Warning Scottish councils could go 'bankrupt' unless government funding is dramatically increased

Cosla says ‘tough choices’ will need to be made unless the current situation improves, ahead of the Scottish budget on December 19

The Scottish Government is being told to increase council budgets. Image: Matt Cardy/Getty Images.

New warnings say councils are at risk of becoming “bankrupt” if Scottish Government funding is not dramatically improved.

Cosla, the umbrella body for Scotland’s 32 councils, made the warning after two English councils effectively declared themselves bankrupt.

Both Birmingham and Nottingham have issued section 114 notices, which prevents spending on virtually everything but the bare bones.

Cosla president Shona Morrison. Picture: Cosla

However in a briefing paper published ahead of the Scottish budget, which will be announced on December 19, Cosla says this could soon become a reality north of the border.

The Scottish Conservatives are also warning this will become a “looming prospect” for many local authorities unless the SNP-Green government gives them the cash they need.

In the briefing paper, Cosla says: “There is a risk this becomes the reality for Scottish councils if the funding by the Scottish Government does not match growing cost pressures.”

Katie Hagmann, Cosla’s resources spokeswoman, also warns that without improvements in council funding, “tough choices” could mean essential services local authorities provide “will cease”.

This all comes after First Minister Humza Yousaf announced a council tax freeze at the SNP party conference, surprising council leaders who had not been consulted before the decision was made.

Cosla says this council tax freeze, coupled with the impact of inflation, means local authorities need almost £14.4 billion in their 2024/25 budgets to “stand still”.

No details have emerged yet on how much money local authorities will get to compensate for the council tax freeze, but the government insists the policy will be fully funded.

Councillor Cammy Day, leader of Edinburgh City Council, previously told The Scotsman it could lose out on £20 million if the tax freeze is not fully funded.

Cosla added: “Last year, councils faced a £1bn funding gap just to keep services going.

“This year there have been increased costs and greater demand on services, meaning councils have had to prioritise spend away from libraries, community and leisure centres.”

Only last week it was revealed Stirling Council could close all but one of its 17 libraries and replace them with mobile book vans in a bid to save cash.

Ms Hagmann added: “Sadly, our reality right now is an extremely challenging financial climate coupled with years of real-terms cuts to council budgets, while additional policy commitments are continually being introduced.

“If this situation doesn’t start to improve soon, it will mean tough choices being made and the many essential services councils currently provide will cease - services that not only address problems on the ground, but actively prevent bigger issues occurring down the line.”

She says Cosla has been “clear that cutting frontline staff isn’t the answer”, and without “adequate and sustainable funding” councils will not be able to tackle poverty, support efforts towards net zero or provide “sustainable public services”.

The Scottish Conservatives now say this needs to be a wake-up call to the Scottish Government ahead of their budget just before the Christmas break.

Liz Smith, the party’s finance and local government spokeswoman, said: “The fact that councils are even having to make this eleventh hour plea is a damning indictment on years of brutal SNP cuts.

“Scotland’s local authorities have been struggling to provide core services for years now and it appears they may finally be nearing breaking point.

“Unless the SNP finally give local councils the fair funding deal they deserve, bankruptcy will become a looming prospect for councils across the country.”

It is worth noting there is no such thing as bankruptcy in Scotland - the technical term is sequestration.

Councils cannot go bust in the same way individuals or companies can, and there is no legal avenue for them to be liquidated.

The legislation around this is also different in Scotland than it is in England, as local government is devolved to Holyrood.

In practice, however, councils in Scotland are obliged to balance their books and if they cannot deliver a plan for a balanced budget, a chain of call-ins via external auditors could ultimately see government civil servants taking over.

Only a few weeks ago Falkirk Council warned that unless “significant steps” were taken it would not be able to balance its budget and would have to resort to this extreme measure.

Similarly the section 114 notices issued in Birmingham and Nottingham do not apply in Scotland.

But in theory a council’s chief finance officer could take a nearly identical approach - a meeting of the council would be called to pass an amended budget.

Scottish councils are also prohibited from embarking on high-risk commercial investment gambles, which have ruined several authorities in England - for example, Woking ran up a £1.2bn deficit by ploughing cash into skyscrapers, shops and parking facilities.

Cosla insists every pound invested in local government “has the potential to generate savings elsewhere across the public sector, for example in health and criminal justice”.

Its president Shona Morrison adds: “Councils really are the key to unlocking the best for our communities - from safe, quality housing, to clean streets, to supporting the most vulnerable people to thrive, to education and social care.

“The importance of these services cannot be emphasised enough, but they need to be funded properly.”

With councils having “no choice but to protect core statutory services”, Ms Morrison says the “unprecedented financial challenges we are all experiencing” mean there are “risks to many other local services our communities rely on, such as programmes supporting children and young people, sports and leisure facilities, and public transport.”

She added: “The campaign we are launching today clearly illustrates not only the challenges our councils are facing, but the great potential they have if funded properly.

“We will continue to work closely with the Scottish Government and other partners to get the best deal for our councils and our local communities.”

A spokesperson for the Scottish Government however argues there has been a real-terms increase in funding to local government in the past financial year.

They said: “Scotland is facing the most challenging budget settlement since devolution as a result of sustained high inflation and a UK Government autumn statement that failed to deliver the investment needed in Scotland’s public services.

“The Scottish Government has increased the resources available to local government in 2023/24 by more than £793m, a real-terms increase of £376m or three per cent, compared to the 2022/23 budget figures.

“Work is also ongoing with Cosla to establish a new fiscal framework for councils through the Verity House Agreement, a landmark agreement that is forging a stronger partnership between the Scottish Government and local councils through the spirit of collaboration and engagement.

“Decisions on local government budget allocations for future years are subject to the outcome of negotiations with Cosla, the results of which will be confirmed in future Scottish budgets.”