Scottish councils could be financially unsustainable within three years, watchdog warns

Scotland’s councils could become financially unsustainable within just three years, a hard-hitting new report claims.

Local government has for years been warning that increasing costs and limited finances are straining the ability to meet community needs, from fixing roads to keeping community centres open.

Now the Accounts Commission warns the country’s 32 authorities face a budget gap of close to £1bn by 2027 – and could become financially unsustainable over the next three to five years.

Major change, including cuts and charges, must be considered to avoid the worst outcomes, it is said.

Several savings rounds have already been made across the sector, but delivery costs are outstripping available funding and increased cash from the Scottish Government has failed to keep pace, it is said.

The warning comes one month after the Local Government Association, which represents councils in England and Wales, warned finances there are at “breaking point”, with 29 authorities having been unable to meet their financial obligations without loans from the UK Government. These include Birmingham, Croydon and Thurrock.

In Scotland, where funding comes through ministers in Edinburgh, the Accounts Commission has said “costs continue to outpace funding increases”, and a reliance on one-off measures like using reserves to make budgets work is “simply not sustainable” and any borrowing comes with a risk of increased costs.

Councils have of late taken on more debt for infrastructure schemes like school and housebuilding as a result of falling Scottish Government support for capital projects.

The report states: “Councils need to take urgent action to address the sustained and recurring cost pressures associated with delivering services. This will mean carefully considering where services need to be reduced; how service delivery can be fundamentally reconfigured; who is eligible to receive services; and policies on fees and charges.”

Focused on the 2024-25 financial performance of councils and the financial outlook, the findings, published today, come around a fortnight ahead of a planned analysis of the 2026-27 Scottish budget, and have triggered angry response from opposition parties.

Tory finance spokesperson Craig Hoy MSP said: “This apocalyptic warning is a damning indictment of the SNP’s systemic underfunding of councils.

“For years the nationalists have short-changed local authorities and hampered their ability to deliver essential services despite imposing whopping council tax rises. Councils are already borrowing to fund schools and housing – and yet the financial crisis is deepening. Local authorities have made savings, raised fees and charges, and yet the latest SNP budget settlement is not enough to bridge the gap.”

His Scottish Labour counterpart Michael Marra said: “The dire financial situation facing councils is the direct result of 19 years of John Swinney and the SNP. They have starved local government of funding, destroyed local services and seek to pass the blame to someone else.”

Calling for Scots to vote his party into power in May, he went on: “If the lack of support from John Swinney’s government continues, there an existential threat to Scottish councils. Meanwhile, local residents will continue to be hammered by huge tax rises as services are cut to the bone or closed altogether.” 

Meanwhile, Jamie Greene of the Scottish Lib Dems said: “There is a titanic gulf between what the SNP have provided and what councils say they actually need to maintain basic local functions.

"The SNP have demanded councils do more with less while an increasing proportion of spending decisions are dictated by ministers half a country away. As a result, we have ended up with school strikes, bin strikes and shortages of elderly care packages.

“The Scottish Government must act now to put local authority finances on a sustainable basis. We need real reform to push powers over both revenue raising and spending out to communities and help them to provide the reliable local services that people are crying out for.”

The report calls on councils to improve their financial reporting and, for papers for elected members to include ‘clear’ explanations of how future revenue budgets will be affected by investment decisions and capital underspends.

Reserves policies should be current and fit for purpose, it is said, with a “clear and time-bound” recovery plan in place where agreed minimum reserves levels may be breached. Assessments of medium and longer-term sustainability should be a “central focus” of reports to councillors, according to the watchdog.

Accounts Commission member Derek Yule said: “Despite increased funding and income, councils are struggling to cope with the financial pressures they face. A growing gap between costs to deliver services and funding available is risking the financial sustainability of councils.

“We’re already seeing the impact on services – the pace of improvement is slowing, some services are being cut or are harder to access and there are growing levels of dissatisfaction from communities. Councils must fundamentally reconfigure how they operate and deliver services.”

The Scottish Government said: “We recognise the financial challenges that local authorities face which is why the draft 2026-27 budget provides Scotland’s councils with record funding of almost £15.7bn, building on continued increases in recent years as confirmed by the Accounts Commission.

“The Scottish Government will continue to work in partnership with local government to address the challenges facing councils and ensure we are operating sustainable public services that communities expect and deserve.”

Councillor Ricky Bell, spokesperson for resources at councils body Cosla, said: “While we acknowledge increases in uncommitted funding in the local government settlement, today’s report reinforces the message that local government finances are under severe and growing strain.

“Councils have worked hard to manage budgets responsibly, delivering significant savings year on year and meeting the vast majority of savings targets. However, there is a clear limit to what can be achieved without impacting the services communities rely on. Increasing reliance on reserves, borrowing and fees and charges is not a sustainable long-term solution.

“As we look ahead to 2026-27, the budget settlement falls far short of what is needed to sustain essential local services without difficult decisions being made locally. We are especially concerned by the continued underfunding of social care and the Real Living Wage across portfolios. 

“The medium-term outlook for local government is deeply concerning, with continued de-prioritisation and the prospect of significant real-terms cuts. If councils are to remain financially sustainable and continue delivering for communities, there must be a more honest conversation about funding, priorities and local flexibility.

“Urgent action is needed to ensure councils have the resources and certainty required to support Scotland’s people and places now and in the future.”