As Austerity Helps Bankrupt an English County, Even Conservatives Mutiny

NORTHAMPTON, England — It was a seething, stomping protest in this ordinarily genteel medieval town: Throngs of residents, whistling and booing, swarmed the county hall. “Criminals!” they shouted. They held up banners that read: “Tory councilors wanted for crimes against people in Northamptonshire.”

The crime?

The bankruptcy of their Conservative-led local government, which has a budget deficit so big that councilors are stripping away all but the minimum services required by law. Inside the county hall, the besieged council debated the latest round of cuts — it had already voted to close libraries and stop repairing roads — as disgusted residents jeered.

“Your guilt should keep you awake at night,” said Patrick Markey at the meeting earlier this month, his voice trembling with rage. “It’s criminal incompetence and criminal politics.”

Usually, local government finance is a dull affair. But Northamptonshire has become a warning sign of the perilous state of Britain’s local governments. A Conservative Party bastion, Northamptonshire is leafy and affluent, littered with aristocratic estates — yet in February its local authority became the first in two decades to effectively run out of money.

Britain is already in upheaval over Brexit, its looming exit from the European Union, with many experts warning of economic hardship ahead. But Northamptonshire is foreshadowing another potential fiscal crisis — local governments drained of resources, cutting services to the bone.

Councils are Britain’s fundamental unit of local government, dealing with an array of basic needs: trash collection, public transport, libraries, town planning, and care for children and other vulnerable people, among other things. They levy a tax on homes and charge fees for some services. They also collect a nationally set tax on commercial real estate, and keep an increasing share of it. But for years they received most of their funding from the central government.

The crisis in Northamptonshire is complicated and partly self-inflicted. But it has roots in the austerity policies and cost cutting that the Conservative-led national government imposed a decade ago in response to the global financial crisis. The Tories in London argued that austerity was the responsible solution to balance public accounts and encourage future growth.

Now some Conservatives, especially at the local level, are openly defying what has been a pillar of Tory ideology.

Funding from London for local governments has fallen by 60 percent since 2010, with reductions expected to total $21 billion by 2020, the Local Government Association has calculated. In response, nearly every council in Britain has cut or outsourced services, sold off assets and tried a host of budget gimmicks, experts in local finance say.

One in 10 of the larger councils that have obligations to care for children and elderly people — about 35 councils in all — are in danger of exhausting their reserves within the next three years, according to the National Audit Office.

“There’s a slow-moving domino effect,” said Rob Whiteman, chief executive of the Chartered Institute of Public Finance and Accountancy.

Northamptonshire was the first flashing red light. East Sussex County Council, run by Conservatives, recently announced it would reduce services to the “legal minimum.” The Conservative-led county council in Somerset warned it might be facing bankruptcy. Last week, two families won a case against Bristol City Council to block plans to reduce funding of special education needs and disability services.

The Northamptonshire council, having run through its rainy-day funds, now has only enough money to pay for mandatory services for the elderly and children. Unable by law to run a deficit, the council voted in February to shut down 21 of the county’s 36 libraries, remove bus subsidies and suspend road repairs. (A court recently blocked the decision to close the libraries.) At the meeting earlier this month, some councilors seemed resigned to the angry public response.

“I am happy to apologize,” said Richard Auger, a Tory councilor. “I think mistakes were made,” he added. “It’s a situation we’re responsible for.”

The crisis is a political embarrassment for Conservatives, who are already divided into warring camps over Brexit. The former leader of the Northamptonshire council, Heather Smith, has resigned from her position, and from the Conservative Party. Investigators sent from London blamed her and other councilors for mishandling local finances, even as she blamed London for impossible mandates and a refusal to consider higher taxes.

Sounding increasingly like their Labour opponents, some Conservative councilors in Northamptonshire are now talking about stopping the outsourcing of public services and demanding tax increases.

“I was a believer that we had to save money, but there had to be other ways than to slash and burn,” said John Ekins, a recently elected Conservative councilor in Northamptonshire. “How did we get to where we are? What the hell has been going on?”

They called it the Graph of Doom.

It was 2013, and the Northamptonshire council was presented a Power Point chart that depicted an unavoidable contradiction: a sharp, rising public demand for local services contrasting with a sharp cutback in money from the national government, as part of the austerity program led by Conservatives in London.

“It was showing how we were all heading towards this cliff edge,” recalled Smith, who was then a senior councilor. The cliff edge was a shortfall of $175 million that needed to be addressed by 2020.

A committed Tory, Smith initially embraced the calls for austerity, as did many in reliably Conservative Northamptonshire. “Being a Conservative-run council, everybody accepted that the country had been overspending and that it was time to scale all of that back,” Smith said.

The problem was how to do it. The council needed to find huge savings, but it also had limited revenue sources.

Raising taxes was ruled out, deemed ideologically unpalatable while the Conservatives were making austerity-related cutbacks. Eric Pickles, the government minister who oversaw local government financing between 2010 and 2015, said it was a “moral duty” for the Tories to keep local taxes low.

“Some Conservative councils had a big fight over it, and said, ‘No, we’re not doing it,'” Smith said. “They had a huge amount of pressure on them.” Northamptonshire also had a more unusual problem. Many Conservative councils were partly shielded from central-government cuts because they had large earnings from the commercial real-estate tax, called business rates.

But the concentration of blue blood in Northamptonshire actually hurt its tax base. Much of the region is owned by gentry like the Duke of Buccleuch, thought to be the largest private landowner in Scotland and England, and Earl Spencer, uncle to Princes William and Harry, heirs to the British throne.

Those holdings are generally agricultural land, said Guy Shrubsole, who runs the investigative blog “Who Owns England?” And agricultural land is exempt from business rates, leaving Northamptonshire even more dependent on funding from London.

Faced with the cold reality of the Graph of Doom, council leaders decided that the old ways of doing business no longer applied. The council’s then chief executive, Paul Blantern, designed an initiative called the “Next Generation Model,” which pivoted the council, like many others across the country, toward outsourcing.

Under “Next Gen,” the council would become a commissioning body, spinning off many of the services it had been performing and, in the process, save millions of pounds a year.

One initiative, Olympus Care Services, was founded in 2014, as a wholly owned subsidiary of the council. It was created to oversee adult social care services, with the intention of generating extra revenue by selling off surplus bed spaces to privately funded care customers.

During its first years, Olympus managed to post modest profits, as well as reducing the overall cost to the council.

But it never achieved the projected cost savings, and as budget pressure from the council mounted, it started recording losses — around $4 million in 2016 and $1.25 million in 2017. “It’s all such a perfect storm,” said Simon Edwards, director of the County Councils Network, a cross-party group that represents England’s local authorities. “Northamptonshire was trying to be too innovative too quickly, outsourcing this and spinning off that, that they thought would save them money and protect some of the services.”

“They did some things wrong,” he added. “But inexorably austerity is leading many counties into very difficult financial positions.”

The outsourcing experiment collapsed last year, before it had fully started. By February, the council realized it had no way out, issuing a formal notification of de facto bankruptcy. In response, Tory leaders in London dispatched government inspectors.

In March, the inspectors issued a damning report.

Max Caller, the chief inspector who wrote the report, said that the county council’s troubles were self-inflicted and that the Next Gen approach did not have any “documented underpinning” that set out how it was expected to deliver savings.

“The things that they did were unwise,” he said in an interview. “You could say that they didn’t want to face up to the challenges of austerity but all the other councils have.”

According to his findings, he said, Northamptonshire overspent by $130 million over three years and took no steps to rein in expenditure. “Everything has been a waste of money.”

Still, he said of the financial problems afflicting other councils: “You can’t go year after year holding down taxation rates at local level and taking the money away and expecting the same level of service. That’s not possible.”

Smith and other local Conservatives said the inspectors’ report was unfair, and that the national government was wrongly scapegoating the council. She said other Conservatives, locally and in London, grew irritated with her insistence that insufficient funding was the core problem.

“They wanted me to shut up about us being underfunded,” she said.

This year, the government announced some new money for councils, including about $200 million for adult social case services. Even so, some experts say that councils are still staring at a $4 billion funding hole.

In response, according to an annual government survey of council leaders, an overwhelming majority of county councils across England plan to raise council tax, their levy on homes, by 5.99 percent this year — the maximum the central government will allow. Many have also said they would like to raise business rates, a move the central government is still rejecting. Before declaring bankruptcy, Northamptonshire took the desperate step of selling and leasing back a $70 million headquarters building it opened just in October. The move brought widespread public ridicule and helped prompt the arrival of the government inspectors.

Northamptonshire’s financial troubles were clear from the moment the government began to pull back on grants to local authorities, officials said. What they did not expect was that a Conservative government in London would let the county slide into bankruptcy.

“I honestly believed that the government would not let us sink because we were a Conservative authority,” said Smith, the former council leader. “But I was wrong. They were quite happy to just throw us out and annihilate us, really.”

On July 24, the Northamptonshire Council issued a Section 114 notice that banned any new expenditure of public money, after realizing it needed to save almost $90 million more this year. In laymen’s terms, this meant that the council was declaring de facto bankruptcy for a second time.

Politics is usually sharply divided in the county, with Labour on the left and the Tories on the right. But by the time the council voted to shut down most of the county’s libraries, the overall scope of the cutbacks startled many people in both parties. In recent years, the council had also closed local centers for children and sharply reduced educational funding.

But it was the vote to shut down the libraries the struck the sharpest nerve, even in affluent villages like Roade, where the local library is described as “a pub without pints.”

“I couldn’t face the libraries being cut,” said Sam Rumens, a Conservative councilor who voted against that measure, as he sat recently with some Labour officials at the town hall discussing “problems of capitalism.” (“This is one of the leftiest views you’ll get out of me today,” he told them.)

“There was a very sharp intake of breath,” he recalled when he said that he would oppose the cuts. Labour lawmakers cheered and members of the public who attended the debate on the budget this winter roared their approval.

“The whole process has gone mad,” said Jason Smithers, another Conservative politician and the incoming mayor of Higham Ferrers, as he strolled through the town, which has yellow-brick houses that look straight out of a Jane Austen novel and a grocer selling organic duck and goose eggs.

Like Rumens, he was a dissenter from his Conservative colleagues. “They were like cowboys running through the town,” he said of colleagues who voted for the library cuts. Smithers said he supported higher taxes even if it would jeopardize his political fortunes. “I’m a Conservative through and through,” he insisted. “But you’ve got to be realistic.” Council leaders in Northamptonshire said they had done everything by the Conservative government rule book.

“We did everything that the government asked for,” a senior council official said, who would speak only on condition of anonymity. There was even a handbook prepared by Pickles, the minister in London, on “50 ways” councils could save money. It suggested banning mineral water in council meetings, scrapping subsidized canteens in favor of local sandwich delivery firms and opening coffee shops in libraries.

In Horton, a village where elegant mansions peek from behind wooded lanes, Wedgwood Swepston, 57, was out inspecting his Land Rover. An Aston Martin idled nearby.

“They’ve been austere in the wrong places,” he said of the government. “When austerity affects people who cannot look after themselves, then you need to question whether austerity has gone too far.”

When asked about his party affiliation, he became thoughtful. “I suppose I’m now what you call a ‘floater,'” he said.

“It makes me cross,” said Gloria Wagstaff, 77, expressing her discontent with typical British understatement as she waited for a bus in Higham Ferrers. “The whole government has lost its way.”