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Birmingham, England's second-largest city, announced bankruptcy on September 5, 2023.

The city council said that it would immediately halt all new government spending, except for essential services for vulnerable people and other statutory obligations, due to mounting debt and a financial shortfall of £87 million.

The direct trigger for Birmingham's financial problems can be traced back to a gender discrimination lawsuit filed over a decade ago. The city is now unable to repay its £7.6 billion debt.

In fact, bankruptcy is not uncommon for British local governments. Birmingham is the seventh British local government to declare bankruptcy since 2020.

In the context of rising inflation, Birmingham City Council is just one example of local governments struggling to make ends meet. The recent spate of bankruptcies among local governments also reflects the risks facing the UK economy due to high inflation, high debt, and high interest rates.

Jonathan Whelan, CEO of Localis, a non-profit think tank in the UK believes that if the financial system for local governments is not reformed, no one will be able to avoid a systemic crisis.

Whelan told NBD that Birmingham has a population of 1.2 million and is home to the largest local government in Europe, with 101 councilors. The city is the economic engine of the West Midlands, which is a strategic asset for the UK national economy. As such, Birmingham's situation has raised concerns.

"If other British local governments follow suit by issuing Section 114 notices and giving up fiscal autonomy, cities will have to cut many local services and social assets that help to build strong urban communities," he said. "The social cohesion of cities, as well as the resilience of local and regional economies, will be significantly threatened."

In fact, Birmingham's economic performance has not been bad. According to UK government data, Birmingham's GDP in 2021 was £31.9 billion, ranking second in the UK, behind only London.

Whelan pointed to more fundamental factors. He told NBD that after the 2008 financial crisis, the UK submitted a public spending review in 2010, marking the beginning of an era of austerity. Local governments were among the hardest hit.

"As a result, central government funding, especially for large regional cities, was slashed," he said. "Local governments had to adjust and change the way they deliver services and use labor."

"Although central government spending on local government has improved in recent years to protect local areas from the impact of the COVID-19 pandemic, local governments have not fully recovered. Given the resources provided by local property taxes and business taxes, and the aging population, the pressure to provide social welfare is too great for local governments," Whelan told the China Daily. "When social welfare accounts for 70% of a council's budget, the ability to provide other services and balance the books becomes precarious."

In addition, the Birmingham City Council mentioned in its statement that the high cost of new IT systems also added to the financial pressure on the government.