The second annual State of Local Government Finance in Scotland found councils are taking every measure available to balance their budgets including raising council tax, reducing expenditure and increasing fees and charges, sharing services and engaging in commercial activity.

However, many councils believe this will still not be enough to prevent the risk of an unbalanced budget. Nearly every respondent said they believe cuts to services will have a negative impact on quality of life in their council, and over 90% that cuts will increase the risks to vulnerable people. 

The report found satisfaction with the Scottish Government is alarmingly poor across the sector. Not a single respondent said they were happy with the Scottish Government’s performance on delivering a sustainable funding system or considering local government in wider policy decisions.

Respondents representing 84% of Scottish councils, made up of council leaders, CEOs and CFOs said times are increasingly hard for local authorities, with ongoing pressure from the cost of living crisis and inflation adding new burdens on top of long-term challenges: demographic change, financing of Scottish Government priorities, and pressures with recruitment and retention of staff.

With councils’ confidence in the sustainability of council finances critically low, the sector is in favour of widespread reform, including multi-year financial settlements, ending ring-fencing, and reform of council tax. Councils are optimistic about the role that local government, sufficiently funded and empowered, could have to advance the prevention agenda, tackle local and national shared priorities, deliver services and empower communities.

The report recommends an agreed national convention between Scottish Government and local government to cover procedures and actions that would then be needed to set a balanced budget; enshrining in legislation the principles of the Verity House Agreement, and committing to an annual review by Scottish Parliament covering the key principles.

Some of the medium to long-term recommendations include reconsidering a whole-system approach to funding wider public finances including a review of council tax, the funding formula and increasing the range of revenue-raising options available for councils.

Jonathan Carr-West, chief executive, LGIU Scotland, said: “This year’s results make for grim reading about the state of local government finances in Scotland. The message from our second annual State of Local Government Finance in Scotland builds on last year: we are nearing the point of no return. The report paints a picture of a system under continual and significant strain, with the scale of financial pressures increasing from 2023.

“Local government finances in Scotland are hanging by a thread. However, the thread has not yet broken. Today’s report delivers a stark warning that councils are in a precarious financial position and there is not much time until the sector starts to see potentially catastrophic consequences. Change is urgently needed. Councils will soon be unable to balance their budgets, meet their statutory duties, or provide for their communities. We need to change course now before it is too late.

“The challenge now is how do we move from the situation we are in now, to one where councils are able to deliver the transformative impact they are confident that they could deliver. Reform is necessary, empowerment will be essential, and trust between Scottish Government and local government – in a critically poor state – must be restored.”

In response, a Scottish Government spokesperson defended the settlement offered to local authorities in last year’s budget.

They said: “The Scottish Government has made available record funding of over £14 billion to councils this year, a real-terms increase on last year, with almost £1bn included in councils’ general revenue grant.”