Watchdog warns of council cuts amid near £1bn financial black hole

Councils risk becoming financially unsustainable unless they cut, reduce or overhaul critical services, a watchdog has said, as it warned of a near £1bn funding gap.

The Accounts Commission said Scotland’s local authorities are facing a combined revenue gap of £975m across the next two years amid increasing financial pressures.

Over the next year, councils face a financial black hole of £529m for their daily operating costs – 3% of their budget.

The watchdog report, which examined council budgets, warns that funding from the Scottish Government is failing to keep pace with rising costs and demand, despite a real-terms increase.

While council revenue funding has increased by 2%, the Accounts Commission said much of the cash will be used to cover existing commitments, such as teachers’ pay increases, leaving councils with limited flexibility over how to spend their money.

It found that capital funding, the type used on infrastructure projects and housebuilding, is down 15%, meaning councils will be forced to borrow more cash, “which heightens long-term financial risk”.

Despite the cut, the report said local authorities remain committed to increasing investment in housing, with many having already declared a housing emergency.

Every local authority increased council tax, by an average of 7.7% for 2026/27, which the watchdog says should raise an extra £248m.

Councils expect to bring in around £1.2bn from fees and other charges, such as for leisure centres and some refuse services.

They are also planning to make savings of £180m – around 1% of councils’ total revenue budget.

But these savings will increasingly affect services people rely on, the commission warns.

Social care makes up a high proportion of council spending and increasing demand for these services is putting major pressure on local budgets.

Councils are spending £4.3bn on social care over the next year, nearly a quarter (24%) of their revenue spending.

The Accounts Commission report said expected reductions in Scottish Government funding over the medium-term are expected to intensify these pressures and increase the risk of councils becoming financially unsustainable.

Derek Yule, a member of the Accounts Commission, said: “As things stand, councils will continue to face increasing financial pressures unless they stop, reduce, or significantly redesign services.

“Savings options are limited and will have to increasingly focus on changes to services people rely on.

“That makes it essential that councils talk to their communities about the difficult decisions they are facing.”

Scottish Liberal Democrat finance spokesperson Liam McArthur said the report showed the “vast gulf between what the SNP Government have provided and what councils say they actually need to maintain basic local services and functions”.

He added: “The SNP have demanded councils do more with less while an increasing proportion of spending decisions are dictated by ministers in Edinburgh.

“As a result, we have ended up with school strikes, bin strikes and a shortage of elderly care packages.

“The Scottish Government must act now to put local authority finances on a sustainable footing.

“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 Scottish Government has been approached for comment.