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Ministers have agreed to give bankrupt Woking council an “unprecedented” £500m taxpayer bailout under government plans to merge a dozen local authorities in Surrey.
In a historic intervention, the communities secretary, Steve Reed, said the government would repay a significant chunk of the debt owed by the former Tory-run local authority.
The bailout helps to smooth over the creation of two new councils in Surrey, in effect splitting the county in two. The plan will result in the merger of 11 district and borough authorities with the county council to create two new “mega council” unitary authorities.
Labour is planning to push ahead with the most far-reaching reorganisation of local government in England for decades, as part of a “devolution revolution” to find efficiency savings and spearhead economic growth.
Woking declared itself in effect bankrupt two years ago after its former Conservative leadership ploughed vast sums of borrowed money into skyscrapers, a luxury hotel and other risky investments that turned sour.
In one of the biggest financial failures in local government history, the local authority, which has been controlled by the Liberal Democrats since 2022, racked up debts of more than £2bn.
The Guardian revealed earlier this year that ministers had been asked to write off £1bn in debt held by the troubled local authority to enable a merger between Surrey’s 12 local authorities.
Reed signalled that Labour had been left with little choice but to provide a “significant and unprecedented” package of taxpayer support given the scale of the debt problem in Woking.
Writing in a letter to local leaders in Surrey announcing the government’s reorganisation plan, he said: “This is a significant and unprecedented commitment given historic capital practices at the council.
“It reflects our acknowledgment that, even after the rationalisation of Woking’s historic assets, there is significant unsupported debt held by the council that cannot be managed locally.”
He suggested that further support could be forthcoming if Woking council was unable to raise sufficient funds from asset disposals and through its normal grant-funding from Westminster.
Labour is pursuing the biggest town hall shake-up in England since the 1970s, merging district and borough authorities with the county councils above them in 21 places to abolish two-tier local government across the country.
First launched by Angela Rayner, the former deputy prime minister, the government hopes to improve public services and to drive efficiency savings. The changes are also considered a vital step on the road to creating more mayoral authorities.
However, some of the councils involved have amassed vast debts, raising the prospect of taxpayer bailouts or residents in nearby areas being asked to take on the financial liabilities of their bankrupt neighbours.
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Surrey was selected as part of the first wave of Labour’s shake-up of local government, in part because ministers wanted to tackle the financial situation in Woking. Dozens more local areas are expected to follow suit with mergers.
Woking will be merged with five other local borough authorities – Guildford, Runnymede, Spelthorne, Surrey Heath and Waverley – to become part of a new West Surrey council.
East Surrey will be created from the borough and district councils of Elmbridge, Epsom and Ewell, Mole Valley, Reigate and Banstead, and Tandridge.
Ann-Marie Barker, the Lib Dem leader of Woking council, said the £500m bailout was “extremely positive news” for the local area and would help the new unitary authority have the best chance of success from its creation.
“We recognise that Woking’s debt is an ongoing concern not only for our own community but for residents across Surrey,” she said.
Alison McGovern, the local government minister, said the reorganisation of councils in Surrey and elsewhere would benefit residents.
“Countless confusing councils and fragmented services don’t build community pride or local identity – good local jobs, better public services and more money for local services do.”
