Fears grow for UK councils after Birmingham effectively declares bankruptcy

Local government bodies have warned that more councils across the UK could declare themselves in financial dire straits, after the country’s second biggest city said it could not balance its books.

In a statement on Tuesday, Birmingham City Council in central England said it had issued a Section 114 Notice under the Local Government Finance Act 1988, effectively declaring itself bankrupt.

The statutory trigger blocks spending on all but essential services, and forces councillors to come up with an action plan within 21 days to tackle the shortfall.

Leaders of the Labour-controlled council – one of Europe’s largest – called the move “a necessary step” to get spending back on a stronger footing.

Birmingham City Council is one if the largest local authorities in Europe. File photo: Shutterstock

They blamed “long-standing issues”, including the roll-out of a new computer system, for an £87 million (US$109 million) hole in its £3.2 billion-a-year budget.

But it said the parlous state of its finances had been compounded by “rampant inflation” – currently the highest in the G7 – increases in the cost of adult social care and reductions in business rates.

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At the same time, successive Conservative governments had cut central funding to the city by £1 billion since they came to power in 2010.

Council leader John Cotton and deputy leader Sharon Thompson said Birmingham was not alone in this, and local authorities across the UK were facing “a perfect storm”.

In June, the local authority revealed that it has to pay up to £760 million to settle historic equal pay claims but does not have the resources to do so.

Tory councillors in the city, which is home to some 1.1 million people, blamed Labour mismanagement of public finances for the crisis.

In London, Prime Minister Rishi Sunak’s official spokesman said Birmingham had received a more than nine per cent increase in additional funding from a pot of £5.1 billion for local councils this year.

“The government recognises that there are pressures that both central and local government face,” he added but indicated it was an issue for Birmingham’s leaders to resolve.

Birmingham’s announcement follows Croydon Council in south London issuing a Section 114 notice in November last year because of a £130 million black hole in its budget.

Thurrock Council in Essex, east of London, also declared itself in financial distress in December last year while Woking Borough Council, southwest of the capital, did the same in June.

The Institute for Government think tank said the spending power of local authorities in England – how much they receive in grants from central government, local housing taxes and business rates – fell by 17.5 per cent from 2009-10 to 2019-20.

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But despite a partial recovery, in 2021-22 it was still 10.2 per cent below 2009-10 levels, assessing that central government funding had been cut by up to 40 per cent in the first decade of Tory rule.

Jonathan Carr-West, chief executive of the local government body and think tank the LGIU, said Birmingham’s announcement was “a sobering moment”.

“Central government has kept councils living from hand to mouth and from year to year for far too long,” he said.

“Birmingham is the biggest council to fail so far but unless something changes, it won’t be the last.”

SIGOMA, a grouping of 47 urban councils within the Local Government Association (LGA), last week warned that one in 10 of its members were considering making the statutory admission that they have no prospect of balancing their books.

Nearly 20 per cent said they could do the same in the next year, putting frontline services run by councils such as social care, transport, housing and education at risk of further cuts.

SIGOMA chairman Stephen Houghton said: “The government needs to recognise the significant inflationary pressures that local authorities have had to deal with in the last 12 months”.

He added: “The funding system is completely broken. Councils have worked miracles for the past 13 years, but there is nothing left”.

Additional reporting by Bloomberg