Major risks to councils' financial sustainability, watchdog warns

Scottish councils face major risks to their financial sustainability in the coming budget year, with the Accounts Commission warning that rising costs and demand are still expected to outpace the money available.

The watchdog said councils are heading into 2026-27 with a projected £529 million gap on day-to-day spending, even after a modest real-terms rise in Scottish government funding and an expected boost from higher council tax receipts.

The report, published on June 11, says the pressure is being driven by pay commitments, demand growth and a squeeze on capital spending. It warns that councils may be forced to borrow more, use reserves or redesign services if they are to stay within budget.

Funding is still not enough

The Scottish government is due to provide £15.7 billion for local authorities in 2026-27, a real-terms increase of about 1%.

Of that total, £15 billion is revenue funding for day-to-day operations, up 2% year on year. But the Accounts Commission said much of the new money is already spoken for before councils even begin the year.

About £244 million of the new £770 million in revenue funding has already been allocated to previously agreed teacher pay increases, limiting the flexibility councils have to meet other pressures.

The commission said the finances therefore look tighter than the headline funding settlement suggests. More money is arriving, but a large share is already committed, leaving less room for local authorities to absorb higher costs elsewhere.

The report also said planned savings of £180 million will increasingly affect services people rely on, which adds to the pressure on councils trying to balance their books.

Council tax rises help, but do not close the gap

Councils are expected to raise council tax by an average 7.7%, which the report says would bring in an extra £248 million over the next 12 months.

That increase will ease some pressure on budgets, but the watchdog said it is not enough to offset the wider mismatch between income and spending.

The Accounts Commission’s warning is that the combination of a funding rise, council tax growth and savings plans still leaves a large shortfall. In its view, the gap remains large enough to pose major risks to financial sustainability unless councils change how they deliver services.

That means the next round of budget decisions is likely to be difficult even before local councils start making choices about service levels, staffing and capital projects.

Capital spending is being squeezed

The report said the capital budget for infrastructure and investment will be £669 million in 2026-27, down 15%.

That matters because capital spending covers work such as housing, roads and other longer-term investment. The watchdog said the lower capital allocation could leave councils relying more heavily on borrowing or reserves to fund housing and other infrastructure spending.

The commission’s concern is not only the size of the annual funding gap, but also the way weaker capital budgets limit councils’ ability to maintain or renew physical assets. That can create knock-on costs later if investment is delayed.

The report suggests the capital squeeze is part of the same financial pressure that is hitting day-to-day services. Councils may be able to keep projects moving, but only by using tools that can reduce flexibility in future years.

Social care remains a major pressure point

Social care is one of the biggest spending areas highlighted in the report, with councils expected to spend £4.3 billion on it in 2026-27.

That scale of spending shows how central care services are to local government finances. It also explains why even small rises in demand or staffing costs can quickly put budgets under strain.

The Accounts Commission said the wider financial problem is being driven by rising demand and higher costs across the sector. Social care, housing and other frontline services are all exposed if councils cannot reshape provision to match available resources.

The commission did not single out individual councils, but its warning is system-wide. The pressure is affecting local government as a whole rather than being confined to one or two authorities.

What councils may have to do next

The report says councils may need to borrow more or use reserves to manage spending on housing and other infrastructure.

It also says they may have to redesign services if they are to live within their means. That is a stronger warning than a simple call for savings, because it suggests incremental cuts may not be enough.

The trade-off is straightforward: councils can keep balancing the books in the short term by using reserves or borrowing, but those choices can make later years harder. They can also protect some services only by changing how those services are delivered.

For local taxpayers, the risk is that council tax rises continue while services still come under pressure. For councils, the risk is that the financial arithmetic becomes harder each year even after funding increases.

What happens now

The immediate question is how the Scottish government and local authorities respond to the report.

The Accounts Commission’s warning is likely to increase pressure on ministers to explain how councils are supposed to protect essential services while absorbing higher running costs and reduced capital flexibility.

It will also sharpen the budget debate inside councils, where officials will need to decide how much of the gap can be covered through local tax rises, reserves or borrowing before service cuts become unavoidable.

The broader message from the watchdog is that higher funding has not removed the underlying problem. Demand and costs are still rising faster than the resources available to meet them, and that leaves councils exposed going into 2026-27.