In a new report into local government finances, the watchdog said Scotland’s councils are managing their money effectively, increasing reserves, with longer-term financial plans in place. Though it added that whilst no council was at immediate financial risk in 2022/23, there is no certainty this will continue.

According to the report, the total budget gap in the country’s local authorities has risen to £725 million for the next financial year – almost double the £476m from the year before.

It revealed that councils are continuing to rely on savings and reserves to balance budgets with more than half of councils using financial flexibilities in 2022/23. This helps with immediate budget pressures but defers costs to later years and fails to tackle underlying challenges to financial sustainability, the report warned.

The Accounts Commission’s latest report assesses the financial position of Scotland’s councils during 2022/23 and the outlook for services beyond this. While councils received more funding and income in cash terms in 2022/23, high inflation means this fell by nearly three per cent in real terms compared to the previous year. A significant and increasing amount of funding continued to be either formally ringfenced or directed towards specific services and national policy objectives – reducing councils’ flexibility in using money to meet local needs.

Despite more core funding from the Scottish Government for 2023/24, there was a significant increase in councils’ total funding gap, due to pressures including increased demand for services, inflation and the cost-of-living. Capital budgets were also significantly strained, risking knock-on impacts on the maintenance of key public buildings and infrastructure, for example schools, libraries and roads.

Councils recognise the risks ahead, but they need to innovate at pace and make difficult decisions about cuts to services to remain financially sustainable. Some councils have experienced opposition from within their communities when seeking to reduce services to balance budgets. This reinforces the need for frank consultation and engagement with communities when planning change.

Ronnie Hinds, interim chair of the Accounts Commission, said: “There is intensifying pressures on council finances and services. Given the funding position for councils, there is increasing reliance on reserves and savings to deliver balanced budgets. This means councils are already making difficult decisions about future service delivery and the level of service they can afford. Having leadership and a workforce with the right skills will be crucial to deliver on this.

“Local government is the second largest area of Scottish Government spending, but despite rising demand for services, the proportion of funding to councils has reduced over the last decade. Urgent progress is needed to agree a funding framework between Scottish and Local Government. This will bring much-needed clarity and certainty of budgets for future years.”

Local authority body COSLA said the report reinforces its warnings over the perilous state of council finances over the last few years.

COSLA’s resources spokesperson Councillor Katie Hagmann said: “The Account Commission’s Local Government in Scotland Financial bulletin for 2022/23, published today, reinforces what we have been saying about council finances and the really difficult and challenging decisions Councils have had to take in recent years.

“It is vitally important that these concerns, which have been consistently raised by COSLA, are now being backed up by hard facts and evidence presented by the Accounts Commission.

“There is widespread agreement from COSLA on the Accounts Commission’s key messages on the scale and financial challenge facing Scotland’s councils, as well as the most pressing issues facing councils now.

“Some of these key messages, whilst extremely stark, come as no great surprise to those of us in local government.

“Today’s Accounts Commission Bulletin is a true reflection of where we are now. Our reality right now is extremely challenging - years of real-terms cuts to council budgets have been coupled with increasing additional policy commitments and increased ring-fencing. With so much funding still directed, the ability to take local decisions on most of our Budget is almost impossible.”

Councillor Hagmann concluded: “The picture painted by the Accounts Commission illustrates why COSLA is lobbying hard on the detrimental impact to communities of the Draft Scottish Government Budget, currently going through the Parliamentary process. The trends highlighted by the Bulletin are why Scotland’s council leaders are so disappointed and furthermore highlights the need to progress the ambitions of our joint Scottish Government and local government Verity House agreement. We must seek a solution to these long-term issues in order to protect the essential front-line service of our communities.

“COSLA’s President, Vice President and Political Group Leaders, from all parties have written to the Deputy First Minister requesting that a meaningful negotiation takes place, to protect those who rely on essential services, support our local economies and continue to progress our net zero national ambitions.”