“Effective Bankruptcy” at Birmingham City Council: Local Authority Funding Re-examined

Local authorities in England are not allowed to declare bankruptcy. Instead, when unable to balance their books and honour ongoing spending commitments, they can issue Section 114 notices, which have been likened to “effective bankruptcy”-in other words, bankrupt in all but name. This is just what happened on 5 September 2023, when Birmingham City Council, Europe’s largest local authority by population and responsible for 1.14 million people, issued a Section 114 notice “as part of the plans to meet the council’s financial liabilities relating to equal pay claims and an in-year financial gap within its budget”. A Section 114 notice is an outcome of the Local Government Finance Act 1988, whereby a council’s chief financial officer can publicly declare that it lacks sufficient income and reserves to service its various ongoing commitments. Birmingham thereupon became the seventh council since 2000 to have issued a section 114 notice, preceded by three other Labour councils (Hackney, 2000; Slough, 2021; Croydon, 2022), two Conservative councils (Northamptonshire, 2018; Thurrock, 2022), and one Liberal Democrat council (Woking, 2023). 

England’s second city, a multi-ethnic metropolis in west-central England and a victim of higher than average levels of socioeconomic deprivation, is a former industrial powerhouse that is now gaining a new identity through inner-city regeneration schemes and the development of alternative sectors of the economy. Labour-led Birmingham City Council consists of 101 councillors- 65 Labour, 22 Conservative, 12 Liberal Democrat, and two Green- who represent 69 wards. The council forms part of the 18-member West Midlands Combined Authority, which is led by a Conservative Mayor. The council is the largest property owner among English local authorities and also has a stake in Birmingham Airport. 

The adversarial nature of politics in Britain means that the government and the right-wing media have inevitably found fault with the council, including criticising a diversion of time and resources towards the successful 2022 Commonwealth Games. The council spent £184 million on its bid to stage the games, which went on to contribute at least £870 million to the UK economy. Some folks on the right also disapprove of the council’s expenditure on “woke” schemes and other attempts at “virtue signalling”. In July 2023, Prime Minister Rishi Sunak thus rejected a bail-out for Birmingham City Council on the grounds of “its financial mismanagement.” 

Many factors have contributed to the current parlous state of Birmingham’s municipal finances, manifested in a budgetary gap of £87.4 million for 2023/24, and rising to £164.8 million for 2004/05. Back in April 2010, around 5,000 mainly female council employees took the council to court after being denied bonuses bestowed upon workers in male-dominated occupations, such as street cleaners and waste collectors. In 2012, the Supreme Court ruled in favour of 174 litigants, mostly employed as catering staff, cleaners, and teaching assistants. The historical equal pay claim of council employees has since steadily crept up to a massive total of £760 million in catch-up payments. Then, in 2018, the council adopted a new IT system to handle its core finance and HR functions. The £19-million Oracle ERP (Enterprise Resource Planning) system has already cost five times the original outlay, and is three years overdue. The council leadership has also cited increased demand for adult social care services, rising inflation, and reduced business rate income, in the face of harsh cuts in central government funding. 

Local authorities in England spent £107 billion in 2021/22. Councils and unitary authorities are funded by a combination of central government grants and local government property taxes- the business rate from business premises and the council tax from residential premises. Central government allocations are made through single-year or multi-year local government finance settlements, the formula for which is in a state of flux. Local government entities are required to run balanced budgets and even access their reserve funds if necessary, so that they can live within their means without having to borrow. Unfortunately, after the central government opted for fiscal austerity in 2010, local authority spending power fell by 17.5 per cent in real terms (adjusted for inflation) between 2009/10 and 2019/20. This figure remained at 10.2 per cent below 2009/10 levels as of 2021/22, in spite of Covid-19 grants and post-pandemic funding for adult social care-according to the Local Government Association, 

The growing financial burden of historical equal pay claims prompted Birmingham City Council to launch its Mutually Agreed Resignation Scheme on 21 August 2023. Members of the 10,000-plus council workforce were offered voluntary redundancy, with severance payments, to help reduce the staffing bill. Then came the Section 114 notice, which caps all new spending apart from that required to fund statutory services. By law, the council is required to continue to fund education services, children’s safeguarding and social care, adult social care, and waste/bin collections. Altered funding priorities could threaten road maintenance, public green spaces such as parks, leisure centres, libraries, cultural projects, grants for community groups, and other non-statutory services. The fate of the annual Frankfurt Christmas Market and of the 2026 European Athletics Championships remain unclear.