Councils warned over scale of financial challenges

Councils must reform "at a pace and depth we've not yet seen" to avoid facing unsustainable losses, Scotland's public finance watchdog has warned.

The Accounts Commission urged local authorities to be upfront about the "scale of financial challenge being faced".

Its latest report, on the 2023-24 financial year, found councils had to plug a budget gap of £759m due to a real-terms decrease in revenue funding from the Scottish government.

It said councils are increasingly reliant on cuts which becomes progressively more difficult year-on-year, and again had to use reserves to remain within their agreed budgets.

Jo Armstrong, who chairs the Accounts Commission, said: "Scotland's councils face a challenging future, with significant financial risks and uncertainties.

"This has been compounded by pressures outwith their control, including ever-increasing demand on services and inflation.

"An expected increase in funding for the year ahead doesn't cancel out the urgent need for transformation, at a pace and depth we've not yet seen.

"With services already being impacted, councils must be clear with communities the scale of financial challenge being faced. Working with communities to deliver differently is vital."

In its Local Government in Scotland Financial Bulletin for 2023-24, the Accounts Commission found there was a 3.3% reduction in councils' total revenue funding and income in 2023-24, compared with 2022-23.

It also found that 12 out of 29 councils that provided data made unplanned use of their reserves in 2023-24 to manage budget pressures.

The watchdog said councils needed to "intensify transformation activity, progressing at scale and pace to ensure their financial sustainability".

It also said that how councils plan to use their reserves, make savings and transform their services needed to become more transparent.

The report noted that there is still uncertainty about how increased employers' national insurance contributions, announced by the UK government, will be funded.

The Convention of Scottish Local Authorities (Cosla) estimates councils will need an additional £265m in 2025/26.

It has said that while additional funding this year was "a step in the right direction", the pressures created by pay, inflation and the changes to Employers National Insurance Contributions "remain unmet".

Cosla's resources spokesperson, Councillor Katie Hagmann, said: "Councils are now being faced with a very difficult balancing act, where they must continue to deliver day-to-day services with increasingly higher demands, whilst at the same time transforming the way they deliver those services to adapt in a time of rapid change."

Since 2007, council tax has generally either been frozen or increases have been capped by Holyrood.

However, a current freeze on rates is due to end in April.

The Scottish government says it is offering local authorities an extra £1bn in 2025-26 and hopes large council tax rises will not be needed.

Individual authorities are expected to decide on any increases next month.

Scottish Conservative finance spokesman Craig Hoy said: "The SNP has been starving councils of resources for years and Scots have seen public services crumble as a result."

Scottish Labour local government spokesman Mark Griffin urged the government not to "bury its head in the sand about the timebomb in local government finances".

He said: "Years of brutal budget cuts by the SNP and growing demands have left councils across Scotland at breaking point."

A Scottish government spokesperson said the 2025-26 Budget would give councils a £1bn funding hike on the previous year.

They added: "Alongside additional funding for local authorities to spend as they require for their communities, there is targeted investment in teacher numbers, additional support for learning and councils' work to tackle the climate emergency."