UK's 2nd largest city declares bankruptcy

Fears grow over fate of more councils after Birmingham files for insolvency

Local governments in the United Kingdom went into panic mode on Wednesday after Birmingham City Council effectively declared itself bankrupt. Authorities warned that more councils across the UK could declare themselves in financial dire straits.

Birmingham City Council, one of Europe's largest, declared itself effectively bankrupt on Tuesday. The council, which looks after services in the city, made the move after saying it could no longer fund its 3.2 billion pound ($4 billion) annual budget.

With a population of about 1.15 million people, Birmingham is the second-largest city in the UK.

Complaining about an annual shortfall of 87 million pounds, the government that provides services in the central English city issued a Section 114 Notice under the Local Government Finance Act 1988, which effectively meant it admitted it was insolvent.

Organizations representing local governments throughout the UK said other municipalities will have noted what had happened in Birmingham and may do likewise, thanks to a perfect storm of fast-rising expenses and an inability to generate enough income to offset them.

Jonathan Carr-West, chief executive of the Local Government Information Unit, said Birmingham City Council's bankruptcy was "a sobering moment" triggered by high inflation and fast-rising fuel costs, as well as falling investment from the central government, and will likely be mirrored elsewhere.

"Central government has kept councils living from hand to mouth and from year to year for far too long," he was quoted by Agence France-Presse as saying. "Birmingham is the biggest council to fail so far, but unless something changes, it won't be the last."

The Institute for Government think tank said the risk of other local governments declaring bankruptcy has been exacerbated by business failures and a corresponding fall in the income councils get from business taxes. The organization said local authorities in the UK saw their incomes fall by 17.5 percent between 2009 and 2020.

Similar announcements

Birmingham City Council's declaration of bankruptcy followed similar announcements by smaller local governments, including the southern London borough of Croydon, which declared itself bankrupt in November after complaining of a 130-million-pound hole in its budget. Thurrock Council in Essex did likewise in December. And Woking Borough Council declared itself bankrupt in June.

The flurry of failures has prompted SIGOMA, a group of 47 urban councils within the Local Government Association, to warn that around 1 in 10 local governments in the UK could declare bankruptcy in the coming months, threatening services such as cultural programs, education, libraries, local authority housing, trash collection, social care and transport.

"The government needs to recognize the significant inflationary pressures that local authorities have had to deal with in the last 12 months," Stephen Houghton, chairman of SIGOMA, told The Associated Press. "The funding system is completely broken. Councils have worked miracles for the past 13 years, but there is nothing left."

Sky News quoted Prime Minister Rishi Sunak's official spokesman as saying that additional central government money, beyond what has already been announced, will not be forthcoming.

"The government, for its part, has stepped in to provide support, an additional 5.1 billion pounds, to councils in 2023-24, which is more than a 9 percent increase for Birmingham City Council," he said.

But he said local governments simply have to "manage their own budgets" so that they make ends meet.

"I know the (central government) has been engaging regularly with them to that end and has expressed concern about their governance arrangements and has requested assurances from the leader of the council about the best use of taxpayers' money," the spokesman added.

The BBC reported on Wednesday that urgent talks had begun, with Birmingham City Council, the central government and union leaders seeking the best way forward. The broadcaster said the talks would focus on a court-ordered 760 million pound bill the local government was handed for equal pay claims and the over-budget rollout of a new computer system that could end up costing the city 100 million pounds.

Birmingham City Council is also seeking to cut its spending and has contacted 10,000 employees to see if any would be willing to voluntarily leave their jobs.

Agencies and Xinhua contributed to this story.