Council Budget Gaps Highlighted By Audit Scotland Report

16th January 2024

A report published today (16 January 2024) by Audit Scotland highlights the financial situation facing Scottish councils. Scottish Government will say the cash given to councils is at record levels but the report shows that for a variety of reasons the money is not keeping up with the increased costs of delivering services. The squeeze on council funds has been happening over the last 10 years and is perhaps most visible in education and roads. The council tax freezes have affected the levels over following years even if they are funded.

Budget gaps reflect a point in time when councils begin to set their budgets and is the difference between anticipated expenditure and funding and income.
At the time of budgeting, the 30 councils in our sample identified
budget gaps totalling £476 million for 2022/23, compared to £350 million for the same sample of councils for 2021/22. This represents a budget gap of 2.9 per cent of the net cost of services (Exhibit 5).

Closing a budget gap for councils will mean a variety of measures are required and hard decisions for councillors to balance the budget that they are legally required to do. The hard decisions may include cutting services, cutting staff numbers, reduction to grants and spending less across the board.

Frank discussions are needed with local communities about the future of council services. Difficult decisions will need to be made. While councils received more money in total (from the Scottish Government, Council Tax and other sources) in 2022/23 than in the previous year, councils had less money to spend in real terms.

Councils received more funding from the Scottish Government in real terms in both 2022/23 and 2023/24 but some of that is directed towards certain policies. And increasing demand for services, inflation and the cost of living crisis means that the financial outlook for councils is extremely challenging.

Councils will have to make difficult decisions about cuts to services and how services are delivered.

The latest bulletin looks at the money councils received in 2022/23, current funding for 2023/24 and what this means for the future.

Spending on Scotland's councils
Local government is the second largest area of Scottish Government spending, although the proportion of the Scottish budget given to local government has reduced over the last 10 years.

Ronnie Hinds Interim Chair of the Accounts Commission said, "Given the funding position for councils, there is increasing reliance on reserves and savings to deliver balanced budgets. This means councils are already making difficult decisions about future service delivery and the level of service they can afford."

"There is intensifying pressures on council finances and services. Given the funding position for councils, there is increasing reliance on reserves and savings to deliver balanced budgets. This means councils are already making difficult decisions about future service delivery and the level of service they can afford. Having leadership and a workforce with the right skills will be crucial to deliver on this.

"Local government is the second largest area of Scottish Government spending, but despite rising demand for services, the proportion of funding to councils has reduced over the last decade. Urgent progress is needed to agree a funding framework between Scottish and Local Government. This will bring much-needed clarity and certainty of budgets for future years."

Total funding and income fell by 2.8 per cent in real terms in 2022/23 compared to the previous year
In 2022/23, Scotland's 32 councils received a total of £21.3 billion in revenue funding and income (funding for day-to-day spending). In cash terms this is £757 million more than the year before but in real terms (that is adjusting for inflation) it represents a real-terms decrease of 2.8 per cent (£619 million).

Council tax is an important source of income for councils, accounting for 13 per cent (£2.7 billion) of total funding in 2022/23. Councils received more income from council tax, due to an overall increase of 4.5 per cent in the amount of council tax billed and an increase in in-year collection rates of 0.5 per cent (from 95.7 per cent to 96.2 per cent). However, the amount received has not kept pace with inflation and in real terms this represents a fall in income of 2.5 per cent compared to 2021/22.

An increasing proportion of Scottish Government funding is formally ring-fenced or provided with the expectation it will be spent on specific services

Specific revenue grants funding totalled £786 million in 2022/23 and must be used to fund specific policies or initiatives such as for early learning and childcare expansion and the pupil equity fund.

In addition to specific revenue grants, other funding received by councils is directed for national policy initiatives. Though not formally ring‑fenced, this funding is provided with the expectation that it will be spent on specific services.

Examples of directed funding in 2022/23 include: £140 million for Local Government pay deals, £145 million for additional teachers and support staff and £234 million for the annual pay uplift to social care staff in commissioned services.

We calculate that ring-fenced and directed funding increased to 25.7 per cent in 2022/23.

While directed funding is important to help deliver national priorities, it restricts councils from making decisions about how funds can be used at a local level to meet local need. The Verity House Agreement, signed in June 2023, includes a commitment to a default position of ending ring‑fencing or directed funding unless there is a clear joint understanding of the rationale for such arrangements.

Over the last decade, the proportion of the Scottish Budget allocated to local government has been reduced

Local government is the second largest area of Scottish Government spending; however, this proportion has reduced over the last decade. In 2013/14 local government (capital and revenue) accounted for 30 per cent of the total spend. In 2022/23, it had fallen to 23 per cent. Over this period, local government spend has been relatively static in real terms while total Scottish Government spend increased by 37 percent. Areas of growth include health and social security.

Read the full report HERE
Pdf 33 Pages