Scottish councils are showing signs of serious financial stress after experiencing further funding cuts, a watchdog has said.

The Accounts Commission, which polices local government finances in Scotland, said several councils were two to three years from draining all their savings to fund services, after the sector experienced average cuts in funding last year of 5.2%.

The total debts amassed by 30 local authorities rose again to near record levels, hitting £14.5bn by the end of March this year, after an increase in borrowing of £836m as councils tried to exploit low interest rates.

At the same time they cut £524m from their budgets and shed 2,200 jobs, spending £33m from their reserves. Although 20 councils dipped into their savings, reserve levels across the sector remained relatively healthy, at £1.1bn for day-to-day spending and £1.9bn overall.

Saying local authorities faced tougher challenges ahead, Ronnie Hinds, the deputy chairman of the Accounts Commission, said: “Our evidence tells us that councils are finding the financial pressures increasingly difficult to manage.”

Conservative councillors in Moray, one of three authorities identified as close to using up all its reserves, were accused by a rebel councillor of being “rightwing extremists” last week after the Tory-led coalition council suggested mothballing libraries and and public toilets and axing school crossings to cut costs.

The Scottish finance secretary, Derek Mackay, faced criticism from the opposition after he said this year that his government was protecting council funding. The commission said it had fallen by 7.6% in real terms since 2010-11.



Mackay is in the final stages of drawing up next year’s draft budget, and is wrestling with serious financial challenges paying for Nicola Sturgeon’s pledges to increase NHS spending by £500m above inflation and to increase public sector pay by more than 1% next year.

Public sector pay rises had been capped at 1%. The commission underlined the pressures facing Mackay and council leaders by pointing out that it would require a 3% increase in council tax rates to fund a 1% pay rise, which would add £68m to local authority wage bills.

A Scottish government spokesman said council borrowing and reserves spending was a matter for councils, but said the overall funding settlement was fair since it included an extra £250m to integrate health and social care.

“We have treated local government very fairly despite the cuts to the Scottish budget from the UK government. Including the extra £250m to support the integration of health and social care, the overall reduction in local government funding in 2016-17 equated to less than 1% of its total estimated expenditure,” he said.

Sturgeon has asked Labour, the Scottish Greens and Scottish Liberal Democrats to discuss some form of compromise deal on income tax rates in Scotland, which are now largely under Holyrood’s control, to help fund a budget shortfall.

Mackay and Sturgeon argue that Scotland’s grant from Whitehall has fallen more than 8% in real terms since 2010–11. Last week’s UK budget offered some relief, however, increasing the Treasury grant for day-to-day spending by £183m more than expected and £340m more for capital spending.

The commission said the funding crisis for councils was worsened by the council tax freeze, which has now ended, and increasing use of national policies directed by Scottish ministers, particularly for schools.

Although councils had been given an extra £250m to pay for the integration of health and social care, central policy drives drained funding for other services. Cultural funding was down 12%, with planning and development down by 14%. Roads and transport spending was down 8%.

The Accounts Commission data does not include Shetland and Orkney councils, which have substantial reserves and investments worth 250% and 300% of their annual income respectively from their oil and gas terminals and harbour charges receipts.

Andy Wightman, the Scottish Green party’s finance spokesman, said the commission’s findings were “stark, damning, but hardly surprising”. After similar warnings from the commission last year, the Greens did a deal with Mackay to modestly increase taxes for middle earners to reduce council funding cuts by £160m.

“The SNP has stalled on local tax reform, but ministers now need to show they seriously want to reverse the cuts made in previous years,” Wightman said.

“The challenge facing Derek Mackay will be in constructing an income tax proposal which meets multiple needs and raises enough revenue to deliver on promises like a real-terms pay rise, without raiding local services to pay for it, and without hitting low earners who are already struggling.”