Birmingham city council, the biggest local authority in the UK and Europe, has declared itself in effect bankrupt, becoming the latest local government body to announce it cannot balance the books this year.
The Labour-run council for the UK’s second city said on Tuesday that it had issued a section 114 notice owing to “unprecedented financial challenges”.
It blamed its predicament largely on the need to settle historic equal pay claims worth up to £760mn, more than its entire annual budget for services.
The council added that it had implemented “rigorous spending controls in July”, which saw it halt all non-essential expenditure, and that government help was now “a necessary step as we seek to get our city back on a sound financial footing”.
Both Labour- and Conservative-led councils across England and Wales are under severe financial stress as a result of rising social care costs, soaring inflation and reduced income.
The total funding gap for local authorities in England and Wales is expected to grow to £2bn or more this year, according to the Local Government Association.
In July, the representative body warned that councils of all political colours were struggling to meet growing demand for the basic services they are legally required to deliver while also fulfilling their legal obligation to balance the books.
Birmingham city council, which serves more than 1mn people, announced last month that it was facing budget shortfalls of £87.4mn for 2023-24, rising to £164.8mn in 2024-25.
By issuing a section 114 notice, the city council has committed to strip spending back to all but essential services in return for help from central government in stabilising the financial outlook. Other councils, including Thurrock and Woking, have in recent months been forced to make the same move.
“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,” the council said on Tuesday.
The city council has already paid out more than £1bn to settle claims since the Supreme Court ruled that it had discriminated against women employees on pay grounds in 2012. But the local authority said in June that it had uncovered huge additional sums.
With ongoing liabilities related to the claims growing at a monthly rate of between £5mn and £14mn, it would be unable to cover the costs from existing resources, including reserves, it said.
The council has in recent years presided over a vast regeneration plan. Financed through public and private investment, the project has reintegrated old industrial wastelands with Birmingham’s city centre, fuelling a boom in the tech sector, among others.
In the process, Birmingham’s economy has become one of the best performers in the country.
But Robert Alden, Conservative leader of the opposition on the council, said that the “golden decade” of opportunity heralded by the city last year would be undermined by its fresh financial woes.
He said overspending by the Labour leadership and failure to address the historic pay claims more urgently had “created this mess where residents will now lose valuable services and investment”.
This article has been amended to clarify details around Birmingham city council’s bankruptcy