Why another British city has declared bankruptcy

Back in early November, Nottingham City Council was considering whether to issue an insolvency notice as it struggled to balance its budget and took further steps to reduce spending. On November 29, local time, Nottingham City Council issued a statement on the "Article 114 Notice", saying that it is expected that the financial expenditure of the city will overspend by 23 million pounds (about 208 million yuan) from 2023 to 2024, and can not reach a balance of revenue and expenditure. In June, Nottingham City Council made £5.048 million in cuts, but high inflation, high interest rates and sluggish economic activity are putting pressure on the council's finances to pay for social care and homeless benefits in the coming months.

Nottingham went bust for slightly different reasons than Birmingham. The city of Birmingham was unable to meet its payment obligations for "equal pay" claims of between £650m and £760m ", and the main reason for its insolvency was increased public demand. The problem for Nottingham City is that in recent years, Nottingham City Council's expenditure on adult social care, child care, school bus services and other aspects has increased significantly. On the one hand, funding sources are limited, the Conservative government's long-term fiscal austerity has led to the local government's insufficient funds from the central government, and the local income has been squeezed by the recent economic environment. On the other hand, councils are facing the impact of inflationary pressures, resulting in higher energy costs for councils, higher wage burdens and higher real fees paid to service providers.

It comes as no surprise that Nottingham City Council has declared bankruptcy. Currently, around one in 10 councils across the UK are at risk of effective insolvency, which would be a disaster for millions of citizens. Local government bankruptcy usually does not mean insolvency, but the inability to balance the books, which will reduce some of the spending on public services, directly affecting the community services and livelihood benefits that people can enjoy. Most councils have struggled to balance their books in recent years, raising council tax, cutting services and dipping into limited council reserves, but the future may see an increasing number of councils failing to make ends meet. While there are many combined factors that cause local councils to go bust, inflation and rising energy costs are the main reasons most councils go bust. Moody's, the rating agency, recently said it expected more councils to "experience financial distress in the near term" due to losses in local commercial property valuations, a high inflation environment, high interest rates and rising demand for public services.

The Municipal Authorities Special Interest Group, a group of 47 local authorities in the UK, believes Nottingham City Council's bankruptcy shows a "complete breakdown in the current funding model" for local government and that the future will see more councils issuing "114 notices". There are fundamental systemic problems in the local government finance system that are driving more and more councils towards insolvency. Local councils' real financial ability to pay for 2023-2024 fell by an average of 19 per cent compared to 2010-11. For councils in low-income areas, the drop will be even steeper. At the same time, local people's demand for public services is growing rapidly, and the UK central government needs to provide more funding for local councils.

Much has changed in the way local government is funded in the UK. In the past, local councils received most of their funding from central government transfers, but now local governments rely on local taxes and investment revenue. These include council tax, business rates and fees for services such as parking, swimming pools and land planning applications, as well as business investments made by the municipality, which are directly linked to local economic conditions. In addition, additional allocation funds from central government can also be obtained through competitive bidding, but winning is mainly dependent on local economic development potential, which makes city councils in low-income and economically marginalized areas less competitive. David Mellen said central government transfers to Nottingham had been cut by around £100m over the past 10 years. After Nottingham City Council declared bankruptcy, Nottingham City Council members Whittom, Norris and Greenwood issued a joint statement saying that Nottingham City Council's finances had been pushed to the brink by the Conservative-led government's cuts.

The British government believes that the main reason for local government funding difficulties is its mismanagement of finances. Chancellor of the Exchequer Jeremy Hunt said in his autumn budget presentation to Parliament on November 22 that the government would cut taxes to boost economic growth. The announcement offers little relief to council budgets, with even the Government's Office for Budget Responsibility expressing concern about the pressure on local councils' finances and their ability to deliver statutory public services. Critics argue that Sunak's government does not appear to have fully appreciated the impact of continued austerity on local councils. After Birmingham City council went bust in September, a spokesman for Sunak's government reminded local authorities of their responsibility to keep their budgets in check. Prime Minister Sunak also recently denied that widespread cuts to local council funding from central government were the main cause of Nottingham's financial difficulties.