Scottish Councils May Face Cuts Over The Next Two Years Even With 5% Council Tax Increases

5th February 2023

Even if Scottish councils were to increase council tax by 5% a year in each of the next two years they may face real-terms cuts to their funding.

New analysis by IFS researchers finds that even if Scottish councils were to increase council tax by 5% a year in each of the next two years (adding around £140 to the average band D tax bill), they may face real-terms cuts to their funding.

Rising costs for social care services and a mooted Scottish Government moratorium on cuts to teacher numbers mean that cuts to the other services councils provide - such as housing support, libraries, leisure centres, local road maintenance and waste collection - are highly likely, even if a cut to overall funding is avoided.

Cuts to grant funding seem likely
The Scottish Government's Budget for 2023-24 shows funding for councils' non-investment spending increasing by 0.9% in real terms in the coming financial year compared to this year. But once one adjusts for top ups received this year, and for new responsibilities (as one should) grant funding for Scottish councils is set to fall by 0.8% in real terms this April. Even if Scottish councils were to increase their council tax rates by 5% in April, their overall funding would still fall by about 0.3% in real terms.

The outlook for 2024–25 is more uncertain. However, official projections by the Scottish Government and Scottish Fiscal Commission suggest that the amount available for all public services is set to fall by 1.6% in 2024–25. If grant funding for councils is cut in line with this, overall funding for Scottish councils would fall by around 0.5% in real terms compared with 2023–24, even if council tax was increased by 5%. The fall in overall funding could be much greater if grants to councils are cut back more in order to protect spending on the NHS and the transition to net zero.

This contrasts to the outlook for funding for English councils' and schools. Substantial top-ups to council funding (targeted at social care) in the Autumn Statement mean that even if council tax is frozen in cash terms in England, funding for councils and schools south of the border will increase by around 3% in real terms in 2023–24, and by 2% in 2024–25. If council tax was instead increased by 5% a year, the increases would be 4.5% and 3.7% in these two years, respectively.

The next two years could therefore see a reversal of the fortunes of Scottish and English councils, compared with the last decade or so. Scottish councils saw smaller cuts than those in England during the 2010s, overall, and were able to substantially increase spending on schools and early-years childcare.

These are among the key findings of Chapter 4 of the inaugural IFS Scottish Budget Report, which focuses on Scottish councils’ funding and spending, including their spending on schools.

The report also looks at how Scottish councils’ spending has evolved since 2009–10.

Scottish schools spending
By 2021–22, spending per pupil aged 3–18 is estimated to have been 17% higher in real terms than in 2009–10. Most of this increase was in the last few years and partly reflects a large boost to teachers’ pay in 2019 and a substantial increase in free childcare hours for children aged 4 and 3, and for some 2-year-olds.
In contrast, spending per pupil in England was still slightly lower in 2021–22 than in 2009–10. As a result, spending per pupil in Scotland in 2021–22 was around 25% (£1,700) higher than in England, up from around 4% (£300 higher) in 2009–10.

Spending on other council services
While Scottish councils’ spending on schools and early-years provision has increased substantially since 2009–10, spending on most other council services has fallen. One exception is social care. Between 2009–10 and 2019–20, Scottish councils’ own spending on social care services grew by 4% in real terms; accounting for additional transfers from the NHS to pay for care services, and client contributions, the increase in gross expenditure was 11% in real terms.
However, other services saw big cuts. This includes spending on housing support and advice, leisure and cultural services, and central administrative services, where spending fell between approximately a quarter and a half (depending on the measure of spending used). This pattern is similar to England, although the cuts to councils’ non-education spending were somewhat smaller in Scotland, overall, than south of the border.
In the short term, Scottish councils be able to cushion cuts by making drawdowns from their reserves. Reserves almost doubled over the course of 2020–21 and 2021–22 as councils struggled to spend all the additional pandemic-related funding they were provided with.

David Phillips, an associate director at the IFS, and an author of the report said, "Scottish councils faced smaller cuts during the 2010s than those south of the border – with schools and early-years childcare the biggest beneficiaries of this. Indeed, by 2021–22, Scottish pupils were benefiting from around a quarter more spending each than English pupils. The Scottish Government will be hoping that this starts to translate into improved educational performance soon, given concerns about Scotland’s decline in international educational rankings.

Looking ahead though, these trends look set to start to reverse. Scottish councils’ funding is likely to fall in real terms over the next two years; at the same time, funding for English councils and schools is set to see a not insignificant funding boost. If Scottish councils are directed to protect social care and schools from cuts, that will intensify the squeeze on other services, which often bore the brunt of earlier rounds of austerity.’

Note
This article is from the Institute for Fiscal Studies.
To read it on the IFS site go to -
https://ifs.org.uk/news/scottish-councils-may-face-cuts-over-next-two-years-even-5-council-tax-increases
Author - David Phillips, Associate Director
David is Head of Devolved and Local Government Finance. He also works on tax in developing countries as part of our TaxDev centre.