Scotland’s local authorities are in a deepening financial crisis, with councils collectively overspending their budgets for the first time in six years and debt soaring by £2.5 billion in a single year, according to a stark new report from Audit Scotland.
The watchdog’s annual Financial Bulletin, published today, reveals that despite a 1.3% real-terms increase in total funding and income in 2024/25, councils faced a £542 million budget gap. To bridge this, they relied heavily on one-off savings and draining reserves, a strategy branded “simply not sustainable.”
For the first time since 2018/19, the sector reported an overall revenue budget overspend of £16.8 million. Twelve out of 29 councils overspent their core General Fund budgets, primarily driven by soaring costs and demand in adult social care and education.
The report highlights a dangerous shift toward short-term fixes. While councils delivered 90% of their savings targets, a significant portion were non-recurring measures. Furthermore, usable reserves fell by 7% year-on-year, with 86% of remaining reserves already committed to specific purposes, leaving little contingency for new emergencies.
Capital investment, though substantial at £3.5 billion, is increasingly funded by expensive borrowing as government grants shrink. Council debt now stands at £21.9 billion, with annual borrowing costs hitting £1.2 billion. A significant driver of the debt increase is new accounting rules (IFRS 16) for leases, including Public Private Partnerships.
Looking ahead, the outlook remains bleak. Councils have already identified a £647 million budget gap for 2025/26. Rising inflation, uncertainty over future pay settlements, and capped council tax income are cited as major ongoing threats.
William Moyes, Chair of the Accounts Commission, said: ‘There are increasing signs that councils are struggling financially… Using reserves and one-off savings to balance the books cannot continue. Councils need to take urgent action to address these sustained pressures, which will involve difficult decisions about reducing, reconfiguring, or charging for services.’
The report calls for much greater transparency in council financial reporting and urges elected members to intensify scrutiny of long-term financial sustainability, warning that without fundamental change, the sector’s financial viability is at risk over the medium term.
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.’
The full report can be read here.
Photo: engin akyurt / unsplash
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