Local Government Finance: Croydon

David Simmonds Excerpts

Wednesday 9th December 2020 Commons Chamber

[David Simmonds (Ruislip, Northwood and Pinner) (Con)]

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.

[Elliot Colburn (Carshalton and Wallington) (Con)]

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?

[David Simmonds]

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.