Taxpayers are being asked to shoulder £1bn in debt amassed by a bankrupt Surrey council that will be merged in the government’s plan for the biggest transfer of powers to England’s regions this century.
Posing a fresh financial headache for the government, councillors in Surrey have requested that ministers “write off” £1bn in debt held by troubled Woking borough council to enable a merger between the county’s 12 local authorities.
Under plans announced last month by the deputy prime minister, Angela Rayner, Labour wants to see dozens of small district and county councils join together to create fewer, large authorities to help streamline services.
However, some of the councils involved have amassed vast debts in recent years, raising the prospect that residents in some areas will be asked to take on the financial liabilities of their neighbours.
Dubbed “mega councils”, the cornerstone of Labour’s devolution agenda to reorganise local government has come under fire after it emerged half of the county councils due to have elections in England this spring could ask to have them postponed.
Local elections are due to take place in 21 county council areas in England in May, but at least 12 are expected to request a delay from ministers to allow them to push forward with their merger proposals.
The details of Surrey’s request for a debt write-off came in a letter by the county council’s Conservative leader, Tim Oliver, to Rayner’s department late last week ahead of a deadline set by the government for areas that would form the first wave of reorganisations.
Writing to the communities minister, Jim McMahon, Oliver said any deal in the county would need to take into account the “significant financial risk of the level of debt held across the Surrey local government footprint”.
“We will request the government to write off those debts,” he said.
Surrey is understood to be among 17 local authorities to have submitted merger proposals to the Ministry of Housing, Communities and Local Government (MHCLG) at the end of last week. Taxpayers could be on the hook for about £43bn of debt from councils that could be combined, the Times reported in December.
Woking became the biggest financial failure in local government history in 2023, declaring effective bankruptcy after its multibillion-pound spending spree involving residential skyscrapers, a hotel and shopping centres turned sour.
Under plans being considered locally, Woking is expected to merge with some or all of its 11 neighbouring Surrey authorities.
However, the prospect of the government wiping the slate clean for a heavily indebted council in a relatively affluent part of the country is likely to stoke anger in poorer parts of England, which suffered the deepest cuts to funding under the previous Conservative government.
It could also fuel tensions between Rayner’s devolution agenda and the chancellor, Rachel Reeves, as the Treasury attempts to keep tight limits on public spending after a week of pressure in the financial markets.
Woking had been led by successive Tory administrations as it racked up its debts, before the Liberal Democrats took control of the authority in 2022. The council has a debt pile worth more than £2bn, of which about £1bn local leaders believe it is not able to manage without central government intervention.
Will Forster, the Liberal Democrat MP for Woking, who is a member of the commons housing, communities and local government committee, said: “It’s fair to say the government acknowledges Woking’s dire financial situation, and know it’s never going to, or is unlikely to repay its debts. The Treasury need to acknowledge that.
“A debt write-off will need to be part of the transformation. There’s no point merging Woking with others that would also end up being bankrupt.”
Ann-Marie Barker, the Liberal Democrat leader of Woking council, said her administration was doing “all we can” to manage its debts, but argued it would never be able to clear them on its own because it only generated about £11m a year in council tax.
An MHCLG spokesperson said:
“The government will facilitate local government reorganisation for two-tier areas and for unitary councils where there is evidence of failure, or where their size or boundaries may be hindering their ability to deliver sustainable and high-quality public services.
“The government has a framework to support councils in financial difficulty, and we will continue to work with best value commissioners to support financial recovery in areas where statutory interventions have been made.”
