Birmingham’s budget woes should be a warning to government – or other councils could follow suit

By issuing a Section 114 notice – essentially notifying the government that it will not be able to balance its budget for this financial year – Birmingham joins a growing number of local authorities who have recently buckled under financial pressure. While there were specific issues in Birmingham, its Section 114 comes after more than a decade of squeezed budgets. 

The immediate triggers of Birmingham’s Section 114 notice (s114) was the discovery in June of a £760m liability relating to a historic equal pay settlement, and the unexpectedly high implementation cost of an IT project.  ⁴² Holland J, Birmingham City Council issues section 114 notice, Room 151, 5 September 2023, www.room151.co.uk/treasury/birmingham-city-council-issues-section-114-notice  Those costs – in particular the equal pay settlement – have left the council with a “blackhole” in its budget of £87m in 2023. ⁴³ Birmingham City Council, Statement regarding Section 114 notice, 5 September 2023, www.birmingham.gov.uk/news/article/1381/statement_regarding_section_114_notice 

The implications of this decision are severe for the residents of Birmingham. While an s114 doesn’t mean that the council is “bankrupt”, as many like to say, it does mean that it may not commit to any new spending, and will likely cut back existing spending to its statutory minimum. ⁴⁴ Sandford M, What happens if a council goes bankrupt?, House of Commons Library, 21 November 2022, https://commonslibrary.parliament.uk/what-happens-if-a-council-goes-bankrupt/  Going forward, the council will have to find a way to close the gap in its budget, likely through a combination of further reductions in spending, increased council tax, and the selling of assets.  

While the circumstances in which Birmingham have reached this decision are exceptional, it does come after a decade of cuts to grant funding that has seen Birmingham’s core spending power fall by more (-23.3%) in real terms than the average upper or single tier local authority, which fell by 12.3% between 2010/11 and 2023/24. 

Financial problems are spreading to many local authorities

Birmingham joins a number of other local authorities that have issued s114 notices in recent years. These include Croydon,  ⁶¹ https://www.croydon.gov.uk/council-and-elections/budgets-and-spending/reports-and-reviews/section-114-notice  Thurrock,  ⁶² https://www.bbc.co.uk/news/uk-england-essex-64028633  and most recently Woking.  ⁶³ itv.com/news/london/2023-06-07/council-declares-effective-bankruptcy-over-12-billion-hole-in-budget Those local authorities all issued s114 notices in the wake of debt-financed investments going wrong in some way. Birmingham has different reasons for its own s114 but, as with those councils, it appears mismanagement primarily drove the s114 rather than purely systemic pressures.  

Arguably more concerning for central government should be the increasing number of local authorities who have recently warned that they too may have to issue a s114, solely due to the triple problems of funding squeezes, rising demand for services, and the increasing cost of delivering those services.  

The most high profile of these warnings came following a poll carried out by SIGOMA – a representative body of municipal authorities – which showed that five of its 47 members are at risk of issuing a Section 114 notice this financial year, with a further nine reporting that they may issue one next financial year. ⁶⁴ Holland J, Sigoma: 26 local authorities could issue s114 notice in next two years, Room 151, 29 August 2023, www.room151.co.uk/treasury/sigoma-26-local-authorities-s114-notice Coventry is represented by SIGOMA, and in August, wrote to the government warning that it may have to issue a s114, citing “increased demand for adult and children’s social care, demand for housing, and wider inflationary pressures” as the primary reasons. ⁶⁵ Coventry City Council, Letter to Secretary of State for Levelling Up, Housing and Communities, 24 August 2023, www.coventry.gov.uk/news/article/4744/letter-to-secretary-of-state-for-levelling-up-housing-and-communities  Other local authorities that have warned of a s114 include: Guildford, ⁶⁶ BBC News, Guildford Borough Council imposes controls amid bankruptcy fears, 13 July 2023, www.bbc.co.uk/news/uk-england-surrey-66188834  Hastings, ⁶⁷ Holland J, Spiralling temporary accommodation costs pushing Hastings Borough Council to the brink, Room 151, 13 July 2023, www.room151.co.uk/treasury/spiralling-temporary-accommodation-costs-pushing-hastings-borough-council-to-the-brink/  Kent, and Hampshire, ⁶⁸ Butler P, Two Tory-run councils warn PM of possible bankruptcy, The Guardian, 14 November 2022, www.theguardian.com/society/2022/nov/14/two-tory-run-councils-warns-pm-of-possible-bankruptcy  among others. 

The government doesn’t have any plan to prevent this from happening again 

Rishi Sunak has said it is “not the government's job to bail out the council for its financial mismanagement”. ⁶⁹ BBC News, PM rules out Birmingham bailout, 24 July 2023, www.bbc.co.uk/news/articles/cd1wnxp9ny1o  This hardline approach echoes the government’s usual response when local authorities have issued a s114, with ministers preferring to provide more powers – such as the ability to increase council tax, or allowing local authorities to use capital budgets to pay for day-to-day spending – rather than provide direct ‘bailouts’. ⁷⁰ Sandford M, Local authority financial resilience, House of Commons Library, 25 January 2023, https://researchbriefings.files.parliament.uk/documents/CBP-8520/CBP-8520.pdf , p.21

The government will always be able to allocate blame to local authorities when they issue a s114, but without some sort of intervention it is likely that other authorities will follow Birmingham. It has had many opportunities to reform local government finance in recent years but has taken few of them, delaying the implementation of its Fair Funding Review – a move which would more equitably allocate grant funding based on need and which was first promised in 2016 – until April 2025 at the earliest. ⁷¹ Knott J, Delay to fair funding review and business rates reset, Local Government Chronicle, 13 December 2022, www.lgcplus.com/finance/delay-to-fair-funding-review-and-business-rates-reset-13-12-2022/  It has declined to reduce the statutory duties of local authorities, as the Conservative leaders of Kent and Hampshire suggested in their letter to the government last year. ⁷² Kent County Council, County council leaders press for urgent Government action to help avert financial crisis, 14 November 2022, https://news.kent.gov.uk/articles/county-council-leaders-press-for-urgent-government-action-to-help-avert-financial-crisis  It has also kept tight control of the limit to which authorities can raise council tax each year.  ⁷³ https://www.instituteforgovernment.org.uk/explainer/local-government-funding-england  There are relative merits and drawbacks to each of these suggestions, but the government has been unwilling to countenance any.  

To its credit, the government did make more money available for adult social care at the autumn statement last year, but that money will mostly be eaten up by inflationary pressures. Without a large increase in funding or a reduction in local authorities’ responsibilities, councils will not be able to deal with the dual pressures of rising demand and large cost increases. 

In addition to those systemic issues, there is an enormous backlog in local authorities’ financial audit. In November 2022, over 630 local government annual accounts had not been signed off, some dating as far back as 2015/16. ⁷⁴ House of Commons Committee of Public Accounts, Timeliness of local auditor reporting, 23 June 2023,  https://committees.parliament.uk/publications/40545/documents/197720/default/ , p.3 Timely audit is crucial for understanding financial risk in local authorities. The government’s recently-launched Office for Local Government will make some financial information more easily accessible, but will do little to shed light on previously unknown financial risks. More importantly, the government has delayed the establishment of the Audit, Reporting and Governance Authority (ARGA), a body intended to lead the local government audit system, until at least 2024. ⁷⁵ House of Commons Committee of Public Accounts, Timeliness of local auditor reporting, 23 June 2023,  https://committees.parliament.uk/publications/40545/documents/197720/default/ , p.4 In its report on the subject, the Public Accounts Committee (PAC) concluded that the delay in establishing ARGA “risk[s] performance deteriorating further”. ⁷⁶ House of Commons Committee of Public Accounts, Timeliness of local auditor reporting, 23 June 2023, https://committees.parliament.uk/publications/40545/documents/197720/default/ , p.6

The government would do well to take action on these systemic problems now. If not, there is a very real risk that many other local authorities following will follow Birmingham down the route of a s114 notice.