The Accounts Commission said the financial position of Scottish local authorities was "increasingly unsustainable" with Scottish Government funding to councils dropping "significantly", and it recommends a "transformation" in how services are delivered in future.
Over the last three years, 23 of Scotland's 32 local authorities have drawn from their reserves, with a net reduction in the amount held by councils of £45 million at the end of last year, the second year in a row when council savings have seen a net reduction.
The report, published today and compiled by Audit Scotland for the Commission, comes six months after the Scottish Government also found that local authorities were using their savings last year to pay for day-to-day spending.
The Accounts Commission, the local government finance watchdog, said the financial pressures on councils were likely to get worse with demand for services growing and government funding reducing in real terms.
Council income "straining"
Graham Sharp, chair of the Accounts Commission, said: “The current position is increasingly unsustainable. There’s a need for councils to continue rethinking how they deliver services, as well as look at ways to increase their income. For some councils in Scotland, finding ways to do this is getting more and more difficult as their current income doesn’t match demand.”
The report says that councils "face the increasing challenge of meeting changing and growing demands on their services, but their income is straining to keep pace" and that while Scottish Government funding has been "relatively stable" this year, since 2013/14 it has fallen by 7.6 per cent in real terms.
It states that the "ongoing use of reserves to manage funding gaps is not sustainable" and adds "after several years of tightening budgets, we recognise councils have already made savings through restructuring and efficiencies, but transformation in terms of service redesign is required to deal with the further reductions forecast."
"Some councils planned to use reserves to present balanced budgets," the report states. "An analysis of data from a sample of 18 councils shows that planned use of reserves for 2018/19 was £52 million. The combined total funding gap for these councils was £272 million, of which planned use of reserves represented 19 per cent. The actual use of reserves by the sample of 18 councils was higher than planned at £71 million."
While the report states that reserves "play an important role in good financial management of councils", it says they are there to be used to invest in major projects or respond to unexpected events, not for day-to-day services.
It names West Dunbartonshire, South Ayrshire, and Moray as councils which have seen "notable reductions" in reserves, £6m (28 per cent), £7m (17 per cent) and £4m (16 per cent) respectively.
Rainy day fund "raided"
According to the report, in 2018/19 Scottish council revenue income totalled £17.7 billion - up from £17.3bn in 2017/18. However while government funding increased by 1.1 per cent in cash terms in 2018/19 it was a 0.7 per cent decrease in real terms (where figures are adjusted for inflation so that they are comparable to other years).
And it says that since 2013/14, Scottish Government funding to councils has reduced by 7.6 per cent in real terms, with councils managing the shortfall through savings and spending reserves. However funding to local government in 2019/20 has increased by 2.9 per cent in cash terms, or 0.9 per cent in real terms.
Overall Scottish Government funding to councils has dropped more significantly than other services, which have seen a 0.4 per cent drop in real terms since since 2013-14.
Scottish Conservative local government spokesman Alexander Stewart said councils were "raiding their rainy-day fund just to keep things going".
He added: "That’s unsustainable, and before long these reserves built up over decades will be gone. That’s what happens when you have an SNP government which has cut local authority funding to the bone.
“The nationalists need to start getting their priorities right. They’ve been in charge of local government for more than 12 years and are entirely responsible for this terrible state of affairs.”
Scottish Labour's communities spokesperson Pauline McNeill added: “With Scotland facing the prospect of several more years of Tory cuts it is more important than ever that we have a redistributive Scottish Government and well-funded local councils as a first line of defence.
“Today’s report clearly shows the SNP is not that redistributive government Scotland so badly needs. Not content with the cuts imposed from Westminster the SNP have cut our councils to the bone with local government funding being cut by 7.6 per cent since 2013/2014.
“The SNP says it is stronger for Scotland but faced with a callous Tory government it decides to slash funding for local councils, pushing services and living standards down. The people of Scotland deserve a radical, distributive government in Holyrood to protect local communities from the cuts imposed from Westminster."
Cosla says councils "hands are tied"
The report also found that a "growing proportion" of Scottish Government revenue funding to councils is committed to national policy initiatives, leaving local authorities with less flexibility in how they spend their funds.
Gail Macgregor, the resources spokeswoman for local authority body Cosla, said councils had "borne the brunt" of government cuts. She added: "We make key financial decisions for our communities every day. How can a council do all it can to tackle child poverty, combat the climate crisis, improve well-being and foster inclusive economic growth if our hands are tied by financial constraint?
"This cannot continue. For the benefit of communities across Scotland, the Scottish Government must make the choice to invest in local government. We need fair funding for councils and a return to local democratic decision-making as quickly as possible."
The report, Local Government in Scotland, also says Integration Joint Boards are struggling to balance their budgets; in 2018/19, 19 of Scotland’s 30 IJBs needed additional funding, or recorded deficits.
The Scottish Government today said councils received fair funding settlements - and threw doubt on the Accounts Commissions figures for 2018/19.
A spokesperson said: “Despite further UK government cuts to the Scottish budget, we have ensured our partners in local government receive a fair funding settlement, delivering a funding package of £11.2 billion for all local authorities in 2019/20 – a real-terms increase of more than £310 million, or 2.9 per cent.
“Contrary to the Accounts Commission’s claim that local authority revenue funding reduced by 0.7 per cent in real terms, Scottish Government revenue funding in 2018-19 increased by 0.3 per cent in real terms compared with 2017-18.”
However Audit Scotland said it had been consistent in how it presented the funding figures, including a last minute £34.5m of additional funding paid to councils on March 28, 2018. It includes this in the 2017/18 figures, rather than 2018/19 statistics, to avoid double counting of this money and to meet accounting standards.