Birmingham, the second largest city in Britain, is poised to have one of the fastest-growing economies this year, as reported by the Express & Star. However, the city council recently faced financial turmoil and declared bankruptcy, signaling its inability to balance the budget.
Several local issues contributed to this dire situation. The council had to pay £700 million in equal pay claims to female employees, in addition to the £1.1 billion it had already paid out. Furthermore, an IT system caused cost overruns, with estimated costs of up to £100 million for repairs.
The bankruptcy of the Labour-run Birmingham council is part of a larger trend of deep cuts to local government funding since 2010, affecting both Labour and Conservative-run councils. Notably, Conservative-run councils, including Thurrock and Woking, have also issued section 114 notices due to financial difficulties.
The Institute for Fiscal Studies has criticized the system of local government funding, describing it as “broken down”. Councils are responsible for funding critical safety-net services, but they have limited control over their annual revenue and are legally required to maintain a balanced budget. This puts councils, particularly those in less affluent areas, at risk as they struggle to provide essential services.
Grant funding to local authorities has been significantly reduced by nearly 50% in real terms between 2010 and 2017, with poorer areas disproportionately affected. Although grant funding has slightly increased since then, it remains nearly a third less in 2021 compared to 2009. Business rate revenues also vary greatly among councils, creating further financial disparities.
As a result, council revenue has declined by 20% on average between 2009 and 2019, despite growing demand for services. The poorest areas have experienced the most significant drop in spending power, exacerbating the inequality. Additionally, central government has restricted councils from implementing alternative revenue-raising schemes.
These financial challenges undermine the government’s “levelling up” agenda and highlight the failures in local government audits since the scrapping of the Audit Commission in 2015. The UK needs a sustainable system of local government finance that allows councils greater control over revenue and includes redistribution from wealthier to poorer areas.
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