The cost of delivering services in Scotland is rising faster than available funding which ‘risks the financial sustainability’ of councils over the next three to five years, auditors warn.

A new report by the Accounts Commission found that while funding from the Scottish Government to local authorities has increased, it has failed to keep pace with rising costs and demand.

The commission reports that councils face a budget gap of nearly £1bn by 2027.

In 2024/25, they met 90% of their savings targets, but reported a collective overspend on the costs of delivering services for the first time in six years. This has led to increasing debts and a reliance on reserves.

Scottish Government funding to deliver capital projects has also fallen which has forced councils to take on more debt to deliver local infrastructure projects such as building schools and housing.

Derek Yule, member of the Accounts Commission, said: ‘Despite increased funding and income, councils are struggling to cope with the financial pressures they face. A growing gap between costs to deliver services and funding available is risking the financial sustainability of councils.

‘We’re already seeing the impact on services – the pace of improvement is slowing, some services are being cut or are harder to access and there are growing levels of dissatisfaction from communities. Councils must fundamentally reconfigure how they operate and deliver services.’

Commenting on the report, Cllr Ricky Bell, COSLA spokesperson for Resources, said: ‘Councils have worked hard to manage budgets responsibly, delivering significant savings year on year and meeting the vast majority of savings targets.

‘However, there is a clear limit to what can be achieved without impacting the services communities rely on. Increasing reliance on reserves, borrowing and fees and charges is not a sustainable long-term solution.’