While councils managed to bridge a £759 million budget deficit in 2023/24, this required deeper cuts and reliance on reserves, a practice deemed unsustainable in the long term.

Reflecting on the state of council finances in that financial year, the Accounts Commission reports many councils made savings or used reserves to deliver services within budget and offset a 3.3% real-terms reduction in revenue and income. The commission stresses that using reserves to routinely balance budgets isn’t sustainable and risks financial sustainability.

Despite an overall increase in funding in 2024/25 and a further funding increase announced for the year ahead, intensifying demand for services, greater borrowing and depleting reserves pose ongoing challenges.

In 2023/24 councils borrowed more to invest in buildings and infrastructure, whilst Scottish Government money to support capital investment continued to decline. Council borrowing increased by over £400m and almost all councils now face higher levels of debt and annual interest costs. This investment is vital, however, in supporting spending on key areas including new schools and housing projects, whilst reducing the risk of buildings becoming unusable and impacting services still further.

Jo Armstrong, chair of the Accounts Commission, said: “Scotland’s councils face a challenging future, with significant financial risks and uncertainties. This has been compounded by pressures out with 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.”

COSLA’s resources spokesperson Councillor Katie Hagmann said: “Today’s 2023/24 Accounts Commission Bulletin is a stark reminder that Scottish Local Government is still facing significant financial challenges and serious risks to services.

“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.

“While additional funding this year is a step in the right direction towards taking on these challenges, significant pressures created by pay, inflation and the changes to Employers National Insurance Contributions remain unmet. The £289m additional uncommitted revenue simply does not cover all of these, meaning more cuts to services will be required to balance budgets.

“If Scotland is to tackle issues such as rising poverty, the effects of climate change and social care reform, we need national governments to commit to sustainable, long-term investment in our local government.

“COSLA has written to the UK and Scottish Governments about funding concerns and hope to continue productive discussions with all parties to ensure our councils can continue to deliver for communities.”

Scottish Labour local government spokesperson Mark Griffin said: “The SNP cannot ignore this stark warning and continue to bury its head in the sand about the timebomb in local government finances.

“Years of brutal budget cuts by the SNP and growing demands has left councils across Scotland at breaking point.

“Now there is a real risk that Scots are going to pay the price for the SNP’s incompetence through Council Tax hikes.

“Labour has put an end to the era of Tory austerity so the SNP has no excuses left – it must provide a fair funding deal and work with councils and communities to deliver the long-term reforms needed.”