Audit Scotland Report - Financial Bulletin 2021/22
Argyll and Bute Council · 20 June 2023
Back to Audit and Scrutiny Committee — 20 June 2023 and its agenda
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ARGYLL AND BUTE COUNCIL AUDIT AND SCRUTINY COMMITTEE FINANCIAL SERVICES 20 JUNE 2023 LOCAL GOVERNMENT IN SCOTLAND – FINANCIAL BULLETIN 2021-22 1. SUMMARY 1.1 The purpose of this report is to present the main issues raised in the recent Local Government Financial Bulletin 2021-22 report by the Accounts Commission and to highlight relevant matters to the Committee. 1.2 The report is split into three parts: • Key messages from Local Government finances for 2021-22. • Part 1 considers councils’ financial summary for 2021-22. • Part 2 considers the financial outlook for councils in 2022-23. 1.3 The report’s key messages are listed on Page 3 of the document and are summarised as follows: • Despite additional Covid-19 funding, councils continued to face significant financial challenges during 2021/22, requiring significant savings to deliver balanced budgets and increasingly difficult choices to be made about spending priorities. • In 2021/22, councils’ savings performance continued to improve and total usable reserves increased, which councils have used to contribute towards meeting budget gaps arising from service demand and budget pressures. • An increasing proportion of local government funding is now either formally ring-fenced or provided with the expectation it will be spent on specific services and is calculated to be around 23 percent of total revenue funding in 2021/22. • Councils face the most difficult budget-setting context seen for many years with the ongoing impacts of Covid-19, inflation and the cost of living crisis. They will need to continue to make recurring savings and also make increasingly difficult choices with their spending priorities, including, in some cases, potential service reductions. • Delivering recurring savings and reducing reliance on using reserves to fill budget gaps will be key to ensuring longer-term financial sustainability. 1.4 The report also contains a number of exhibits some of which show where Argyll and Bute Council is placed compared to other Local Authorities. • Argyll and Bute Council had the smallest budget gap of the 32 Scottish Councils as a proportion of net cost of services for 2021-22 which demonstrates sound financial management. • The Council achieved the majority of its savings targets for 2021-22. • Similar to most Council’s, Argyll and Bute’s Useable Reserves increased in 2021-22 placing it seventh highest across Scotland ensuring financial risks or unplanned expenditure are able to be managed.
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• The Council’s Covid-19 reserves as a percentage of the total general fund balance for 2021-22 were the second lowest in Scotland which demonstrates that the funding provided was required and used timeously. • Argyll & Bute had the fourth lowest Budget Gap for 2022-23 as a percentage of net cost of services across all 32 councils which again demonstrates sound financial management. 2. RECOMMENDATIONS 2.1 The Audit and Scrutiny Committee is asked to consider the contents of the Accounts Commission report. 3. IMPLICATIONS 3.1 Policy - None. 3.2 Financial - None. 3.3 Legal - None. 3.4 HR - None. 3.5 Fairer Scotland Duty - None. 3.5.1 Equalities - None. 3.5.2 Socio-Economic Duty - None. 3.5.3 3.6 Islands Duty – Climate Change - None. None. 3.7 Risk - None. 3.8 Customer Services - None. Kirsty Flanagan Executive Director/Section 95 Officer 30 May 2023 Policy Lead for Finance and Commercial Services - Councillor Gary Mulvaney For further information contact Anne Blue, Head of Financial Services anne.blue@argyll-bute.gov.uk Appendix 1 - Audit Scotland Local Government in Scotland Financial Bulletin 2021- 22.
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Local government in Scotland Financial bulletin 2021/22 Prepared by Audit Scotland January 2023 Appendix 1
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2Financial bulletin 2021/22 Contents Key messages 3 About this report 5 1. Councils’ financial summary 2021/22 6 2. Councils’ financial outlook 22 Audit team The core audit team consisted of: Blyth Deans, Adam Bullough, Chris Lewis and Martin Allan under the direction of Carol Calder.
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3Key messages Key messages Local government finances for 2021/22 1 Despite additional Covid-19 funding, councils continued to face significant financial challenges during 2021/22, requiring significant savings to deliver balanced budgets and increasingly difficult choices to be made about spending priorities. 2 In 2021/22, councils’ savings performance continued to improve and total usable reserves increased, which councils have used to contribute towards meeting budget gaps arising from service demand and budget pressures. 3 In 2021/22, Scottish Government revenue funding to councils increased by 5.3 per cent in real terms. This represented the first real-terms increase on the 2013/14 revenue funding position since 2015/16 (excluding one-off Covid-19 money). In 2021/22, revenue funding levels for local government and other parts of the Scottish Government budget (excluding Covid-19 funding) have converged back to a level similar to eight years ago. 4 An increasing proportion of local government funding is now either formally ring-fenced or provided with the expectation it will be spent on specific services. We calculate this to be 23 per cent of total revenue funding in 2021/22. Ring-fenced and directed funding helps support delivery of key Scottish Government policies but removes local discretion and flexibility over how these funds can be used by councils.
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Key messages 4 5 Councils have noted that Covid-19 and inflationary costs are having an impact on capital projects. If these issues persist, they will present risks to councils’ capital programmes which form a necessary component of modernising services to deliver improved outcomes for local communities. Outlook for local government finances 6 Councils face the most difficult budget-setting context seen for many years with the ongoing impacts of Covid-19, inflation and the cost of living crisis. They will need to continue to make recurring savings and also make increasingly difficult choices with their spending priorities, including, in some cases, potential service reductions. 7 Two-thirds of councils intend to use reserves to help bridge the 2022/23 gap between anticipated expenditure and revenue (budget gap) of £0.4 billion but this reliance on non-recurring reserves is not sustainable in the medium to long term. Delivering recurring savings and reducing reliance on using reserves to fill budget gaps will be key to ensuring longer-term financial sustainability. This makes the case for a continued focus on service reform, based on strong engagement with communities, more important now than ever.
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5About this report About this report 1. This bulletin provides a high-level independent analysis of the financial performance of councils during 2021/22 and their financial position at the end of that year. It also sets out some of the longer-term financial challenges facing councils in the context of the Scottish Government’s Resource Spending Review and the cost of living crisis. 2. The Accounts Commission’s wider local government overview report will be published in May 2023 and will include further analysis of the financial information presented in this bulletin along with wider commentary on the financial and performance challenges facing local government. 3. Our primary sources of information for the financial bulletin are councils’ 2021/22 audited accounts, including management commentaries and the 2021/22 external annual audit reports, where available. We have supplemented this with data collected as part of a data set request issued to local auditors in October 2022. 4. The Covid-19 pandemic has again created challenges that have affected the preparation of this report. The rescheduling of audit timetables meant that audited accounts did not require certification until 30 November 2022. Ten sets of accounts were certified by the revised deadline, with a further 16 signed off thereafter. As at 20 December 2022, five councils’ accounts are still to be certified; therefore, analysis in this report is based on 27 sets of audited accounts and five sets of unaudited accounts. 5. We refer to ‘real-terms’ changes in this bulletin. This means that we are showing financial information from past and future years at 2021/22 prices, adjusted for inflation so that they are comparable. To make that comparison we use gross domestic product (GDP) deflators to adjust for inflation, which are published quarterly by HM Treasury. GDP deflators are the standard approach adopted by both the UK and Scottish governments when analysing public expenditure. As a result of the way that GDP is calculated, Covid-19 resulted in volatility across 2020/21 and 2021/22. To compensate for this, and to provide meaningful comparisons between years, we have used an average GDP growth rate across 2020/21 and 2021/22 in our calculations to separate inflation (changes in prices) from changes in outputs and those largely attributable to Covid-19 spending. 6. We also refer to figures in ‘cash terms’ in this bulletin. When we use this term it means that we are showing the actual cash or money paid or received.
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6 Chapter title/key messages 1. Councils’ financial summary 2021/22 1. Councils’ financial summary 2021/22 Total revenue funding and income 7. Total revenue funding and income to councils was £20.3 billion in 2021/22, a £0.3 billion (or one per cent) decrease on the previous year in real terms (one per cent increase in cash terms) (Exhibit 1, page 7). The majority (55 per cent) of this funding comes from the Scottish Government, with the remaining balance from other sources, see Exhibit 1 for a full breakdown. 8. Councils have received a range of new and additional funding amounting to £1.3 billion in 2020/21 and £0.5 billion in 2021/22 to support them in dealing with the financial impacts of the Covid-19 pandemic. This additional Covid-19 funding has decreased as a proportion of overall council funding as the pandemic has progressed, from six per cent of total funding received in 2020/21 to three per cent in 2021/22. 9. The Scottish Government also provided councils with £90 million to allow them to freeze council tax levels in 2021/22. 10. Excluding Covid-19 related funding, revenue funding and income saw a £0.5 billion (or three per cent) real-terms increase in 2021/22 on the previous year, from £19.3 billion to £19.8 billion. The average Council Tax collection rate across Scotland increased during 2021/22. It is now more in line with pre pandemic levels 11. The in-year collection rate (for 2021/22 charges) increased from an average of 94.8 per cent in 2020/21 to 95.7 per cent, which is broadly in line with pre-pandemic collection rates (95.8 per cent in 2019/20). Collection rates rose across all councils apart from Midlothian which remained static and Orkney which fell by 2.5 per cent. The total amount of council tax billed, taking account of council tax reductions, was £2.7 billion. Of this total, £2.6 billion was collected by 31 March 2022. Revenue funding and income saw a 3 per cent real terms increase in 2021/22, once Covid-19 related funding is excluded
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1. Councils’ financial summary 2021/22 7 Exhibit 1. Sources of funding and income 2019/20 and 2021/22 Total revenue funding and income to councils was £20.3 billion in 2021/22, a £0.3 billion (or one per cent) decrease on the previous year in real terms (one per cent increase in cash terms). £20.3 bn£19.6 bn £20.6 bn 2019/20 2020/21 2021/22 11% 9% 7% Customer and client receipts 7% 7% 7% Housing Revenue Account rents 13% 13% 13% Council tax 15% 9% 10% Non-domestic rates 16% 16% 18% Grants including Scottish Government and other sources 38% 40% 42% GRG baseline 0% 6% 3% GRG Covid-19 funding Source: Audited financial statements 2019/20, 2020/21 and 2021/22 Scottish Government funding 12. In 2021/22 councils received total revenue funding of £12.1 billion from the Scottish Government. This consisted of General Revenue Grant funding of £8.7 billion; Non-Domestic Rates distribution (NDR) of £2.1 billion, specific grants of £0.8 billion and non-recurring Covid-19 funding of £0.5 billion. Total revenue funding to councils from the Scottish Government increased by 1.1 per cent in cash terms and decreased by 1.6 per cent in real terms in 2021/22 compared to the previous year (Exhibit 2, page 8).
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1. Councils’ financial summary 2021/22 8 Exhibit 2. Changes in Scottish Government revenue funding in 2021/22 Scottish Government revenue funding fell by 1.6 per cent in real terms in 2021/22, although when non-recurring Covid-19 funding is taken out there is an increase of 5.3 per cent. 2020/21 £ million 2021/22 £ million Cash change % Real terms change % General revenue grant 8,099 8,682 7.2 4.4 Non-domestic rate income 1,868 2,090 11.9 8.9 Specific revenue grants 710 776 9.3 6.5 Non-recurring Covid-19 funding 1,254 515 -58.9 -60.0 Total revenue funding 11,931 12,063 1.1 -1.6 Total revenue excluding Covid-19 10,677 11,549 8.2 5.3 Source: Finance circulars and Scottish Government budget documents 13. When non-recurring Covid-19 funding is excluded, the increase in funding from the previous year is 8.2 per cent in cash terms and 5.3 per cent in real terms. An increasing proportion of local government funding is now either formally ring-fenced or provided with the expectation it will be spent on specific services 14. Within the £12.1 billion Scottish Government revenue funding, an element is identified by the Scottish Government as specific revenue grants, set out in the annual settlement to councils. This ring-fenced funding, totalling £0.8 billion in 2021/22 (£0.7 billion in 2020/21), must be used to fund identified policies, such as: • Early Learning and Childcare Expansion (£546 million) • Pupil Equity Fund (£120 million) • Criminal Justice Social Work (£86 million). 15. In addition to specific revenue grants, other funding is directed for national policy initiatives, though not formally ring-fenced, this funding is provided with the expectation that it will be spent on specific services.
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1. Councils’ financial summary 2021/22 9 16. Collectively, ring-fenced and directed funding totalled £2.7 billion, representing 23 per cent of total revenue funding (18 per cent in 2020/21). £1.61 billion of this was allocated at the start of the year with a further £1.04 billion allocated throughout the year through budget revisions (Exhibit 3, page 10). A large amount of this was to support elements of education and social care service provision. 2021/22 funding levels from the Scottish Government to local government (excluding Covid-19 funding) increased in real terms for the first time since 2015/16 and converged with other Scottish Government revenue funding 17. In previous overview reports, we have commented that Scottish Government funding to local government has not kept pace with relative increases in the levels of funding allocated to other parts of the Scottish Budget. Previous overview reports have also highlighted that for many years now councils have had to make efficiency savings, redesign services, and use reserves to meet budget gaps arising from service demand and budget pressures. 18. Revenue funding from Scottish Government to local government between 2013/14 and 2021/22 increased by 6.1 per cent (in real terms) whereas Scottish Government revenue funding to other parts of the Scottish Government budget increased by a significantly higher figure of 27.2 per cent over the same period. This, and previous differences in relative funding, has largely arisen as a result of Scottish Government policy to protect funding for the NHS. 19. Over the period 2013/14 to 2021/22, after two years of relatively static funding local government saw its real-terms revenue funding fall between 2015/16 and 2020/21 (excluding Covid-19 funding) with 2021/22 being the first year of real-terms growth (excluding Covid-19 funding) since 2015/16. In 2021/22 funding levels for local government and other parts of the Scottish Government budget (excluding Covid-19 funding) have converged back to a level similar to eight years ago. 20. The large increases in the Scottish budget in 2020/21 and 2021/22 were a result of Covid-related Barnett consequentials. Given these were exceptional sources of funding we have analysed the underlying Scottish Government and local government revenue funding position with Covid-19 funding excluded (Exhibit 4, page 11). Under this analysis, over the same period, Scottish Government revenue funding to local government increased by 1.6 per cent and Scottish Government revenue funding to other parts of the Scottish Government budget increased by 0.8 per cent. Barnett consequentials The Barnett formula is the way the UK Government ensures that a share of additional funding – allocated only to England – is provided fairly to Scotland, Wales, and Northern Ireland. The formula delivers a fixed percentage of additional funding allocated in England to services which are devolved. Each devolved administration can allocate these funds as it believes appropriate.
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1. Councils’ financial summary 2021/22 10 Exhibit 3. Ring-fenced elements of Scottish Government revenue funding The proportion of funding which is ring-fenced and directed or provided for specific services has increased, with around £1 billion allocated during the year in 2021/22. Source 2020/21 £ million 2021/22 £ million Specific Revenue Grant from finance circular 709.8 775.9 Measures outlined in initial circular narrative 606.3 347.4 Transfers from other portfolios in Scottish Budget 188.1 488.1 Redeterminations in further circulars 48.0 544.8 Transfers from other portfolios in Autumn budget revision 350.5 395.7 Transfers from other portfolios in Spring budget revision 42.9 104.0 Total ring-fenced/expected to be spent on specific services 1,945.5 2,655.8 Total revenue funding 10,667.8 11,549.0 Percentage ring-fenced/expected to be spent on specific services 18.2% 23.0% Source: Scottish Local Government Finance Circulars and budget documents. Some elements of funding appear in circulars and Scottish Budget so have been removed to avoid double counting.
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1. Councils’ financial summary 2021/22 11 Exhibit 4. A comparison of real-terms changes in revenue funding in local government and other Scottish Government areas (including and excluding Covid-19 funding) Revenue funding from Scottish Government to local government between 2013/14 and 2021/22 increased by 6.1 per cent when Covid-19 funding is included, and by 1.6 per cent when Covid-19 funding is excluded. -10 0 10 20 30 40 % SG funding minus LG LG Total Revenue Excluding Covid-19 funding Including Covid-19 funding SG minus LG 21/2213/14 21/2213/14 LG Total revenue Source: Finance circulars and Scottish Government budget documents Council budgets and outturn 2021/22 In 2021/22, budget gaps were largely consistent with previous years 21. In 2021/22, Scotland’s 32 councils had a budgeted net expenditure of £15.2 billion. At the time of budgeting, councils identified budget gaps totalling £0.4 billion (three per cent), which was broadly consistent with the gap identified in the two previous years (£0.5 billion in 2020/21 and 2019/20). The budget gap at a council level varied between one per cent and 22 per cent (Exhibit 5, page 12). Budget gap This describes the difference between anticipated expenditure and revenue at the time of setting the budget.
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1. Councils’ financial summary 2021/22 12 Exhibit 5. Budget gap as a proportion of net cost of services for all 32 councils in 2021/22 The budget gap at a council level varied between one per cent and 22 per cent. 0 5 10 15 20 25 Argyll and Bute Fife Renfrewshire Dumfries and Galloway East Lothian Glasgow West Dunbartonshire North Ayrshire North Lanarkshire South Ayrshire Moray Dundee City Stirling Inverclyde Eilean Siar Scottish Borders Midlothian Highland West Lothian East Ayrshire East Dunbartonshire City of Edinburgh Clackmannanshire East Renfrewshire Angus Aberdeenshire Aberdeen City Falkirk South Lanarkshire Perth and Kinross Orkney Shetland Budget gap in 2021/22 Percentage % Source: Council budget papers, Auditor data return
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1. Councils’ financial summary 2021/22 13 22. Recurring savings were expected to contribute 37 per cent of the £0.4 billion budget gap in 2021/22 along with Scottish Government funding to allow councils to freeze council tax (20 per cent), use of reserves (17 per cent), non-recuring savings (eight per cent), financial flexibilities (four per cent) and a range of other specific actions (12 per cent). Savings performance improved in comparison to previous years 23. Councils had set themselves savings targets totalling £0.2 billion in 2021/22. Ninety-four per cent of these savings were achieved (84 per cent in 2020/21), with 76 per cent on a recurring basis. Fourteen councils achieved their savings targets in full on a recurring basis, whereas five councils had over half of their savings being delivered on a non-recurring basis. Four councils had no savings targets in place for 2021/22 (Exhibit 6, page 14). Total usable reserves increased by £0.3 billion to £4.1 billion in 2021/22 24. In 2021/22, almost three quarters of councils (23) reported an increase in usable reserves. This compares to all 32 councils reporting an increase in 2020/21, largely as a result of additional Covid-19 funding carried forward. Total usable reserves now stand at £4.1 billion, representing an increase of £0.3 billion (seven per cent) on the previous year. This compares to an increase of £1.2 billion in 2020/21 compared to 2019/20. Exhibit 7 (page 15) details the increase in councils’ usable reserves during 2021/22. 25. General fund reserves, excluding Housing Revenue Account (HRA), have increased by £0.3 billion to £2.7 billion. The vast majority of this relates to increases in committed balances (that is reserves have been allocated for a specific purpose) which increased by £0.3 billion to £2.3 billion in 2021/22, and is more than half of the total usable reserves balance. Uncommitted reserves (money not earmarked for a specific purpose) have decreased from £0.5 billion in 2020/21 to £0.4 billion in 2021/22. These reserves are used to mitigate the financial impact of unforeseen circumstances. Exhibit 8 (page 16) shows the nature and value of usable reserves in 2021/22. Councils have improved the way in which Covid-19 funds are disclosed in their accounts, but the level of detail varies 26. Elements of Covid-19 funding that have been carried forward in general committed and uncommitted reserves total £0.6 billion, 23 per cent of the total general fund balance. However, at a council level this varies between 49 per cent of the total general fund balance (Moray and West Lothian) to eight per cent (Dumfries and Galloway), (Exhibit 9, page 17). General fund reserves This is the main revenue account which summarises the cost of all services provided by a council.
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1. Councils’ financial summary 2021/22 14 Exhibit 6. Councils’ savings targets compared with savings achieved in 2021/22 Fourteen councils achieved their savings targets. 0 5 10 15 20 25 30 35 Orkney Dumfries and Galloway Stirling East Lothian Moray Clackmannanshire Eilean Siar Fife Argyll and Bute North Ayrshire South Ayrshire West Dunbartonshire Inverclyde Falkirk East Renfrewshire Angus Dundee City Glasgow East Ayrshire West Lothian Scottish Borders Highland South Lanarkshire Perth and Kinross North Lanarkshire Aberdeenshire City of Edinburgh Aberdeen City £ million 2021/22 savings target Savings achieved Note: Excludes East Dunbartonshire, Midlothian, Renfrewshire and Shetland due to not having savings targets in place for 2021/22. Source: Audited financial statements 2021/22
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1. Councils’ financial summary 2021/22 15 Exhibit 7. Changes in councils’ usable reserves during 2021/22 Twenty-three councils increased their usable reserves. -60 -40 -20 0 20 40 60 80 Glasgow Midlothian Shetland West Dunbartonshire Inverclyde South Ayrshire East Renfrewshire East Dunbartonshire Stirling Aberdeen City East Ayrshire East Lothian Orkney Moray Eilean Siar Clackmannanshire Angus South Lanarkshire West Lothian Falkirk Dundee City Perth and Kinross Aberdeenshire Scottish Borders Renfrewshire Argyll and Bute Highland Dumfries and Galloway North Ayrshire Fife City of Edinburgh North Lanarkshire 23 councils increased their usable reserves £ million Source: Audited financial statements 2021/22
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1. Councils’ financial summary 2021/22 16 Exhibit 8. The relative size and nature of councils’ usable reserves In 2021/22, usable reserves held by councils totalled £4.1 billion. Councils’ usable reserves £4.1 billion Capital £0.6 billion Used for future capital expenditure or to repay borrowingRevenue £3.5 billion General fund (including HRA) £2.9 billion Other statutory reserves £0.6 billion Committed £2.3 billion Surpluses with identified future uses Uncommitted £0.4 billion Surpluses with identified future uses – a contingency balance HRA £0.2 billion Balance of housing surpluses, strictly part of general fund, but used to offset future HRA deficits or enable investment Repairs and renewals £0.2 billion Used to fund future maintenance and repair of assets Insurance £0.1 billion Manages self-insured losses by charges to services Other usable reserves £0.3 billion Includes harbour funds at Orkney and Shetland Source: Audited financial statements 2021/22
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1. Councils’ financial summary 2021/22 17 Exhibit 9. Total Covid-19 reserves as a percentage of the total general fund balance for 2021/22 0 10 20 30 40 50 60 Shetland Dumfries and Galloway Argyll and Bute Highland East Dunbartonshire North Lanarkshire Eilean Siar Orkney Angus Inverclyde Scottish Borders Clackmannanshire East Ayrshire Perth and Kinross Glasgow South Lanarkshire Aberdeen City Renfrewshire Midlothian North Ayrshire Stirling East Renfrewshire Falkirk City of Edinburgh South Ayrshire Fife Aberdeenshire Dundee City East Lothian West Dunbartonshire West Lothian Moray Covid-19 reserves as a percentage of the total general fund balance Percentage % Note: Excludes Shetland as they do not have any Covid-19 related reserves carried forward. Source: Audited financial statements 2021/22
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1. Councils’ financial summary 2021/22 18 27. In last year’s Local government in Scotland: Financial overview 2020/21 we noted that within the general fund, councils’ accounts had not always clearly identified the element arising from Covid-19 funding and recommended that elements of Covid-19 funding that are being carried forward into general reserves should be clearly identified. Councils have improved the way in which Covid-19 reserves are disclosed in their accounts. However, this varies, with nine councils only providing a single line narrative and the remaining councils providing varying levels of detail as to how the funds have been allocated (eg, education, housing, business support, mental health and equalities). Eilean Siar and Aberdeen City had the most detailed breakdowns. Capital Capital expenditure increased in 2021/22 though was still below the level in 2019/20 28. Capital spending across Scotland increased by £0.7 billion in 2021/22, from £2.4 billion in 2020/21 to £3.1 billion (Exhibit 10, page 19). Capital spending in 2019/20 was £3.6 billion. 29. Twenty-six councils (81 per cent) reported higher capital expenditure in 2021/22 than in 2020/21. Only six councils spent less on their capital programmes in 2021/22 than 2020/21. 30. The main sources of capital financing are still government grants. These were largely unchanged from 2020/21 (£1.1 billion in 2021/22 compared to £1.2 billion the previous year), however, the overall increase in capital expenditure means that an increasing amount is financed by borrowing. Covid-19, inflationary costs and shortages in construction materials had an impact on capital projects 31. Auditors in councils reported slippage against capital projects and cited Covid-19, inflationary costs and shortages in construction materials as reasons for this. If these issues persist they will present risks to councils’ capital programmes which are a necessary component of modernising services to deliver improved outcomes for local communities. There were some exceptions, for example in West Lothian where expenditure on capital was £141.3 million, an increase of £14.8 million against its original budget. Acceleration of £13.1 million for new developer-funded schools at Winchburgh was the most notable example. Local government in Scotland: Financial overview 2020/21 Accounts Commission March 2022 Capital spending across Scotland increased in 2020/21 to £3.1 billion
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1. Councils’ financial summary 2021/22 19 Exhibit 10. Capital expenditure analysed by sources of finance 2017/18 to 2021/22 Capital expenditure increased in 2021/22 although an increasing proportion was funded through an increase in borrowing. 2021/222020/212019/202018/192017/182017/18 2018/19 2019/20 2020/21 2021/22 21% 21% 9% 14% 30% An increase in borrowing 2% 3% 4% 4% 5% Other contributions and Public Private Partnership (PPP) 5% 3% 17% 3% 2% Capital receipts 11% 12% 8% 12% 11% Capital Funded from Current Revenue (CFCR) 24% 23% 27% 20% 15% Internal Loans fund repayments available to reinvest 37% 38% 35% 48% 37% Government grants 2,687 2,749 3,605 2,408 3,099 Total expenditure (£ million) Source: Audited financial statements 2017/18 – 2021/22 Further information about how councils may borrow money to fund capital expenditure can be found at Local government borrowing: factsheet.
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1. Councils’ financial summary 2021/22 20 32. Slippage against capital projects was noted at some councils in 2021/22: • Dundee City Council: Capital works costing £57 million were completed in 2021/22 against a budget of £117 million, representing slippage of 51 per cent. This was highlighted as a risk to the council delivering against strategic objectives. • East Dunbartonshire Council: General services capital spending was £69 million compared with an initial budget of £96.3 million, which was subsequently revised downwards to £76.1 million for projects impacted by Covid-19. The main area of slippage was related to a new additional support needs school (£3.5 million) which has been rescheduled to 2022/23. Housing capital expenditure totalled £15.9 million against a revised budget of £17.5 million. • East Lothian Council: The general services capital budget for 2021/22 was £97.7 million. A significant element of the £32.7 million underspend has been reprofiled to 2022/23. In addition to the issues and challenges arising from Covid-19, supply chain problems and the war in Ukraine were reported as having increased certain costs as well as the council’s risk exposure for capital investment. The HRA capital budget for 2021/22 was £29.7 million. The overspend of £1.2 million reflects accelerated new build council housing, the costs of which have been partially offset by additional grant funding above the budgeted figure. Net debt has increased by £0.2 billion since 2020/21 33. Total net debt (total debt less cash and investments) has increased across councils by £0.2 billion to £16.4 billion. Fifteen councils have increased their net debt in 2021/22. This compares to eight councils in 2020/21. 34. Councils’ total debt has increased by £0.3 billion to £19 billion; this may be related to the increased need to borrow to fund capital expenditure, with 19 out of 32 councils having increased long-term borrowing from the previous year and 15 councils with increased short-term borrowing compared to the previous year.
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1. Councils’ financial summary 2021/22 21 Local government pension funds 2021/22 Pension Fund investment returns, although largely positive, were 62 per cent lower than in the previous year 35. Ten of the 11 main Scottish Local Government Pension Funds experienced positive investment returns in 2021/22. Orkney Islands Pension Fund recorded a loss on investment activity, representing 2.7 per cent of the net investment assets brought forward into 2021/22. 36. Although Pension Fund investment returns were largely positive, net returns on investments were 64 per cent lower than in 2020/21 (in cash terms). The net returns on investments, as a proportion of the brought forward net investment assets total, varied between a reduction of 2.7 per cent and an increase of 11 per cent in individual funds. Scottish Pension Fund’s funding positions have generally improved since the last triennial valuation 37. Scottish Pension Funds recorded a cumulative funding level of 104 per cent, ranging from 92 per cent to 118 per cent, per the triennial actuarial review figures as at 31 March 2020. At the time of this valuation, four of the 11 Scottish Local Government Pension Funds recorded liabilities as being greater than assets. Although four of the funds recorded liabilities in excess of assets, the 2020 position represented an improvement since the 2017 triennial valuation. 38. Auditors reported that the Covid-19 pandemic had a significant impact on Scottish Pension Fund’s funding position and asset valuations, as indicated in the triennial valuation as at 31 March 2020. Auditors have indicated that since the valuation, asset values have largely recovered. 39. Preparation is under way for the next triennial valuation covering the period to 31 March 2023. Any changes to employer contributions as a result of the next valuation will not take effect until 2023/24. Funding Level This describes the pension fund assets as a proportion of the liabilities, arising from pension benefits payable. Triennial valuation Every three years an actuarial valuation is carried out to monitor the assets of the fund against the liabilities of the pension benefits payable.
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222. Councils’ financial outlook 2. Councils’ financial outlook Councils are having to deal with a number of significant financial challenges and will need to make some difficult decisions with their spending priorities 40. In last year’s Local government in Scotland: Financial overview 2020/21 we noted that the longer-term funding position for councils remained uncertain, with significant challenges ahead as councils continued to manage and respond to the impact of Covid-19 on their services, finances and communities. 41. At a time when councils and their communities are still feeling the impact of the Covid-19 pandemic, councils are now having to deal with the cost of living crisis and inflationary pressures. Councils consistently identified short- and long-term cost pressures in their initial 2022/23 budget papers, including: • pay inflation and living wage costs • costs associated with Covid-19 recovery • energy inflation • non-pay inflation (including cost of materials, construction costs and contract inflation) • demand for and price sensitivity of chargeable services and the related impact on income from fees and charges. 42. Common themes across management commentaries from councils unaudited accounts for 2021/22 are that councils continue to face significant financial challenges going forward and will need to deliver consistent recurring savings and use reserves to deal with the immediate and on-going financial impacts. They also note that elected members will need to make increasingly difficult choices, which could include having to consider service reductions. Further commentary and analysis on the future funding position of councils and the associated challenges will be included in the wider local government overview being published in May 2023. Local government in Scotland: Financial overview 2020/21 Accounts Commission March 2022
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2. Councils’ financial outlook 23 The future funding settlements set out in the Scottish Government’s Resource Spending Review reflects flat cash funding settlements for 2022/23 to 2025/26 43. In May 2022 the Scottish Government published the first multi-year Resource Spending Review (RSR) in Scotland since 2011, outlining its resource spending plans to the end of this Parliament in 2026/27. The RSR assumes an overall cash-terms increase to the Scottish Government spending envelope of £5.7 billion over the period 2022/23 to 2026/27. The estimated increase in local government funding over this period would be £0.1 billion. This reflects flat cash funding levels for 2022/23 to 2025/26, with a small uplift in 2026/27. However, the outlook of the RSR may look different after the Scottish Government’s 2023/24 budget. 44. The Fraser of Allander Institute reported in May 2022 that the RSR provides welcome insight on government priorities, and highlights a scale of challenges facing public services. However, spending plans are expressed at ‘level 2’ for the four years of the Spending Review period. That means financial information is at a less detailed level than public bodies would ideally like for planning purposes. It also noted that at the time of their review the RSR implies that the local government budget will decline by seven per cent in real terms between 2022/23 and 2026/27. The Convention of Scottish Local Authorities (COSLA) has expressed concerns that a flat cash settlement will result in fewer jobs and cuts to services. 45. Following the RSR, in December 2022, the Scottish Government presented their proposed spending and tax plan for 2023/24 to the Scottish Parliament. In this updated position, the Scottish Government sets out that there will be an increase of over £570 million in additional revenue and capital funding available to councils for 2023/24. They also confirmed that they would not seek to freeze or set a cap on council tax increases, giving council’s full flexibility to vary rates locally. 46. The recent Sottish Parliament Information Centre (SPICe) publication reports that, once adjustments are made for the in-year funding councils will receive for free school meals, the additional funding for 2023/24 was just under £640 million. SPICe report that this will represent a £223 million real terms increase in funding, based on 2022/23 prices. 47. COSLA had previously estimated a £1 billion gap for councils in 2023/24 and argue that the uplift amounts to £71 million once national policy commitments are taken into account. They welcome the flexibility to set their own council tax rates but state that the scope to do this will be limited due to the cost of living crisis.
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2. Councils’ financial outlook 24 Budgets for 2022/23 Councils intend to bridge the budget gap of £0.4 billion for 2022/23 with planned savings and reserves, but the reliance on non- recurring reserves is not sustainable in the medium to long-term 48. At the time of budgeting, councils identified budget gaps totalling £0.4 billion in real terms, which represented three per cent of the 2021/22 net cost of services. This is consistent with the gap identified in the previous years. The 2022/23 estimated budget gap as a proportion of 2021/22 net cost of services varied across councils from an anticipated surplus of 0.2 per cent to a gap of 23 per cent (Exhibit 11, page 25). 49. The majority of the estimated budget gap for 2022/23 was planned to be funded through the following (Exhibit 12, page 26): • agreed recurring savings (36 per cent) • use of reserves (32 per cent) • increases in Council Tax (16 per cent). 50. Sixty-six per cent of councils intended to use reserves to help bridge the 2022/23 budget gap, however, the use of reserves is not sustainable in the medium to long term. The achievement of recurring savings and a movement away from the reliance and use of non-recurring reserves will be key to ensuring longer-term financial sustainability. This makes the case for a continued focus on service reform, based on strong engagement with communities, more important now than ever. 2022/23 funding settlement Scottish Government revenue funding in 2022/23 decreased by 0.1 per cent in real terms when non-recurring funding elements are excluded 51. In paragraphs 43 to 47 we have outlined the longer-term Scottish Government spending plans which were set out in the RSR. The initial local government revenue settlement from the Scottish Government in 2022/23, before taking into account non-recurring elements, increased by 3.9 per cent (cash terms) from 2021/22 to £12.0 billion. This was a real terms decrease of 0.1 per cent (Exhibit 13, page 27). 52. Non-recurring Covid-19 funding provided to councils in 2021/22 was £0.5 billion, the last year of this funding. In 2022/23, an additional £0.25 billion has been allocated to reduce council tax bills. 53. Total revenue funding in 2022/23 was £12.3 billion. This is a 2.4 per cent real-terms reduction on the 2021/22 position. Councils identified budget gaps totalling £0.4 billion (3%) in real terms, of the 2021/22 net cost of services
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2. Councils’ financial outlook 25 Exhibit 11. Budget gap as a proportion of net cost of services for all 32 councils in 2022/23 The budget gap at a council level varied between a 0.2 per cent surplus and a 22 per cent gap. 0 5 10 15 20 25 Renfrewshire East Lothian Fife Argyll and Bute Glasgow Stirling West Dunbartonshire North Ayrshire Eilean Siar City of Edinburgh East Dunbartonshire Dumfries and Galloway Aberdeenshire South Ayrshire North Lanarkshire East Ayrshire Inverclyde Scottish Borders Dundee City West Lothian East Renfrewshire Highland Angus Clackmannanshire Midlothian Perth and Kinross Aberdeen City South Lanarkshire Falkirk Moray Orkney Shetland Budget gap in 2022/23 Percentage % Source: Council budget papers, Auditor data returns
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2. Councils’ financial outlook 26 Exhibit 12. Aggregate analysis of all 32 councils’ proposed ways to meet the budget gap for 2022/23 The majority of the estimated budget gap for 2022/23 was planned to be funded through agreed recurring savings, use of reserves and increases in Council Tax. 36% 32% 16% 10% 4% 2% 36% Agreed savings – recurring 32% Use of reserves 16% Increase to council tax 10% Other 4% Agreed savings – non-recurring 2% Loans Fund Review 0% Unidentified savings 0% Fees and charges increase Source: Auditor data returns
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2. Councils’ financial outlook 27 Exhibit 13. Changes in Scottish Government initial revenue funding from 2021/22 to 2022/23 Total revenue funding will fall by 2.4 per cent in real terms in 2022/23. 2021/22 £ million 2022/23 £ million Cash change % Real terms change % General revenue grant 8,682 8,450 -2.7 -6.5 Non-domestic rate income 2,090 2,766 32.3 27.2 Specific revenue grants 776 785 1.1 -2.8 Non-recurring Covid-19 funding 515 Cost of living funding 250 Total revenue funding 12,063 12,250 1.5 -2.4 Total revenue excluding Covid-19/ cost of living 11,548 12,001 3.9 -0.1 Source: Finance circulars and Scottish Government budget documents 54. Scottish Government funding will not include Covid-specific allocations from the UK Government in 2022/23, however, there will be an increase in the overall Scottish Government budget. If we remove Covid-19 funding in 2021/22 from our analysis, the Scottish Government budget is set to increase by seven per cent in real terms, as opposed to a real-terms cut in local government funding of 0.1 per cent. However, if we include Covid-19 funding in the 2021/22 Scottish Budget, in 2022/23 it falls in real terms by ten per cent, a bigger fall than local government. Capital funding The Local Government capital settlement in 2022/23 increased from £649 million in 2021/22 to £685 million 55. Capital funding has increased by 1.4 per cent in real terms between 2021/22 and 2022/23. Capital funding had experienced significant increases up to 2019/20 before falling in 2020/21 and 2021/22. Real-terms total capital funding has now returned to levels closer to those seen in 2016/17 (Exhibit 14, page 28).
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2. Councils’ financial outlook 28 Exhibit 14. Real-terms Scottish Government capital funding between 2013/14 and 2022/23 Scottish Government capital funding will increase slightly in 2022/23, but this follows two years of decreases over 20 per cent. 0 200 400 600 800 1,000 1,200 2022/232019/202016/172013/14 Capital funding (£ million) Change in capital funding from the previous year (%) 50.2% 1.4% -30.7% 27.4% 9.3% 21.8% -27.8% -22.0% 1.4% Source: Finance circulars and Scottish Government budget documents 56. Higher interest rates and inflationary costs will present risks to councils’ capital programmes going forward. The affordability of capital spend will be significantly impacted by changes in interest rates. Some councils have anticipated costs will double, which has meant they will need to consider the affordability of their capital programmes going forward.
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Local government in Scotland Financial bulletin 2021/22 Audit Scotland’s published material is available for download on the website in a number of formats. For information on our accessibility principles, please visit: www.audit-scotland.gov.uk/accessibility For the latest news follow us on social media or subscribe to our email alerts. Audit Scotland, 4th Floor, 102 West Port, Edinburgh EH3 9DN Phone: 0131 625 1500 Email: info@audit-scotland.gov.uk www.audit-scotland.gov.uk ISBN 978 1 915839 01 5