On September 5, Birmingham City Council, the second-largest city in the UK, issued a "Section 114 notice," effectively declaring bankruptcy.
Following the announcement, the council will halt all new spending, except for essential services and protections for vulnerable groups. Daily public services such as library operations, street cleaning, and park maintenance in Birmingham will be impacted.
Birmingham isn't the first local council in the UK to declare bankruptcy. Since 2020, seven local councils have issued "Section 114 notices." UK Prime Minister Rishi Sunak previously stated that local councils should be responsible for their financial management, and the central government would not provide assistance.
To address the financial shortfall, Birmingham City Council may consider measures such as raising taxes, selling assets, laying off staff, and further reducing expenditures. Amid ongoing high inflation in the UK, surveys indicate that at least 26 other local councils face a risk of bankruptcy within the next two years.
What's Next for Birmingham?
With a population exceeding one million, Birmingham, the birthplace of the Industrial Revolution, remains a hub for industry and commerce in the UK. Last year, the city hosted the Commonwealth Games and plans to host the European Athletics Championships in 2026.
Led by the opposition Labour Party, Birmingham City Council, the largest local authority in Europe, consists of 101 councilors.
On Tuesday evening, the council stated that the issuance of the "Section 114 notice" was primarily due to two factors: compensation payments for equal pay lawsuits and a current budget deficit of approximately 87 million pounds (equivalent to about 7.99 billion yuan).
According to the UK government website, local councils are legally required to maintain a balanced budget. If they cannot secure funds for their budget, they must issue a "Section 114 notice." Once issued, councils can't make new expenditures beyond essential services, but existing contracts continue.
One of the direct reasons for Birmingham's financial crisis was the equal pay lawsuit. In 2012, the council lost a case where the UK's Supreme Court ruled that 174 employees, mostly women, in roles like cleaning, catering, and teaching assistance, were not receiving bonuses that their male counterparts in roles like garbage collection and street cleaning were getting. Since 2012, the council has paid nearly 1.1 billion pounds in compensation. The council anticipates an additional payout between 650 million and 760 million pounds, funds they currently cannot raise.
Additionally, the Labour-led council blamed a decade-long 1 billion pound funding cut by the Conservative central government and a malfunctioning new IT system as major reasons for the financial crisis.
John Cotton, the chair of Birmingham City Council, stated that like other parts of the UK, Birmingham faces "unprecedented financial challenges," including rising demands for adult social services, plummeting business property tax revenues, and soaring inflation.
A spokesperson for the Prime Minister's office reiterated that the Sunak administration had already increased allocations to local councils and that councils should be responsible for their budgets. The spokesperson expressed concern about the governance of local councils and urged them to use taxpayers' money wisely.
Regarding the equal pay lawsuit, the UK government has initiated an independent review, the results of which will be announced later.
Local council funding in the UK primarily comes from central government allocations, service fees, and taxes, including business property tax and residential property tax.
In the absence of assistance from the Sunak administration, local officials indicated in media interviews that Birmingham City Council might cut non-statutory services, including public facility operations, green belt maintenance, and community group funding.
Selling assets is also an option. The council owns shares in Birmingham Airport and has numerous properties that could be sold to bridge the funding gap. Additionally, the council might consider raising residential property taxes.
Earlier this year, Croydon, the largest borough in South London, declared bankruptcy. Subsequently, the borough was permitted to raise residential property taxes from the 5% cap to 15%.
A Looming Threat
A July forecast by the Local Government Association revealed that due to high inflation affecting local governments' ability to provide basic services, even if the UK's inflation rate drops to 2.9% by the end of the year, local governments in England and Wales will still face a funding gap of at least 2 billion pounds by next year. The funding gap for 2024-2025 is projected to be 900 million pounds.
If inflation continues to rise, local governments in England and Wales will face an additional expenditure of 740 million pounds next year, with the extra expenditure reaching 1.5 billion pounds from 2024 to 2025. This forecast only considers local governments in England and Wales providing services at current levels and does not include new challenges.
Pete Marland, chair of the Local Government Association's Resources Committee, warned that out of the 340 districts and unitary councils in England and Wales, 20 are already in severe financial difficulty. He pointed out that from 2010 to 2020, the central government reduced allocations to local governments by at least 15 billion pounds.
At the end of last year, Sunak agreed to allocate 59.5 billion pounds to local councils for 2023-2024, a 9% increase from the previous year. However, local officials noted that the UK's high inflation has offset most of the increase in allocations.
A survey conducted in August by Sigoma (Special Interest Group of Municipal Authorities), a group consisting of 47 local councils, revealed that at least 26 local councils face a substantial risk of bankruptcy within the next two years.
Of these, five local councils are considering issuing a "Section 114 notice," and six councils anticipate declaring actual bankruptcy next year. Additionally, at least 12 councils not part of Sigoma are considering issuing a "Section 114 notice" between 2023 and 2024.
The survey identified the main reasons for the financial issues faced by local councils as rising social service demands, persistent inflation, and wage increases. Following the Russia-Ukraine conflict and rising energy prices, the UK's inflation rate has been climbing.
Last October, the country's inflation rate surged to 11.1% year-on-year, a 41-year high. This year, the UK's inflation rate has decreased slightly, but the core inflation rate remains high. Internal analyses from the Treasury predict a potential rebound in the inflation rate for August.
In early August, the Bank of England announced its 14th consecutive interest rate hike since December 2021, raising the benchmark interest rate from 5% to 5.25%. High inflation and interest rates have also increased the risk of a recession in the UK.
A forecast released on Monday by the UK's Center for Economic and Business Research predicts that the UK might experience a recession in the fourth quarter of this year and the first quarter of 2024.
Due to high interest rates increasing the debt burden on businesses, an average of 7,000 companies is expected to go bankrupt each quarter next year. In the second quarter of this year, over 6,700 companies went bankrupt in the UK, double the quarterly bankruptcy rate during the COVID-19 pandemic.
On the day the forecast was released, major stock indices, including the UK's FTSE 100, Germany's DAX30, and France's CAC40, all declined.
