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Birmingham city council, the largest local authority in Europe, has declared itself in effect bankrupt, becoming the latest UK local government body to announce it cannot balance the books this year.

The Labour-run council for the UK’s second city, which serves more than 1mn people, said on Tuesday that it had issued a section 114 notice owing to “unprecedented financial challenges”.

It blamed its predicament largely on the need to settle historic equal pay claims worth up to £760mn, more than its annual budget for services.

The council added that it had implemented “rigorous spending controls in July” and that the 114 notice was now “a necessary step as we seek to get our city back on a sound financial footing”.

Councils across England and Wales are under severe financial stress as a result of rising social care costs, soaring inflation and reduced income.

The total funding gap for local authorities in England and Wales is expected to grow to £2bn or more this financial year, according to the Local Government Association.

In July, the representative body warned that councils were struggling to meet growing demand for the basic services they are legally required to deliver while also fulfilling a legal obligation to balance the books.

Birmingham announced last month that it was facing budget shortfalls of £87.4mn for 2023-24, rising to £164.8mn in 2024-25. 

By issuing a section 114 notice, the city council has committed to strip spending back to all but essential services in return for help from the UK government in stabilising the financial outlook. Other councils, including Thurrock and Woking, have in recent months been forced to make the same move.

“Like local authorities across the country, it is clear that Birmingham city council faces unprecedented financial challenges, from huge increases in adult social care demand and dramatic reductions in business rates income, to the impact of rampant inflation,” council leader John Cotton said in a joint statement with his deputy, Sharon Thompson.

The city council is under additional strain as a result of the settlement it made after the Supreme Court ruled in 2012 that it had discriminated against hundreds of women employees who missed out on bonuses awarded to their counterparts in traditionally male-dominated roles.

The council has already paid out roughly £1.1bn as a result of the ruling, but said in June that it had uncovered an extra bill of between £650mn and £760mn.

With ongoing liabilities related to the claims growing at a monthly rate of between £5mn and £14mn, it would be unable to cover the costs from existing resources, including reserves, it said.

The council has in recent years presided over a vast regeneration plan. Financed through public and private investment, the project has reintegrated old industrial wastelands with the city centre, fuelling a boom in the tech sector, among others.

In the process, Birmingham had become one of the best-performing city economies in the country.

But Robert Alden, Conservative leader of the opposition on the council, said that the “golden decade” of opportunity heralded by the city last year would be undermined by its fresh financial woes.

He said overspending by the Labour leadership and failure to address the historic pay claims more urgently had “created this mess where residents will now lose valuable services and investment”.

Jonathan Carr-West, chief executive of the Local Government Information Unit think-tank, said Birmingham’s predicament was a “sobering moment” and that the council’s decision-making should be scrutinised.

“Questions should also be asked about an inconsistent, fragmented and short-term funding system that is driving dozens of councils across the country to financial ruin,” he said.

This article has been amended to clarify details around Birmingham city council’s bankruptcy

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