The Quiet Crisis of Local Finance

From the federal United States to the hyper-centralised UK, and even in the tightly state-directed system of China, local government is increasingly constrained and hollowed out. The slow-building emergency in government debt is not only on a national level but on a local level too. Across advanced and emerging economics, local governments have taken on growing responsibilities without the fiscal tools to fund them, undermining service provision and political trust without triggering alarm that would usually be associated with deep spending cuts.

Whilst there has been some acknowledgment of the dire states of British councils. A prolonged period of austerity has steadily withdrawn core funding from councils while leaving statutory responsibilities, most notably adult social care, children’s services and special educational needs, both intact and growing. The scale of the problem can be seen in the rising use of Section 114 notices, the mechanism used when a council’s spending is expected to exceed revenue. Since their introduction in 1988, just fourteen councils have issued them, yet twelve have done so since 2018. This concentration follows more than a decade in which councils’ core funding fell by 9 per cent in real terms, and by 18 per cent per person, between 2010-11 and 2024-25. 

Legally required to balance their budgets but tightly constrained in their ability to raise revenue, local governments have gutted the provision of other services eroding local communities' public spaces and amenities. This hasn’t stopped the state of councils still being depicted as isolated cases, such as with Birmingham councils equal-pay payout and IT-system overspend, or due to profligate spending decisions by councils controlled by the opposition party. These trends in the viability of local governance go beyond Britain, by examining its struggles internationally the centralisation of political power is revealed growing autocracy is evident.

In the United States, the crisis of municipal finance operates through a different institutional framework but leads to similar outcomes. American cities and counties enjoy far greater constitutional autonomy than their British counterparts thanks to federalism, yet this autonomy is tightly constrained by their balanced-budget requirements. After 2008 and the pandemic, local governments saw falls in property, sales, and income taxes forcing them to cut, mainly capital, spending. This has resulted in a reliance on short-term strategies such as deferring infrastructure maintenance and selling some public assets.

The result has been a reliance on short-term strategies such as deferring infrastructure maintenance and selling some public assets. In many cities this has produced a growing backlog of unfunded obligations, most visibly in deteriorating roads, ageing water systems and under-maintained public buildings with 91% of cities delaying critical infrastructure projects due to lack of funding. Pension and healthcare obligations for public employees consume an ever larger share of budgets, reducing discretionary spending, while infrastructure decay is treated as a future problem rather than a present liability. 

China presents the most opaque and potentially most destabilising version of the same fiscal problem. Although the Chinese state is formally unitary, local governments are responsible for around 80% of public spending while only entitled to half of total public revenues resulting in a structural deficit at the regional and local level. This gap has been managed through short-term measures such as land sales to private ventures as well as indirect mechanisms. 

The most important of these has been land-based finance and borrowing via Local Government Financing Vehicles (LGFVs), which allow Chinese municipalities to raise debt using their land assets as collateral. For years, rising property prices and rapid urban expansion masked the fragility of this model, but the slowdown in China’s real estate sector since the turn of the decade has exposed the scale of the underlying liabilities. 

Officially recognised local government debt now exceeds 40 trillion yuan (£4.17trn), while estimates of LGFV liabilities add a further 60-70 trillion yuan (£6.26-£7.30trn) as of 2023, pushing China’s public debt well beyond headline figures to 117% of GDP instead of the official 69%. As land sale revenues collapsed with China’s property crisis, local governments have increasingly resorted to asset sales and debt restructuring. Unlike in liberal democracies, public regional failures are not tolerated with bankruptcies avoided through administrative intervention preserving the appearance of stability while deepening political dependence on Beijing. The result is a system in which local governments become increasingly constrained by hidden debt that reduces their autonomy and power.

Together, these three cases point to a shared governing logic that cuts through ideology or institutional design. Whether through austerity in Britain, balanced budget constraints in the US, or administrative control in China, local governments have become the touchpoint for uncertainty. When the media narrative is fixed on problems with national debt, issues with local finance prove to be a warning of what's to come. Local failure in governance diffuses blame from central government and justifies tighter oversight without the costs of overt authoritarianism or formal constitutional change. 

The crisis of municipal finance is therefore not just a technical problem of budgets and debt, but a feature of modern states. Local government is kept at a level functional enough to provide mandated services, managing most everyday pressures, but weak enough to be a political target. Until this imbalance between responsibility and resources is directly confronted, local governments will continue to fail in ways that are economically damaging and politically corrosive.

Image: Wikimedia Commons/Roger D Kidd

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