Potential financial deficit of £780 million for Scottish councils, as indicated in a recently published report.
In a concerning development, local authorities in Scotland are grappling with a budget gap of £585 million this financial year, as revealed by the Accounts Commission. This revelation comes as the 2024/25 funding allocation to local government has increased by 5.7%, but most of the increase is directed to funding central government pledges.
Katie Hagmann, COSLA's resources spokesperson, has expressed her concern about the financial states of local authorities, stating that the concerns consistently raised by COSLA Leaders should be acted upon. She further emphasises that the ability for councils to take local decisions on most of their budget is almost impossible due to years of real-terms cuts to core budgets, additional policy commitments, and less flexibility in how they allocate increasingly directed budgets.
Derek Yule from the Accounts Commission concurs, stating that it is getting harder for councils to do more with less. He also highlights the importance of understanding the impacts on the most vulnerable and fully engaging with local people and being clear about the different and difficult budget choices. Yule further emphasises the need for councils in Scotland to improve the presentation of their financial information.
The proposed solutions to increasing budget gaps for local authorities in Scotland focus on improving financial resilience through better governance, scenario planning, and compliance with financial management codes. Additionally, maintaining stable funding frameworks such as the Barnett Formula is crucial.
Financial resilience measures involve councils improving financial oversight, conducting stress tests against economic shocks like inflation and demand surges, and embedding the CIPFA Financial Management Code to ensure sustainable spending and strategic reserve use.
The UK Government supports retaining existing funding mechanisms such as the Barnett Formula, which distributes funds to Scotland and underpins its higher per capita public spending compared to the UK average. However, the Scottish Government’s aim to end the Barnett Formula could create a significant funding gap, presenting serious fiscal challenges for local authorities to manage.
The Scottish Government proposed budget increases for 2025-26 include significant additional spending on public services, but given the overall economic and funding context, these may not fully offset the financial pressures on councils. Recent funding reviews in the UK have introduced floors on funding reductions to limit drastic losses for councils, although these measures apply mainly to England and Wales and are part of wider UK-wide financial planning that indirectly affects Scotland’s local authorities.
Broader fiscal context: Scotland’s Government reports a large fiscal deficit, and due to limited borrowing powers, it must balance budgets annually by relying heavily on UK transfers. This constrains flexibility for local government budgeting and highlights the significance of stable intergovernmental funding arrangements.
COSLA, a councillor-led, cross-party organization, is calling for a 'real' and 'meaningful' solution to address the financial problems faced by local authorities in Scotland. The Accounts Commission has also highlighted that councils could be facing a budget shortfall worth £780m by 2026/27.
In summary, the main strategy to address budget gaps involves enhancing financial governance and resilience locally while relying on continued UK-level financial support mechanisms. The expected impact is improved financial stability and the ability to cope with funding shocks, though substantial risks remain if funding formulas change or demand for services grows faster than budgets.
Interestingly, many local authorities in Scotland were planning to increase their budgets by increasing council tax in 2024/25, but a council tax freeze was announced by the government in the Autumn of 2023. This freeze will undoubtedly put further pressure on the already strained budgets of local authorities in Scotland.
- Amidst the financial struggles of Scotland's local authorities, the Scottish Government has proposed budget increases for 2025-26, aimed at increasing spending on public services. However, these might not entirely alleviate the financial pressures faced by the councils.
- As the local government in Scotland grapples with a budget gap of £585 million this financial year, policy discussions have centered on improving financial resilience through better governance, scenario planning, and adherence to financial management codes.
- Derek Yule from the Accounts Commission has underscored the importance of understanding the impact on the most vulnerable and engaging with local people, stressing the need for councils to improve the presentation of their financial information.
