Scotland Finance

Three key questions for local government finance in Scotland


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Part two, in a roundup of a recent LGIU and Solace seminar on local government finance in Scotland, this article examines three themes of the state of local government finance in Scotland. Complimenting our ongoing survey and report on the state of local government finance in Scotland, the background for this article is from a roundtable discussion with senior officers in Scottish local government on the “behind the scenes” picture of local government finance in Scotland.

To find the first article examining five international lessons for local government finance in Scotland from LGIU’s recent programme of research, click here

The context

An ever-growing list of councils declaring or warning of Section 114 notices indicates the pressing concern over the financial sustainability of local government in England. Aiming to get an inside look at the state of local government finance in England, in early 2023, LGIU sent an online survey to council leaders, chief executives, finance directors and cabinet members responsible for council resources across England.

Having received 160 responses from 138 unique councils spread across political control, regions and types of authority, this offers an important lesson to Scotland on key questions to ask ourselves ahead of Budget 2024/25.

While acknowledging the structural differences between the two systems of local government finance, having a decade-long and in-depth evidence base for English local government finance means we can outline the key questions to ask ourselves ahead of Budget 2024/25.

Theme 1: How sustainable are council finances?

In England, only about 14% of respondents said they were confident in the sustainability of council finances. A decrease of around 6% from 2016, the downward trend of confidence in English local government finance echoes the warning bells raised in Scotland over the use of council reserves.

In Scotland, Audit Scotland shows how Two-thirds of councils intended to use reserves to bridge the 2022/23 budget gap (Accounts Overview 2023). While the recovery from Covid-19 meant funds were carried forward via reserves, current debates over freezing Council Tax create a possible shortfall between £148m and £183m for 24/25 (Fraser of Allander).

Once again, as councils are forced to dip into reserves to meet statutory requirements for balanced budgets, one key question for our survey in Scotland will be how confident councils are on the sustainability of local government finance in Scotland.

Theme 2: What drives budget pressures?

Drivers of council budgets in England. From the State of local government finance in England 2023.
Drivers of council budgets in England. From the State of Local Government Finance in England 2023.

In England, our research indicated how a “perfect storm” of inflation, the cost of living crisis and workforce shortages means that councils are increasingly reliant on commercial activity to fill the gap in their funding. In fact, 52% of respondents said they would increase commercial activity this year, primarily through local housing and commercial developments and asset sales.

Recognising that in Scotland, the lack of a general power of competence means that local government finance is not as heavily reliant on commercial activity, our roundtable discussion did highlight three drivers of council budgets.

  1. Ring-fenced funding. While Audit Scotland and COSLA provide different estimates for the nature of ring-fenced funding pre-Verity House Agreement, both show that ring-fenced funding streams linked to specific policies from the Scottish Government are a trend that is increasing.
  2. Education. For one participant, “education is becoming the NHS of local government”, and others remarked on the dominance that providing educational services holds on budgets. In particular, the ring-fencing and rules over teacher numbers, in effect, tie the hands of councils.
  3. Misunderstandings of local government finance. Councils acknowledge the tough position of public service finances, but a growing issue is the myths around the funding of councils.

For many civil servants and the public, the baseline assumption is that Council Tax funds services. However, few appreciate that Council Tax only raises around 19% of general council revenue spending. This means tackling the issues of financial sustainability in local government means disseminating research to educate the public and partners in Government is as important as the research itself.

Theme 3: What next?

“Actions speak louder than words, and we haven’t seen those actions of the verity house agreement of late.”

The overriding theme of the roundtable discussion was the need to enforce the actions contained in the Verity House Agreement and the Programme for Government with actions.

Uncertainty, and perhaps intentional ambiguity, from the Scottish Government over what it means to “fully fund the freeze to ensure councils can maintain their services” further heightens the apprehension concerning Budget 2024/25 and the finance circular in 2024.

However, as LGIU progresses with a survey and report on the State of Local Government Finance, we aim to quantify and build the evidence base of local government finance in Scotland and contribute to the sector’s growing calls to acknowledge the issue of financial sustainability.

Join us for the launch of our report on The State of Local Government Finance in Scotland on 13 Dec 2023.

This session is open exclusively to LGIU members. Not a member but interested in this report launch? Reach out to us to explore how we can work with your organisation!



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