Havering Council pins hopes on government loan to avoid bankruptcy within three months

Havering Council will be forced to declare itself effectively bankrupt if the government does not agree to a multi-million-pound loan within three months.

The council is not allowed to take out a loan to pay for its day-to-day services, known as a capitalisation order, without the government’s permission.

However, a spokesperson has said that without the loan, Havering Council would have “no alternative” but to issue a Section 114 notice in February, which means it is effectively bankrupt.

This is the first time the council has named a deadline for issuing a Section 114 notice.

The council needs the loan as it is facing a £31million overspend in 2023-24, and has only set out £12m in cuts and savings to council services to close the gap so far.

A spokesperson told the Local Democracy Reporting Service (LDRS): “The council has made it quite clear that a response is needed by February at the latest to enable the 2024/25 budget to be set at council.

“Failure to confirm the order by this date would leave the authority no alternative but to issue a [section] 114 notice through an inability to set a balanced budget.”

The council has said it expects to make the formal request this week, although is “still finalising” exactly how much it will ask to borrow.

Other solutions for closing the £31m gap include increasing council tax by more than the 4.99 per cent cap.

However, this would either require a local referendum, which the council has ruled out, or another special request to the government.

There is also a possibility that the government’s announcement on funding for councils in 2023-24, which is usually made in December, will include more money than is expected.

Labour group leader Keith Darvill told the LDRS the council’s request for a government loan paints a “dismal picture”.

He added: “There’s a big disadvantage of a capitalisation order in that you have to pay the current retail prices index (RPI) interest rate, plus one percent.”

The Labour leader said the cost of paying the interest on the borrowing would be “massive”.

Cllr Darvill said: “Effectively government support for local government has reduced and is at a stage where it is untenable really.

“That’s the situation we are in. It is really between us and central government, which is the challenge.”

Since 2020, the government has given 16 councils permission to borrow money to cover their costs.

Some, including Slough, Croydon and Thurrock, had already issued section 114 notices when asking for the loans and have permission to borrow hundreds of millions of pounds over several years.

Other councils have avoided issuing the notice and later withdrew their request.

The government says it only provides support on an “exceptional basis”, on the condition that each council agrees to an external assurance review on their financial position.

The loan must be repaid within twenty years, with interest.

Council leader Ray Morgon blames increased supplier costs, spending on social care and government cuts for the financial problems.

More than two-thirds (70 per cent) of Havering’s £170m annual spend is on social care services for adults and children – statutory services which it must provide for residents.

Cllr Morgon has also criticised the formula that Havering Council uses to calculate how much funding councils need, which is based on “outdated” population data from 2011.

The LDRS approached the Department for Levelling Up, Communities and Housing (DLUCH), which is responsible for funding councils, but it has not responded at the time of publication.

However, in response to previous coverage of Havering’s budget crisis, a spokesperson said Havering received a 9.2 per cent funding increase last year, although this required it to increase council tax by 4.99 per cent.

They added: “We stand ready to speak to any council that has concerns about its ability to manage its finances or faces pressures it has not planned for.”

DLUCH has repeatedly refused to comment on why it has not updated the local government funding formula since 2013.

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Josh Mellor

Local Democracy Reporter