Birmingham city council declared itself effectively bankrupt in September last year, but only now are the facts about what really happened beginning to emerge. A series of monumental problems and errors, including the botched implementation of a new IT system, a likely overstated equal pay liability, and a disastrous financial package imposed on the council by the last Conservative government, have paved the way for the largest programme of cuts and asset sales yet for any local authority.

This was far from inevitable. When council officers issued the section 114 bankruptcy notice last September, it identified a looming set of equal pay claims as the primary cause of the council’s financial distress. Two weeks later Michael Gove, then secretary of state for levelling up, housing and communities, told parliament that it was the “independent auditors’ assessment” that this equal pay liability was probably at least £760m (and could be “much higher”), and that the council did not have enough money to cover this.

But it’s not as simple as he made it seem. Yes, the council is in real financial difficulty. A costly launch of a new Oracle IT system, Covid, austerity, and the cost of living crisis all left Birmingham council with rising costs and falling income. But the council’s external auditors claim that they did not audit the £760m equal pay figure that has since been given as the main reason for the council’s bankruptcy. We also know that the figure was probably overstated, and that the auditors didn’t even have access to the model on which it was based. What has happened since then raises even more troubling questions.

As The Audit Reform Lab has found in our recent report, triggering the “bankruptcy” notice and the subsequent programme of cuts that followed is having disastrous effects. First, linking the bankruptcy to the probably overstated equal pay figure has forced the council into selling off £750m of public assets at knock-down prices, including the land and housing stock in Bordesley Park and Perry Barr for hundreds of millions of pounds below market value. These assets are being sold at substantial losses to pay for a liability that, by the commissioner’s own assessment, will not be as large as the council anticipated.

Worse still, we found that basing the current crisis plan on the cost of the equal pay claim did nothing to address the council’s mounting deficits. Put simply, the equal pay liability was not based on any actual cash costs to the council in the short or medium term. Removing this figure from the budget therefore did nothing to address the council’s immediate shortfall. Basing the plan on the Oracle costs, on the other hand, would have removed tens of millions of pounds of real short-term costs – such as consultants, temporary staff, council tax write-offs, and more – from the budget, eliminating the need to make these devastating cuts.

The current plan for dealing with the shortfall, drawn up by Gove’s department, therefore delivers the worst of all worlds – forcing through eye-watering asset sales on the basis of a misdiagnosis, while doing nothing to help the council balance the books. We estimate that a correct diagnosis of the council’s problems could have reduced the asset sales by as much as half a billion pounds. Our research tells a shocking story: the extent and seriousness of the Oracle IT disaster (currently running at more than £100m over budget) received scant public attention at the start of the crisis, while the £760m figure appeared in the public domain seemingly out of the blue.

We can only guess as to their reasoning, but the effects of this have been clear. Instead of focusing on an unfolding IT disaster and a costly contract, all attention has been on the council’s negotiations with trade unions. An Oracle-based bankruptcy would have been a very different scandal, which may have resulted in senior resignations. An equal pay claim, on the other hand, was something the council could more easily blame on unions.

Gove’s plan has since led to the biggest ever cuts to any local authority budget, with the council slashing £149m from crucial statutory services, including children’s services, adult social care, homelessness prevention and youth services. These cuts were rushed through with very little public consultation. As a result, we are already seeing big overspends in children’s services and adult social care that are, we think, directly linked to previous cuts in services. It’s no surprise that cuts to prevention lead to more expensive solutions as vulnerable people reach crisis point. The estimate of cuts that will be needed to balance Birmingham’s books next year has now risen to an astonishing £195m.

Another way forward is still possible. While a lot of unnecessary damage has already been done, a new plan is still within reach. For this to be possible, the government should extend its period of support until April 2028 so that the council can properly assess its finances and avoid these brutal cuts and sell-offs. This scandal doesn’t just affect Birmingham. One in five council leaders in England say their authority could go bankrupt in the next two years. The government needs to urgently get to grips with local authority funding, and when councils like Birmingham do “go bust”, they need a serious and functional system of support for failing councils. Otherwise, the next local government scandal will be just around the corner.