government and directly accountable through their elected councillors to local residents. Where powers in the Local Government Act 1999 are used, that involves the passing of functions in those democratically elected members to people appointed by the Secretary of State. Intervention in a local authority by central Government is therefore not to be undertaken lightly. We have been clearing the path such that the powers will be used only when there is evidence of systematic and significant failure at a local authority. Our firm preference when a local authority runs into difficulties is that it will tackle those challenges itself, possibly with sector-led support, as my hon. Friend mentioned. That continues to be the case.

However, it is worrying that the interim chief executive officer said in November, when she wrote to councillors:

“Colleagues across the council are still putting forward requests to spend money and for growth next year that we simply cannot afford.”

That is why, on 29 October, my right hon. Friend the Secretary of State for Housing, Communities and Local Government announced a rapid, non-statutory review of the council to be conducted by an independent review team. Announcing the review, my right hon. Friend was clear that the situation described in the public interest report is

“deeply concerning and unacceptable”

and that residents of Croydon

“deserve… better… from their local council.”

I am pleased to confirm that the independent review team has reported its findings to the Secretary of State. He is considering the report and will respond in due course. I can reassure Members that the Secretary of State will take a keen interest in the steps the council will need to take to address the governance and financial management issues that have been identified through the independent review, ensuring that the residents of Croydon receive the services they have every right to expect.

I can, of course, understand that the current situation and the ongoing existence of a section 114 notice might be a matter of concern for Croydon residents. Once a notice has been issued, the council is required to operate controls on spending for 21 days. During this period the council may not enter into any new agreement that involves expenditure unless a finance director has specifically authorised the spend. However, we would expect existing expenditure to continue, such as salaries, pension costs and expenditure required to honour existing contracts and legal requirements. Officials from the Ministry of Housing, Communities and Local Government have been in discussion with the council, which has confirmed that services linked to safeguarding vulnerable people and statutory responsibilities will continue to be delivered. We have also been clear that the council should notify us if it anticipates that spending controls during the 21-day section 114 period will prevent it from delivering any services that are required to safeguard the residents of Croydon during the pandemic, and we will continue to monitor.

At the end of the 21-day period, the council must meet to discuss a plan to bring the budget back into balance. The council held a meeting in response to the first section 114 notice on 1 December, where it was agreed that it was not possible to deliver a balanced budget, leading to the issue of a second notice the following day. It is for the council to decide what steps it needs to take to balance its budget. The council made it clear in its section 114 notices and accompanying reports that it will submit a request later in December to the Government for financial support to help it bring the budget back into balance. That request will be considered as and when it is received.

I thank my hon. Friend for calling this debate on a very important matter, and it is a shame that Labour Members who represent the area are not here. As I have outlined, the Secretary of State will be responding in due course to the independent report of the non-statutory review team, alongside any request that Croydon Council may submit to Government for financial support. The Government will continue to take a keen interest in the steps that Croydon Council is proposing to resolve the matters that have been outlined so eloquently by my hon. Friend. It is imperative that the council moves forward towards a financially sustainable footing to ensure that it continues to deliver for the communities it serves.

Finally, I repeat that, although these are exceptional circumstances and many councils up and down the country face challenges due to the pandemic and demands on their purse, they are still able to provide that robust oversight challenge and deliver balanced budgets. I assure residents that many local authorities up and down the country operate in a very good way, which we happily support going forward.

Question put and agreed to.

House adjourned.