Scotland's councils 'risk becoming financially unstable', warns Accounts Commission

Scotland’s councils are facing mounting financial pressure as the cost of delivering services rises faster than the funding available.

The Accounts Commission has warned this could threaten the long-term financial sustainability of local authorities over the next three to five years, despite increased Scottish Government support.

In its latest update on council finances, the Commission said councils are overspending on service delivery and increasingly relying on borrowing and reserves.

It estimates councils face a budget gap of almost £1bn by 2027.

During 2024/25, councils achieved 90% of their savings targets. However, for the first time in six years, they reported a collective overspend on the cost of delivering services.

The report also found debt levels are increasing, with many councils relying on reserves to balance budgets.

While councils have increased income through fees and charges, the Commission said this has not kept pace with inflation and rising costs.

It also highlighted that with Scottish Government funding for capital projects falling, councils are taking on more debt to deliver local infrastructure such as new schools and housing.

Derek Yule, member of the Accounts Commission, 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.”

Cosla, the umbrella body for Scotland’s 32 local authorities, said the findings underlined the scale of the challenge facing councils.

Councillor Ricky Bell, Cosla’s spokesperson for resources, 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.”

Earlier this month, the Scottish Government set out its tax and spending plans for the year ahead of May’s Holyrood election.

As part of the proposals, two new council tax bands will be introduced for homes worth more than £1m, alongside an updated valuation system due to be in place by April 2028.

The new bands will be added above the current highest band.

Band I will apply to properties valued between £1m and £2m, while Band J will cover homes valued above £2m.

The Scottish Government said the new tax bands would be based on updated valuations for those properties only, with all other homes remaining within the existing Council Tax valuation framework.