Birmingham is Britain’s second largest city and is forecast to have one of its fastest-growing economies by the end of this year. Yet last week Birmingham city council effectively declared itself bankrupt, issuing a section 114 notice to signal it no longer had the resources to fulfil its legal obligation to balance its budget.
There are some specific local issues that have led to this dire situation. The council has had to agree to pay out £700m in equal pay claims to female employees, on top of the £1.1bn it has already paid out. A new IT system has been subject to cost over-runs, linked to problems the council says will cost up to £100m to fix.
But bankruptcy at Labour-run Birmingham has occurred against a backdrop of deep cuts to local government funding since 2010. It follows several other councils that have issued section 114 notices, including Conservative-run Thurrock and Woking. The latter declared itself bankrupt in June, after building up a £1.2bn deficit– as a result of risky investment decisions – that is more than 100 times its annual core revenue. While the councils already in this situation are there partly as a result of poor decision-making, others are likely to follow purely because of being unable to provide services their residents need within the revenue they can raise: a group that represents 47 urban councils says more than half of its members are at serious risk of having to declare bankruptcy in the next two years.
The Institute for Fiscal Studies – with good reason – has characterised the system of local government funding as “broken down”. Councils are legally responsible for funding some of the most critical safety-net services: children’s social care for at-risk children, adult social care for older and disabled adults who are eligible for state-funded personal care, and housing and homelessness services for those with the greatest needs. Because so many of their services are disproportionately relied on by people living in poverty, it is those councils in the least affluent areas of the country that will face the greatest demand for their services.
Yet, unlike with many central government safety-net services like benefits, where funding is determined by the level of demand, councils have little power to determine their annual revenue and are legally obliged to operate a balanced budget each year. Local government revenue consists of three main sources: grants from central government, council tax revenues, and the 50% of business rates revenues that they have been able to keep since 2013 (before then, all business rates were paid to the Treasury and redistributed to councils through central government grants).
Between 2010 and 2017, grant funding to local authorities was cut by just under 50% in real terms, with the poorest areas hit disproportionately, as Rishi Sunak boasted last year. Though that trend has been partially reversed since then, grant funding was still almost a third less in 2021 than it was in 2009, excluding special Covid grants. Meanwhile, there is huge variation in business rate revenues, which are linked to commercial property values; a council in Westminster generates many times the business rate revenue of a council in an urban area in the north-east, for example. Councils are limited in the amount they can put up council tax by each year, and, because council tax is a regressive tax, based on property values determined in 1991, families who live in the lowest-value properties end up paying a far greater proportion of their property value towards local services than those living in the most expensive properties.
All this means that council revenue fell by 20% between 2009 and 2019 on average, at a time when demand for services was increasing sharply due to an ageing population and a growing need for children’s services. But councils in the poorest areas have experienced the biggest drop in spending power, even though they face the biggest demand for services, and those that choose to put up council tax within the limits imposed by them on central government have to do so in the knowledge that it has a disproportionate impact on their less affluent residents. Central government has a track record of refusing to let councils implement other revenue-raising schemes – for example, it prevented Birmingham from introducing a city-wide hotel tax on tourists during the 2022 Commonwealth games.
All this makes a mockery of the government’s “levelling up” agenda, which involves local areas having to waste considerable resources competing for relatively tiny pots of cash compared with overall budgets, and which anyway have been channelled disproportionately towards Conservative areas. The financial difficulties have been compounded by the failures in local government audits since the government scrapped the Audit Commission in 2015 in the expectation that the private sector would take over: there are too few private sector auditors willing to audit councils at the rates they can pay. Woking, which has gone so spectacularly bust, has not been audited since 2018
The UK has the worst regional inequalities of any wealthy economy. These will not be closed by ministers tinkering at the margins with relatively small amounts of money whose allocations are shaped by political self-interest. England urgently needs a sustainable system of local government finance that not only gives councils powers to retain a proportion of revenue from taxes other than outdated and regressive property taxes, but involves a much stronger element of redistribution from richer to poorer areas.
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