Demise intensifies the debate over wider national crisis in local government finance
Birmingham, the UK’s second-largest city, has enjoyed one of the country’s fastest economic recoveries from the pandemic, attracting record levels of inward investment and generating a palpable buzz in its central business district.
But the boom is in stark contrast to the dire financial straits that its Labour-run local authority has found itself.
This week, Birmingham city council issued a section 114 notice — which means it is in effect insolvent — announcing that it would be unable to fulfil its legal duty to balance the books this year.
The demise of Europe’s largest single tier local authority — in terms of the number of people it serves and services it provides — has intensified the debate over local government finance in the UK.
The council says the immediate cause of its crisis is a recent jump to as much as £760mn in potential liabilities for equal pay claims from several thousand mostly female employees — equivalent to more than its annual budget for services.
There is a lot more trouble to come elsewhere
Jonathan Carr-West, CEO of the Local Government Information Unit
But experts in local government also point to the wider national picture, with local authority funding cut to the bone by Conservative governments in the decade to 2020, hitting large urban areas such as Birmingham particularly hard.
The city, which has forecast a budget shortfall of £87.5mn this year, has been forced to make more than £1bn in savings since 2010, losing 60p in the pound from its budgets, according to the council.
“Obviously a £760mn equal pay claim is a mistake and a big one. But where you have a really fragile system, there is no capacity to absorb shocks,” said Jonathan Carr-West, chief executive of the Local Government Information Unit think-tank.
“The bigger story is that the city is the bit of the iceberg we can currently see. There is a lot more trouble to come elsewhere,” he added.
Sharon Thompson, a former housing officer who took over as Birmingham’s deputy council leader in May, said the authority had been “digging deep” to determine the scale of its liabilities. From July it had already tightened spending on all but essential services.
The council acknowledged that it made mistakes in the introduction of a new Oracle IT system, which led to a cost overrun of about £75mn. It has also launched an inquiry into why the gap between male and female pay had not been closed despite past warnings, and who was responsible.
“It’s going to be painful. But we are determined to get through this,” said Thompson.
Only a decade ago, the council was forced to pay £1.1bn to settle claims related to a legacy of discriminatory remuneration largely built up under a former Tory-Liberal Democrat coalition administration. This saw workers in male dominated roles, such as refuse collection, paid more than those in equivalent positions traditionally held by women, such as cleaners and teaching assistants.
To cover the costs of the claims, the council, which was by then run by Labour, sold off a number of assets, including the leasehold to the national exhibition centre, one of its prize properties.
The leadership is keeping its current recovery plans confidential ahead of a forthcoming meeting of the council and closed door discussions with the Department for Levelling Up, housing and communities.
“For a number of months we have been in conversations with the government speaking about the challenges we have. We will be looking at all options because we want to protect our staff as much as possible and we want to protect the services,” Thompson said, adding that the priority would be to ensure that support was available for the most vulnerable sections of society.
Section 114 obliges councils to strip back spending to core functions, such as adult and child social care and refuse collection, with potentially painful consequences for non-ringfenced programmes.
One way out of the immediate crisis, council insiders suggested, would be to securitise the equal pay claims, borrow against them and pay them back over time, which would entail government help.
But Conservatives in the city argue that the worst of the pain could be avoided if the council was willing to leverage its land and property holdings, among the most extensive of all UK local authorities.
“What cannot be done is a salami slicing of services,” said Andy Street, the Conservative regional mayor of the combined authority for the West Midlands.
One of Street’s immediate concerns, which is shared by the council, is that Birmingham’s regeneration achievement is undermined and the work that has gone into reviving the city’s reputation over the past decade reversed.
Birmingham’s economy has grown by 36 per cent since 2013 to £29bn, attracting the most foreign direct investment in any city outside the capital over the past year.
“We have to redouble our efforts to bang the drum of success. I am spending my time talking to developers and all sorts of investors and I hope what I can do personally is be part of that conversation with government to make sure we do get a solution that is in the best interest of everyone,” Street said.
Meanwhile the optics of the funding crisis pose a dilemma for Rishi Sunak. The prime minister was quick this week to blame Labour for Birmingham council’s woes, saying in parliament that the country could expect the same problems if the party wins the general election expected next year.
But with a much wider national crisis in local government financing, brought about in large part by cuts imposed by successive Conservative governments, that strategy could backfire, said Matt Cole, professor of history at Birmingham university and an expert in the city’s politics.
Until recently, councils such as Birmingham that have gone bankrupt, have had specific challenges. But now almost all — including big Conservative-run county authorities in Hampshire and Kent as well as the city of Stoke-on-Trent — are sounding the alarm.
According to a recent LGIU survey only 14 per cent of senior council figures felt confident in the sustainability of their finances.
“This is very bad news for the councils involved. It is also a challenging story for the government. It brings back the whole question of who cut the funds,” said Cole.
The Department for Levelling Up, Housing & Communities said: “We have been engaging regularly with Birmingham city council in recent months over the pressures it faces, including around its equal pay liability and a failed IT implementation, and have expressed serious concern over its governance arrangements.
“We continue to closely monitor councils’ funding pressures to make sure we understand the costs they are facing.”
Source: Financial Times
