2024 State Of Local Government Finance In Scotland

28th November 2024

A report published on 27 November 2024 by LGIU (Local Government Information Unit) looks at the state of funding for councils by the Scottish Government.

Confidence in the sustainability of council finances is critically low. Seventy per cent of all councils believe they could be unable to pass a balanced budget within the next five years.

Times are increasingly hard for local authorities, with ongoing pressure from the cost of living crisis and inflation adding new burdens on top of long-term challenges: demographic change, financing of Scottish Government priorities, and pressures with recruitment and retention of staff.

Councils are taking every measure available to balance their budgets: raising council tax when they can, reducing expenditure and increasing fees, sharing services, charges and commercial activity. However many councils believe this will still not be enough to prevent the risk of an unbalanced budget.

Satisfaction with the Scottish Government is alarmingly poor across the sector. Not a single respondent said they were happy with the Scottish Government's performance on delivering a sustainable funding system or considering local government in wider policy decisions.

The sector is in favour of widespread reform, including multi-year financial settlements, ending ring-fencing, and reform of council tax.

The sector is optimistic about the role that local government, sufficiently funded and empowered, could have to advance the prevention agenda, tackle local and national shared priorities, deliver services and empower communities.

Recommendations - immediate
In order to address the risk of a Scottish council being unable to pass a balanced budget, there should be an agreed national convention between Scottish Government and local government to cover procedures and actions that would then be needed to set a balanced budget.

Implement and enshrine in legislation the principles of the Verity House Agreement, and commit to an annual review by Scottish Parliament covering the key principles.

Recommendations - medium to longer-term
Local government finance should with urgency be reconsidered as a whole system approach to funding, considering wider public finances, looking into the suitability of every aspect: council tax, the funding formula, increasing the range of revenue-raising options available for councils, methods for redistributing funding between territories and linked to a review of the role of councils in Scotland.

The role of local government as both a key component of democracy (as per the Democracy Matters review) and part of the public sector should be set out more clearly, with an aim to confirming, and then protecting through statute, the exact roles, powers and responsibilities of local government.

Scottish and local governments should be brought together in a standing commission or representative body, which should be defined in statute with a key role in pre-budget engagement processes, negotiation of the funding settlement, and any and all decisions that have an impact on councils.

The exact responsibilities and membership of this body should be a matter for future discussions, but should at a minimum include ministerial representation.

Introduction
"Staff in local authorities are increasingly in a position of gatekeeping a smaller and smaller pot of resource for a wider and wider pool of demand and increased expectations. This is fueling dissatisfaction with local government, potentially disempowering local communities as represented by their elected members and causing conflict between those with competing needs/rights."

Local government finances in Scotland are hanging by a thread. However, the thread has not yet broken. This is the message from our survey results. These findings present a stark warning that although councils are in a precarious financial position and there is not much time until the sector starts to see potentially catastrophic consequences. Change is urgently needed.

Statistical evidence from Accounts Commission and SPICe have outlined the overall financial sustainability of local government, noting that although councils as a whole are financially sustainable in the short term, in the medium term there are rapidly increasing demand pressures, ring-fencing of funds, increased use of reserves and risks to service quality, which indicate that local authority finances are in a poor state.

LGIU research adds another perspective to this evidence: the view from the inside. We asked council leaders, Chief Executives and Chief Finance Officers a series of questions on their experiences trying to run councils in the last financial year, and their views on how councils' financial sustainability could be assured. We had 56 responses, representing 84% of Scotland's councils, with a roughly equal mix of leaders, CEOs and CFOs and covering a wide range of urban, rural and island geographies.

The results make for grim reading about the state of local government finances. They paint a picture of a system under continual and significant strain, with the scale of financial pressures increasing from 2023.

Councils emphasised:

the reductions in levels of service that they will have to make;
the tax increases;
the burdens imposed by Scottish Government priorities;
the ongoing strains of inflation;
increased interest rates, and;
the demand pressures caused by demographic changes and the cost of living crisis.
Overall, respondents were sounding an alarm on the scale of the crisis facing local governments in Scotland.

However, respondents were keen to suggest ways out of the current financial predicament. Chief amongst these were multi-year financial settlements, reforms to council tax, end to ring-fencing and directed spending, and further exploration of other types of fiscal devolution, such as a local share of national taxes.

Local government, if funded properly, can and does have a transformative effect on quality of life in communities. Respondents wrote about how they could improve transport, reduce loneliness, improve the long-term determinants of health, wellbeing and life opportunities, invest in prevention to tackle the route causes of issues before they arise, and harness the creativity and innovation that they have demonstrated over the years of financial strain to improve services, but only if they are funded adequately.

The challenge now is how do we move from the situation we are in now, to one where councils are able to deliver the transformative impact they are confident that they could deliver. Reform will be necessary, empowerment will be essential, and trust between Scottish Government and local government - in a critically poor state - must be restored.

Council finances: hanging by a thread?
We asked senior council representatives how confident they were in the sustainability of local government finances. Not a single participant out of the 55 responses said they were confident. This is unprecedented in all of our years of running this survey in England, and compared unfavourably to our survey in Scotland last year, where only one person said they were confident. But one is more than none, which is the position we are in now.

In order to assess why this is, we also asked how likely respondents thought it was that they would be unable to pass a balanced budget - first in the next financial year, and then in the next five years. 27% of respondents (12 unique councils) answered that they thought it was likely they would be unable to pass a balanced budget in the next financial year. This rose to an extraordinary 71% (23 unique councils) over the next five years.

This has never happened before in Scotland. So far, no council has been unable to balance their budget despite repeated warnings that this is likely to occur in the near future.

In England there is a clear legislative process, whereby councils can issue a section 114 notice, indicating that their Chief Finance Officer believed it would be impossible to pass a balanced budget in-year. This is commonly referred to as "effective bankruptcy" and results in a freeze on a council incurring new expenditure and central government intervention. Several English councils have been through this in the past two years, though it was previously much more rare.

In Scotland there is no legislative equivalent, and, as recently outlined in a joint LGIU and CIPFA research report, no obvious appetite in the local government sector (at least amongst finance officers) to introduce one. Instead, there is a clear preference for preventative action, including reassessments of local government obligations to meet existing Scottish Government spending priorities (such as on teacher numbers), and a recommendation that there should be a clear national convention between Scottish Government and local government to cover the processes that would take place should a council be unable to pass a balanced budget.

What the results of this survey show us is that the threat of an unbalanced budget is felt across the sector. As one respondent put it:

"Not sure what it will take for any change but am certain at least one Council will go bankrupt within the next 2 years - will see if that makes any difference..."

Read the full report HERE

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