Councils in England in crisis as Birmingham declares itself bankrupt

The crisis in local authorities was laid bare on Tuesday as Birmingham city council in effect declared itself bankrupt, with experts warning that others across the UK were now living “hand to mouth”.

The council’s head of finance took the dramatic decision on Tuesday to issue a section 114 notice, indicating that it did not have the resources to balance its books.

Woking, Croydon and Thurrock are among the other councils to have made similar announcements recently after botched investment projects and deep funding cuts.

But the contagion spreading to Europe’s largest local authority, which hosted last summer’s Commonwealth Games, is likely to intensify pressure on Rishi Sunak’s government over the legacy of 13 years of austerity.

The notice means all but essential spending will be halted, in order to protect core services. It came after the Labour-led council estimated in July that equal pay claims brought by its female staff could cost it up to £760m.

Jonathan Carr-West, chief executive of the Local Government Information Unit (LGIU), said Birmingham’s decision raised questions about governance at the council, but was also a symptom of wider financial challenges facing local authorities.

“The LGIU has been supporting councils for 40 years, but our members tell us that they are experiencing the most acute crisis they can remember,” he said.

“Central government has kept councils living from hand to mouth and from year to year for far too long. Birmingham is the biggest council to fail so far, but unless something changes, it won’t be the last.”

The Local Government Association (LGA) estimates that councils face a £3bn funding gap over the next two years to maintain services at current levels.

Shaun Davies, the LGA’s chair, said “councils’ ability to mitigate these stark pressures are being continuously hampered by one-year funding settlements, one-off funding pots and uncertainty due to repeated delays to funding reforms”.

Birmingham’s equal pay claim is part of a long-running battle with trade unions. In June, the council revealed it had paid out £1.1bn to female workers but still had a current liability of £650-£750m, accruing at a rate of £5m to £14m a month.

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The GMB union had lodged a fresh claim on behalf of 3,000 women, believing that the council did not fully implement the ruling in a case that dates back more than a decade and went as far as the supreme court.

The GMB has also lodged claims with other councils, including Coventry and Dundee, and is examining evidence at 20 more. “Birmingham are exceptionally poor, but plenty of other councils have made exactly the same mistakes,” said Rhea Wolfson, the GMB’s head of internal and industrial relations.

The union believes local authorities across the UK could ultimately end up paying out tens of billions of pounds. “This is not free money for women, it’s being stolen from them minute by minute,” Wolfson said.

Thousands of women employed by Birmingham council were granted compensation in 2014, after the original case. The council subsequently sold a number of key assets, including the National Exhibition Centre (NEC), in a decision seen at the time as partly aimed at funding the cost of the judgment.

Women in female-dominated roles such as cleaners and caterers had complained that they were missing out on bonuses given to staff in male-dominated roles, such as refuse collectors.

The Fawcett Society said the “eye-watering bill represents a staggering dereliction of responsibility for equal pay”, which the council could have avoided, “had they adequately valued and remunerated their women employees in the first place”.

It added that as women tended to rely more heavily on public services such as nurseries and social care, “it is tragic to think that cutbacks will now unduly punish the women of Birmingham”.

Announcing the section 114 notice on Tuesday, the leader and deputy leader of Birmingham council, John Cotton and Sharon Thompson, said the authority, “does not have the resources” to fund its equal pay liability, pointing to an £87m hole in this year’s budget.

“From huge increases in adult social care demand and dramatic reductions in business rates income, to the impact of rampant inflation, it is clear that local government is facing a perfect storm,” they said.

Clive Betts, Labour chair of the House of Commons select committee on levelling up, housing and communities, said: “If you look at all the problems that various councils have had in the last couple of years or so, you’ve got particular factors in all of them – but you’ve also got an underlying problem that local government has had bigger cuts than any other part of the public sector since 2010.

“The likelihood is we’re going to see more councils getting into difficulties.”

Andy Street, Conservative mayor of the West Midlands, rejected the idea that Birmingham’s woes were part of a UK-wide malaise, however, saying the section 114 notice raised “serious questions about the council’s leadership and the decisions they have taken over the past decade”.

He said that “no plan has emerged” as to how the council intended to tackle its equal pay bill, and argued that while local authorities had “faced significant cuts over the past decade”, most have managed “to keep services running to the standard that people expect”.

The council had already announced a freeze on nonessential spending in July and offered voluntary redundancy to all its employees in an attempt to cut costs.

David Phillips, associate director of the Institute for Fiscal Studies, painted a more reassuring picture of local authority finances, with central government funding expanding at a “decent clip”, this year and next, and many councils able to dip into reserves built up after the Covid crisis.

However, he predicted a potential crunch point in 2025. “The next spending review period, the government has pencilled in much, much tighter spending totals of only 1% above inflation across the public sector as a whole,” he said.

“We don’t know exactly how the money is going to be divvied up yet, but it could easily be the case that an area like local government could see real-terms cuts.”

Asked whether a Labour government would be likely to be more generous, he said: “Given the state of play of the public finances, unless they were to substantially increase taxes, there isn’t much wriggle room in there.”

The Department for Levelling Up, Housing and Communities has been approached for comment.