22 February 2024

The financial crisis in Birmingham City Council

The financial crisis in Birmingham City Council image
Image: Number1411 / Shutterstock.com.

Dr James Brackley and Prof. Adam Leaver of the Audit Reform Lab, University of Sheffield, call for an urgent value for money assessment of Birmingham City Council’s proposed cuts and asset sales.

In the coming days, Birmingham City Council will vote through unprecedented expenditure cuts that may be the largest any council has made, amounting to £149m of savings and £500m of asset sales in 2024/25. Triggering the current crisis was the section 114 report in September of last year, which cited a previously undisclosed equal pay liability of up to £760m. This was quickly followed by the appointment of Commissioners to oversee spending reductions, and a statutory report by the external auditors.

Mounting in-year deficits of more than £80m, which were projected to grow to over £300m by 2025/26, together with the new equal pay liabilities, left the council in a negative General Fund position. This was ultimately covered by an ‘exceptional financial support’ package from the Department for Levelling Up, Housing, and Communities (DLUHC) coming to over £1.2bn.

However, the Audit Reform Lab’s investigations show that the equal pay liability has yet to be audited and has left sources within the council baffled about the size of that sum. Furthermore, the equal pay liability seems to play little role in the £300m budget deficit, which is instead largely the result of rising pressure on services and the failed implementation of a new Oracle accounting system in April 2024.

The Oracle implementation has run an astonishing £60m over budget and created as many as 70,000 transaction errors between the council’s cash position and their accounting records. The failed implementation is also largely responsible for the writing-off of previous savings targets of £69m in 23/24, with the council falling behind on debt collection and failing to monitor budgeted spend.

The ‘exceptional financial support’ provided has also been covered confusingly in the media. The £1.25bn figure quoted does not, in fact, relate to cash provided to the council, nor has there been any additional net investment by the Government. Instead, the package relates to the Government’s provision of short-term borrowing, which was necessary because borrowing costs went up after the announcement of the section 114. The amount of short-term borrowing provided is thought to be no more than £200m.

Attached to this support package are strict conditions – to balance the budget within two years and to put £500m of assets up for sale. If the council do not meet these conditions, they face a situation in which the DLUHC could withdraw short-term borrowing support.

Under the detailed proposals, finally released on 19th February, there are cuts to crucial services, including Children’s Services, which appear to leave the authority at serious risk of breaching their statutory duties to vulnerable people. We also see multiple examples of cuts that appear highly likely to lead to knock on costs, increased service level pressures, and serious business continuity issues. For example, the council cut £1.7m from their finance function, removing 40 posts from their 2019 budget. Three years later, this department had a £60m overspend which external auditors put down to a severely understaffed team. We may see similar things happen if these latest cuts are pushed through – hence the urgent need for a full independent value for money assessment.

Moreover, the council do not appear to know what their current financial position is. In the latest papers, the CFO states that ‘reliance could not be place on the most basic of financial information’ and that there was ‘no assurance that the financial information provided a sound basis for decision making’. This is quite astonishing and suggests that cuts are being pushed through before the situation has been properly understood.

What is needed is an urgent value for money assessment of the proposed cuts and asset sales; with cuts only made once the revenue outturn position for 23/24 have been finalised and the equal pay liability audited. The commissioners and the DLUHC need to step away from what could be a truly disastrous budget for the city. Anything short of this will, in our view, become a transparency and accountability crisis, on top of a financial one.

For more on the local government financial crisis, check out our feature, Can local government take much more?

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