Birmingham City Council declares itself ‘Effectively Bankrupt’

Birmingham City Council has admitted “defeat” in its efforts to manage its financial crisis in-house and has issued a Section 114 notice.

A Section 114 notice is the equivalent of a white flag surrender that officers cannot see a way out of the mess without support and intervention.

The news is a blow to the council, its staff and the city’s residents.

It comes after a desperate attempt by officers to resolve the catastrophic financial straits the Labour-run council finds itself in.

A massive equal pay liability – believed to top £1 billion – along with the costs of correcting a disastrous IT implementation programme, and the rising costs of meeting demand for adult social care, the housing crisis and children’s services, have all taken their toll.

Attempts to stave off government intervention have included a recruitment freeze, a non-essential spending ban and a call to staff to apply to quit to cut wage bills.

In a statement, Birmingham City Council’s Leader and Deputy Leader John Cotton and Sharon Thompson said:

“Since entering our posts in May, we have been consistently clear that Birmingham City Council faces long-standing issues, including the Council’s historic Equal Pay Liability, and the implementation of the Oracle ERP system, which have been compounded by the reality that Birmingham has had £1 billion of funding taken away by successive Conservative governments.

“Like local authorities across the country, it is clear that Birmingham City Council faces unprecedented financial challenges, 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.

“Sigoma, who represent large local authorities, recently warned that up to 26 local authorities could issue a section 114 notice in the next two financial years.

“We implemented rigorous spending controls in July.

“And we have made a request to the Local Government Association for additional strategic support.”

“Today’s issuing of a Section 114 Notice is a necessary step as we seek to get our city back on a sound financial footing so that we can build a stronger city for our residents.

“Despite the challenges that we face, we will prioritise core services that our residents rely on, in line with our values of supporting the most vulnerable.”

What is a Section 114 Notice?

• Under the Local Government Finance Act 1988, if a council’s chief financial officer believes the authority cannot meet its expenditure commitments from its income, they have to issue such a notice.
• They do not need the consent of councillors to do so.
• Local authorities in the UK cannot go bankrupt but the issuing of the notice is often described as “being effectively bankrupt”, meaning they cannot make new spending commitments and must meet within 21 days to discuss next steps.
• No new expenditure is permitted with the exception of funding statutory services, including safeguarding vulnerable people, but existing commitments and contracts will continue to be honoured.
• Most councils in such a position pass an amended budget, reducing spending on services.
• In recent years, Thurrock, Croydon, Slough and Northamptonshire have issued Section 114 notices.

Leader of the Opposition Councillor Robert Alden said:

“Labour’s failure in Birmingham has become clear for all to see, what Labour pledged was a Golden decade ahead to voters in 2022 turns out to be based on budgets in 20/21 and 21/22 that did not balance and were unfunded.

“Combined with Birmingham Labour’s refusal to deal with equal pay over the last decade this has created this mess where residents will now lose valuable services and investment.”

Professor Tony Travers, a Visiting Professor in the London School of Economics’ Department of Government, said Birmingham had faced financial difficulties “on and off” for more than a decade due to equal pay and other challenges.

He said: “Birmingham is a very important city within Britain and it is essential for the whole country that its services are good and that the city is seen to be motoring forward.

“The risk is that the city council’s provision of services will be trimmed further and further back and that has consequences not only to what the city looks like and feels like to live in, but also the reputational hit to the city as well.”

Reacting to the announcement, Gavinder Pawar said:

“Another example of George Osborne’s reckless vandalism destroying this country.

“But don’t worry, he’ll still be all over the media and rewarded with high-paid jobs.”

Redbridge Councillor Khayer Chowdhury said:

“The government is saying Birmingham City Council is responsible for its own funding.

“This is like your water company switching off your supply for a week and then saying you are responsible for your personal hygiene.

“Without government funding, councils cannot run.”