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Birmingham issues bankruptcy warning

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England’s largest local authority has warned the government it will “go bankrupt” unless the Treasury allows it to spread the cost of a £757m pay settlement.

The alert was issued by Birmingham City Council after its auditors issued a letter to its audit committee, giving a “qualified value for money conclusion” on the council’s financial resilience, economy, efficiency and effectiveness.

Auditors Grant Thornton said it was concerned that the council faced a further increase in ‘equal pay claims’ after it lost a Supreme Court case last month. Birmingham already faces equal pay liabilities of £757m.

“The increase in equal pay claims against the council continues to negatively impact on its financial resilience and the wider delivery of value for money,” the letter states. “In all other aspects we are satisfied with the council’s arrangements for securing value for money.”

Albert Bore, leader of Birmingham Council told a public meeting this week that government had given the council permission to spread £430m of the equal pay liability through its ‘capitalisation directions’ regime. “But if the the government doesn’t give us permission for the rest, the council will go bankrupt. I am pretty sure the government won’t allow that to happen,” he added.

Birmingham’s appeal for the permission to capitalise the remaining £327m liability was made amid concerns of Whitehall resistance to a wider local government need to capitalise austerity-induced costs.

Paul Woods, city treasurer at Newcastle City Council and a member of the LGA’s core advisory group, said many authorities would want to capitalise any anticipated redundancy costs in their budgets.

“It was not going to be so bad under the spending review but it looks like the cuts are now going to be deeper so there will have to be more redundancies.”

Government guidance had, however, indicated that funding for capitalisation would be taken out of the new business rates retention regime. A Whitehall consultation on the scheme said in July that the government would hold back £100m from council funding business rate retention scheme to provide capitalisation support for local authorities.

 “That would be lunacy,” Mr Woods said. “They are not giving us real money, only giving us permission to use our own money,” he said.

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