Local Government, Housing and Planning Committee [Draft]

Meeting date: Tuesday, April 23, 2024

Official Report 910KB pdf

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“Local government in Scotland: Financial bulletin 2022/23”

Agenda item 2 is an evidence-taking session on the Accounts Commission report, “Local government in Scotland: Financial bulletin 2022/23”. We are joined by Jo Armstrong, who is the chair of the Accounts Commission, and Andrew Burns, who is the deputy chair; and by, from Audit Scotland, Carol Calder, audit director; Blyth Deans, senior manager; and Lucy Jones, audit manager. I welcome our witnesses to the meeting, and I particularly welcome Jo Armstrong to her first committee meeting as chair of the commission.

Thank you very much, convener.

I have a short opening statement to make. First, I am pleased to be here as the new chair of the Accounts Commission, and I am pleased to be joined by my new deputy chair, Andrew Burns, and by colleagues from Audit Scotland, who are, in effect, the powerhouse behind the commission, as they develop the analysis and the evidence that we use in our reports.

The Accounts Commission’s principal role is to provide independent reporting on the performance and finances of Scotland’s public bodies. As the new chair, I am seeking to reinforce and develop the commission’s approach by focusing on using the sector’s own data to monitor and report on performance and best value. In other words, I am not looking to add to the burden of local authorities in collecting data; instead, I want to make different use of what is already out there.

A key priority is to ensure that the commission delivers effective scrutiny of Scotland’s local bodies and, in doing so, to identify and share best practice where we find it, because I think that it is important to flag up where things are going well, as well as where things might not be working quite so well. The financial bulletin that we will discuss this morning clearly signals the increased strain on councils’ finances, which reinforces the need for more—and, we would argue, faster—transformational change to ensure that services are maintained.

We would like to think that the commitments that were made public in the Verity house agreement and in relation to the fiscal framework give us in the commission an opportunity to build on our reputation for independent and objective scrutiny, which is something that we think is needed now more than ever. We will wait to see what happens with what comes out of the Verity house agreement and the fiscal framework; I have no doubt that the committee will have questions on that.

I look forward to answering your questions on not just the financial bulletin but our wider work programme. Thank you very much, convener.

Thank you very much. It was helpful to get that brief overview of priorities. I think that it is a great approach to use the sector’s existing data and to share best practice across local authorities.

How does the commission intend to measure and maximise its impact in achieving its aims?

That is a good question. We consider a variety of reports and approaches in order to ensure that our view of what is happening in the sector is made available and accessible across the public sector and across communities in Scotland. We use formal reporting, blogs, videos and internet approaches as ways of reaching as broad a spectrum as possible to show what we are doing, and we seek consultations on what we are doing to ensure that people feel that we are doing the right thing. We constantly monitor what we are doing to ensure that we are not doing things that are inappropriate.

For example, there is a plethora of data out there, and we want to try to ensure that the data that we use is the right data and that we do not ask for more data to be delivered or gathered by local authorities. It is a case of engaging with our stakeholders as best we can and listening to what our stakeholders are asking us to do to ensure that we deliver what they think it is best to report on in respect of the performance of the sector.

It sounds as though there is quite a lot of interaction, consultation, dialogue and back and forth.

Yes. We try to have that, convener.

As you will be aware, the Local Government Information Unit found that

“Confidence in the sustainability of council finances in Scotland is critically low”.

I am interested in understanding what the commission’s views are on the sustainability of local government finances. Are those views any different from the concerns that the commission has expressed over the past few years?

As the new chair of the commission, I know from reading back that we are seeing themes coming through now that are similar to those that we saw before. It is a testament to the sector that it has managed to maintain sustainability through year-on-year efficiency savings and year-on-year adaptations.

Given the financial challenges that face not only the country but local government, we argue that those challenges are making it harder and harder to deliver current levels of service, and we know that demand is growing. The likelihood of being able to continue to deliver efficiency savings and maintain services is getting harder and harder to justify, so we are now arguing for transformational change. We have said in the past that we need to increase the pace of change, but we are now saying that there needs to be transformational change.

To amplify what the chair of the commission has said, the 2022-23 financial bulletin, which we are discussing this morning, shows that there is a slight difference between the picture here compared with the picture down south in England—I know that that is potentially behind your question.

The financial bulletin found that no council in Scotland was at immediate financial risk in 2022-23, but it is really important to underline that there is no certainty that that will continue. There are extremely challenging financial decisions ahead of local authorities in Scotland. They are not in the same position as local authorities in England are in, but there is a risk that they could be in the medium to long term, and they will have to make very difficult decisions about changes to local services. There is currently a distinct difference between the position down south and the position in Scotland, but the risks are still significant and present.

Thank you for highlighting that.

I will bring in Pam Gosal, who has questions about the financial bulletin.

Good morning, panel, and thank you very much for the opening statement.

I want to probe into the financial bulletin a little more. Obviously, the bulletin outlines the significant financial challenges that confront local authorities and categorises them as “unprecedented”. It underscores the fact that there was a council budget deficit of £725 million for the 2023-24 fiscal year. Can the commission provide a little more detail on the overall budget shortfall for the current fiscal year and elaborate on the strategies that local councils are devising to address the gaps?

First, I will pick up on the financial gaps. It is important to note that, as Andrew Burns said, the financial gaps are being funded principally by reducing reserves and using surpluses, so there are no imminent challenges that local authorities face in not being able to deliver what they have set out to deliver in their budgets.

The challenge facing the sector relates to the difference of opinion over whether more or less money is needed for the delivery of services based on an expected council tax revenue-raising opportunity. It is important that we think through how we understand what services need to be delivered and then get clarity on the funding that is required to deliver those services. We do not have clarity on either at the moment, but we have budgets that are based on historical positions. Last year drives a lot of what happens next year, and last year’s service delivery drives a lot of what service delivery will be next year.

Through our best value reports, we seek to ensure that local authorities are mindful of their long-term financial sustainability and that they indicate how, through transformational change, they will be able to change how they deliver their services so that they do not have to rely on reserves. Once reserves are used up, they will not be there for future purposes.

My colleague to my left, Blyth Deans, has more detail on some of those numbers, if you would like to understand a bit more about them.

Thank you, but you have probably prompted some of my supplementary questions. You said in your opening statement that we need faster transformational change because of the state of the finances. I was lucky enough to speak to the chief executive officers of 31 of the 32 councils, and they talked about looking at reserves and their spending.

However, I want to discuss an issue that you have just touched on—the fact that we have outdated council tax and non-domestic rates models, pending a wholesale reassessment of local government funding. Has there been any exploration of alternative revenue strategies that councils could use? Are you aware of anything that they are moving towards? You have also said that we need to look at which services need to be delivered.

I have no view on the appropriateness or otherwise of the NDR approach in the funding of local government. That is clearly for politicians to decide on. The challenge is to do with the level of service that is needed and the funding that is required to achieve that.

If we are talking about financial challenges in the economy as a whole, it is clear that there are financial challenges for service delivery. It is not just the gross domestic product deflator or general inflation that is the issue; it is the specific inflation that affects the delivery of services. For example, wage increases in the care sector have risen faster than inflation, which means that the budget that is available to fund care will have to go further, because it will have to pay out more on wages.

I will hand over to Blyth Deans to pick up on the specific numbers.

I can provide a wee bit more colour on some of the bridging actions or the actions that councils have taken to set a balanced budget and what they have done in response to those budget gaps.

As you might expect, savings are a key part of that, but, as part of our report, we have tried to analyse the relationship between recurring and non-recurring savings. As more recurring savings are made, it is less easy for councils to find more, which means that they rely increasingly on non-recurring actions, and it is clear that there are sustainability issues with doing that year after year. As the chair of the commission said, that is why our reports have increasingly focused on recommending transformational change as almost the only way that councils will be able to maintain financial sustainability.

There are other methods that councils can use, one of which is the use of reserves. I can talk about reserves at length—I am sure that that will come up as a separate question—but the savings part of that is critical. As you can see in exhibit 15 of the report, councils agreed £239 million of recurring savings, and their track record in delivering those is pretty good. We can take confidence from that, but, as I said, that challenge is going to get more intense as the years go on.

I want to talk about the fiscal framework. You mentioned the council tax and NDR models. We are hoping to see what the fiscal framework in the Verity house agreement sets out, but we and local government have been calling for more certainty about the money that councils will get. In addition, the Verity house agreement agrees to the charter for local self-government, and localism is an underlying principle, with local by default and national by agreement.

For that to happen, there must be more flexibility about how councils can use the money—with less in-year money coming in, more certainty, multiyear budgets and less directed funding—and in relation to how they can pursue routes for revenue raising, including council tax and the visitor levy. We wait to see what the fiscal framework will look like, but we hope that it provides more flexibility so that councils can plan for the future on the longer-term horizon, which is where transformation is important, look at a prevention agenda and focus resources on those who are most in need.

09:15  

I have one more supplementary, which is on what Blyth Deans mentioned. Councils can make savings, but their doing so year after year will have an effect. I will ask a question about reserves later.

One of the concerns that councils have raised is that, although they might be okay this year and they might be okay next year, there will be serious problems in the coming years because they will not be able to use certain money, such as savings and reserves. It is understandable that you mentioned transformational change, but have you forecast where councils will end up in a number of years from now if they do not carry out that transformational change?

We do not do forecasting. In our best value reports and in our analysis of local government, we get councils’ forecast budgets. Councils do forecasting, but the challenge that they have is that they can only plug in a line based on what they think that their revenue will be—in other words, it is their best guess. We are not seeing anything that suggests that there is an imminent danger of a local authority not being able to maintain a balanced budget.

However, the corollary to that is that it gets harder and harder to access services—the bar that you have to pass to get services gets higher and higher. The issue is not about councils being unable to fund what they are doing; it is about whether what they are funding and doing is adequate for what the Scottish electorate believes is needed.

Part of what we are trying to think through is how we can help to create an environment in which there can be an honest conversation about what local government can deliver and where we need to find other means by which people can be supported in their communities.

Willie Coffey has a supplementary.

The figures in the report are for 2022-23, but looking slightly ahead, we could argue that the position might look a little bit better, given that an extra £574 million is being allocated to local councils next year. That is a cash-terms uplift of 4.3 per cent or a real-terms uplift of 2.5 per cent. Has the commission had any chance to do an analysis of the current figures and the potential impact that that might have in resolving some of the issues that have been discussed round the table so far?

As I said, we do not do forecasting. We ask for and get information from local authorities about their budgets, which helps us to understand where they are sitting in relation to their budget forecasts. We have a report coming out this week or next on our budget, so I do not want to pre-empt what that will say.

We are mindful of the need to ensure that we understand what is happening year on year and that our understanding is based not just on historical data but on what will happen in the future. As Carol Calder said, local government’s challenge is the ability to plan effectively when it has limited flexibility around some budget lines. Increasing the flexibility is, in our view, a good thing, and the un-ring fencing of some of the budget lines is a good thing. However, that means that localism must be to the fore. The challenge is whether we have enough clarity on what local communities are looking for and what they want from local government services.

Part of our request of local government is that we see local authorities engaging locally and that we understand the engagement strategies that will help them to drive their priorities and decision making. That is part and parcel of what we do in our best value work.

I will move on to questions from Miles Briggs.

I thank the witnesses for joining us today. One of the commission’s recommendations is about the prioritisation of recurring savings. Will you outline examples of good practice in that area as you see it? To what extent are recurring savings now becoming more difficult to identify and achieve?

I will come back to my colleagues about specific examples, if that is all right with you, Miles. As Blyth Deans indicated, and as is inevitably a truism, if you keep making savings year on year, you either did not need that money or you are not managing to deliver the services that are necessary—because, in the main, the service costs will be rising at least by the level of inflation, if not higher, so that continuing to deliver savings that are just for efficiencies, rather than being transformational, becomes harder and harder.

We challenge councils when they come to our meetings, by saying, “How can we get comfort that you are in line? You can put a number in a line to show that the budget will balance, but what are you doing to give us comfort that the number in that line—that saving—is actually achievable and deliverable?” They keep doing it, but it gets harder and harder as the years go on.

Blyth, do you have any examples of good practice in savings? I apologise for putting you on the spot.

I can come in on that. You are right. It gets more difficult to make recurring savings. For 2022-23, 37 per cent of the bridging actions for the budget gaps were recurring savings; 34 per cent was the use of reserves; increases in council tax were 17 per cent; and 12 per cent was via various other methods. Recurring savings is quite a chunk.

The difficulty comes in how debt has been reprofiled with the service concessions that have been allowed. That is kicked down the road a little by asking what the future sustainability of reprofiling debt is over a longer time. That issue is part of financial sustainability, which is what the commission has been talking about. The meat has been cut off the bone when it comes to efficiencies, so the issue is now about transformation. What we mean by that is a fundamental redesign: councils working together; one council delivering for Scotland, or joint councils—regional partnerships; collaboration with communities; co-production; and so on.

That is nicely set out in the Society of Local Authority Chief Executives and Senior Managers paper “Delivering a future for Scottish local authorities”. It sets out the examples that we are talking about when we discuss transformation. That is more about asking the question, what are councils for? That document refers to them as being “delivery agnostic” and enablers of place. That is the kind of shift that we do not yet quite see, but SOLACE has produced that paper with a very clear direction that it wants to go in.

However, there are some significant barriers to making that transformational change happen. In order to achieve financial sustainability in the longer term, we have to look at transformational change.

Thank you for that. I note that overall net debt increased by £1 billion. Has the commission managed to find any explanation for that? Specifically—we touched on this earlier—do some specific councils have more exposure to that debt than others? Are those councils at risk in the future?

Again, borrowing has to be done on the basis of its being prudential, affordable and capable of being paid back. We in the commission do not get involved in looking at that in detail, but we look at the extent to which some of the metrics are monitored. For example, we are beginning to look more closely at metrics such as the proportion of revenue to debt and interest payments, to see whether any challenge might be coming through.

In the event of not being given an uplift on capital, or of capital funding being lower than perhaps had been anticipated, debt is the obvious solution to plugging a gap in carrying out a project. It will be harder and harder to deliver the infrastructure projects that are required without using borrowing, but the corollary to that is whether the borrowing programme is affordable. I ask Blyth Deans to pick up on that.

Much as we found last year, the main movements in net debt related to either a reduction in cash and investment balances or increases to short-term or long-term borrowing. Again, nothing was particularly out of the ordinary when we looked at that in detail.

One thing that might be interesting to the committee is that the cost of servicing that debt has gone down. That is linked to what has already been mentioned: pushing the term to be slightly longer, which means that the annual repayments are less.

I will illustrate that with some figures. In 2013-14, 8.4 per cent of the general revenue budget was used to service the debt, but that figure has come down to 5.4 per cent. There has been some movement in between. For example, in South Ayrshire Council, cash and investments have gone from £17 million down to £11 million, which has had quite a significant impact on the net debt position, and, in East Dunbartonshire Council, there has been an almost £20 million reduction in cash and investments, which has had a knock-on impact on the net debt profile. The reason for that is that there might have been some borrowing to take advantage of attractive interest rates and assist with cash flow, but, as Jo Armstrong said, capital spending has also had a big impact on the borrowing profile. Nothing majorly concerning has come out of that analysis.

We have not analysed how the debt profiles of certain councils correlate, so I cannot offer a position on that.

Last year, there was also the one-off reprofiling of public-private partnership debt, which is probably reflected in those figures.

I have previously raised issues regarding the funding formula that the Convention of Scottish Local Authorities uses. Has the commission done any work, or does it intend to do any work, on the effect of population growth on demands on councils? Lothian is expected to experience about 80 per cent of all growth in Scotland, but there is expected to be depopulation in other council areas, such as Argyll and Bute. Will the commission be doing further work on that?

We have not discussed that yet. I ask Carol Calder to come in.

On behalf of the commission, Audit Scotland has looked at the funding formula in the past. There is a discussion to be had with the Scottish Government and COSLA, because there are always winners and losers if the formula is changed. We found that there is a very weak correlation between funding and deprivation but a very strong correlation between funding and population levels. There are many different elements to the equation, but the biggest driver is population.

Earlier this year, in March, when we looked at loan funds and capital finance accounting, we heard that regulations that were introduced in 2016 allow councils to extend loan fund repayments into the future, which adds pressure on future budgets. Given that most local authorities have used those flexibilities, is the commission concerned that future taxpayers could end up paying for assets that no longer exist?

It is important to understand that assets must be maintained, so the issue for us is whether councils take on assets when they do not have the capacity to fund capital maintenance programmes for them. We do not look at that closely at the moment.

It could be argued that being able to extend the term of a loan to free up resources is a good thing if the resource is used for innovation or investment in something that will allow the council to provide a cheaper or more cost-effective service in the future. We are asking whether the benefits from, for example, the triennial pension valuation that has been introduced are being used to refigure or recast service delivery as a way of reducing costs in the future, or whether they are being used just to plug gaps. We see a mixed picture in that regard.

If assets are properly maintained, extending the life of a loan is not necessarily a bad thing, but, ironically, that will add to ring-fenced expenditure in the future, which one could argue is a good thing or a bad thing, depending on which side of the coin you are sitting.

We do not have a crystal ball for these things, but perhaps we should keep an eye on that.

I have a few questions about reserves. The presentation of local authority reserves is sometimes interpreted as councils sitting on large amounts of surplus money. Could the commission say a bit more about committed and uncommitted reserves and provide examples of reserves being earmarked for specific purposes? Have there been any notable trends in the levels and use of reserves over recent years? Does the commission have any concerns about the relatively low levels of uncommitted reserves in some councils?

Again, Blyth Deans is the font of all knowledge on that, so I will pass over to him. However, any organisation needs to have some level of reserve to deal with rainy-day requirements, unexpected shocks and unexpected and unplanned issues, such as having to decant tenants from a house that has reinforced autoclaved aerated concrete. Having reserves is not a bad thing—that is prudent financial management.

The notion that there is a large amount of unutilised and unearmarked reserves is not one that I see, but I am happy to hand over to Blyth to give more detail behind that.

09:30  

The commission has been quite consistent in how we have reported on reserves over the past few years. Exhibit 10 in the report offers a flow chart from the headline figure of total usable reserves all the way down to the committed and uncommitted elements. That shows that the headline figure is not really just what councils have got to use as they see fit. In Exhibit 10, we can see that the uncommitted element of the general fund is £0.46 billion, which is 15 per cent of the general fund. That means that a larger proportion is committed for particular purposes. There will be particular purposes that are mandated by the policy commitments and the nature of the funding, but a lot of that commitment or earmarking is done locally. It will be down to councils to decide what works best for them in their circumstances.

We did a bit of work to identify what some of those earmarked funds are, as well as their appropriateness and how they fit into councils’ general approach to maintaining their financial sustainability. As you might expect, the 32 individual authorities are quite different, and the disclosures in their accounts are quite different as well. To put it mildly, it is not the easiest comparability task that I have ever done.

However, we are seeing a growing trend towards councils taking steps to earmark funds for contingency, which, in a way, adds to the uncommitted element that we have shown in exhibit 10 in the report. That money is earmarked for unexpected events or uneven cash flows, so that councils can use it to help them to smooth the path, so to speak.

I will give you some examples of earmarked funds. Some of their titles are really detailed and some are less so. For example, North Ayrshire Council has a recovery and renewal support fund, which is worth £13 million. It also has a fund that supports medium-term financial strategy, which feels quite high level. The council will have a bit of control over and discretion in how it applies the fund to meet the objectives of that financial strategy. It also has earmarked funds, which could be for anything. Over the past few years, the commission has reported extensively on that sort of vagueness. Transparency around reserves—what they are there for, when they will be used and what the strategy is for putting them to use—will be really interesting and helpful for the public’s understanding.

Another example is that West Dunbartonshire Council has funds for future pay awards. That feels quite specific, certainly in comparison with some of the other funds that we have seen. It has early retirement and voluntary severance schemes and a smoothing fund, which also feels a bit like a contingency fund. There are also risk and resilience funds.

As I said, the point still stands about transparency. As much as councils have taken pretty significant steps in recent years to improve transparency in their accounts, it still feels as though more could be done in relation to timing and plans for spend, when some of the funds enter into the general fund. Clearly, as we have seen in recent years, particularly around Covid, when councils receive funds late in the year, they cannot spend them at that point, so they must be carried forward in reserves. There is quite a lot going on with reserves but, as I said, I hope that, in the report, we have been able to show a clearer picture of the uncommitted element and what councils have to fall back on, should they require it.

Thank you for giving the examples of earmarked funds. I asked earlier about the forecasting, and I know that that is not your role, but it is about whether councils are doing the right thing and about what help they need.

I have a quick follow-up question on the reserve side. For how many more years do you think councils will be able to make up the difference in that way before uncommitted reserves run out? Have you done any work around that, or have you taken any data from councils?

We did some analysis on that, or loosely related to it, this year as part of the financial bulletin 2022-23. It relates to one of the Chartered Institute of Public Finance and Accountancy financial resilience index indicators. The analysis was around reserve depletion rates. We have seen in the past that councils might be at risk of exhausting their usable reserves within a set timeframe, but that is not necessarily the case just now. The trend is that councils are adding to their reserves. The analysis that we carried out showed that no council was at risk of fully exhausting their reserves within the next four years.

The warning sign that you were perhaps looking for has not come through in our analysis. Covid had a bit of an impact on the general trend of inflating reserves, which could skew the analysis ever so slightly. That is part of the CIPFA resilience index.

Thank you for that information. It is interesting because 31 out of 32 councils have given me a different picture. They talk about how much pressure is on their reserves and that they will eventually run out. They also talk about the fact that they cannot make year-to-year savings and that they will have eventually have to stop making them.

You are right that transformational change will have to happen, and I have a question on that for Jo Armstrong. Do you think that councils are equipped to make those plans for transformational change?

That is a very good question, and it is certainly in our best value reporting. We look at leadership and the ability to identify strategies and understand how best to implement transformational change opportunities. There is time for that to happen; it is running out, but there is time.

On the reserves picture, investing in transformational projects does not happen overnight, but we are asking about that, and we get a feel for whether that is happening. When we say that we need to increase the pace of change, our reports indicate that perhaps that is not as fast as it needs to be—perhaps we need to be slightly blunter.

I will add to that. As Jo Armstrong says, it is variable. We have talked about risk, debt and reserves, which are the warning signs. It is a complicated picture, so one thing would not make us concerned about a particular council. We look at a variety of things, not only the level of reserves and the trend or pattern of depletion, as Blyth mentioned. We also look at the council’s history of delivering its savings targets and plans, and what proportion is recurring versus non-recurring, whether it has good medium and longer-term financial planning, the budget gap, the level of unidentified savings, the bridging actions that it is using and the plans that is has for managing that. We look at a bundle of things. There is not one indicator that would say that the reserves are low so we are worried about council X, because those other things are also in the mix.

As Blyth said, the reserve position is very complicated. The commission will call for more clarity in our next piece of work about those reserves, including what is uncommitted and how much is committed for what and when, so that we can have a better understanding of how much cushioning there is or is not. The chief executives told you that there is not, but we do not have the detail to be able to confirm that.

I want to return to the subject of earmarked contingency funds. Blyth talked about how that happens at the local level—it is nuanced—but I am curious about the idea of earmarking such funds. Surely, they would be unearmarked. Could you say a bit more about that?

I think that I agree with you. I was trying to get that point across in my answer. It is difficult for us to know how those funds will be used. Beyond the contingency heading, the council might have plans that are in details that perhaps do not make it into the accounts, but that reinforces the message that accounts need to be clearer.

You are right that a contingency fund alongside an unallocated amount feel like the same thing. You will know that the commission recommended that councils hold between 2 and 4 per cent of net revenue expenditure in uncommitted reserves. We found that some councils were below that this year, which is not always the case, but when we did some analysis and looked in more detail, we saw that they also had contingency reserves, so they were actually sitting above the threshold.

There is a lot of nuance to all this, as you have correctly pointed out, but I think that it speaks to the challenge that we face in interrogating the accounts to get the true picture of what reserves look like. Again, we reinforce the message that transparency could improve.

Just to follow up on that, I would say as the new chair that, with regard to using data to help drive our scrutiny of and reporting on what is happening in local government, understanding the finances and budgets is something that we need to do a bit more on. However, we do not want to add to local government’s scrutiny burden, so we need to find the right way through that challenge.

Blyth Deans has started down that track, and the budget report that will come out in the next couple of weeks represents our first foray into what the outlook on budgets is for the next three years and whether that gives us enough comfort to say that the sector is, if not as strong as it could be, then sufficiently strong for us not to be concerned. We need to find some way of getting greater transparency about what the budgets and numbers are telling us so that we can give clarity to taxpayers, to council tax payers and to communities that their local authority is able to deliver the services that it needs to deliver, without facing a financial challenge.

That was really helpful. Colin Beattie has some questions.

Good morning. The commission notes that spending on unprotected services is continuing to fall. Have you conducted any assessment of the impact of such spending cuts, for example, by speaking directly to users of the services?

We do talk to users—and, indeed, are increasingly doing so—but we have not actively reviewed the impact of spending reductions on specific services to specific users. Carol Calder will have more detail on or more history to highlight with regard to what is going on in that space.

We have been talking to the Improvement Service about the local government benchmarking framework data to try to work out whether there is any correlation between the spend on and the performance of individual services. There is not a statistical relationship between the two things; the picture is much more complicated than that, with all sorts of things such as demand, need, criteria for services and policy decisions lying behind the headline figures. Correlation does not necessarily mean causation, but there are no clear-cut indicators from the LGBF data to show that performance and spend are related.

That said, our last local government overview report contained a diagram showing that education and social work were the two services that have had funding increases over the years, and that all other services have had cuts, with planning at the bottom with a cut of around 30 per cent. If you track the spend on individual services in individual councils, you can get a more meaningful relationship, but when you try to take a global 32-council approach, you will find that, because of the other factors and variables, it becomes meaningless and there is no correlation. We sometimes see that correlation when we look at individual councils, and if unprotected services, as we call them, were showing decreases in performance, the commission would report that in a best value report.

The Improvement Service has put out the annual report on the LGBF data this year, and it showed for the first time that, across all the indicators, more of them are declining than are being maintained or are improving. However, we are talking about the global level of all the indicators, and that does not include any weighting of indicators or consideration of what is more important to service users or behind-the-scenes efficiencies involved in delivering a service. The picture is really complicated, and the only way that you can look at it is at an individual service or individual council level.

Members have heard previously about service rationing and the growing level of unmet needs. Have you looked at that at all? Has there been any change in that? Is there a negative trend in that respect?

We do not monitor unmet need, which, by default, is difficult to put a figure on: it is difficult to measure people who do not come forward to ask for a service that is then recorded. It would be hard to believe that the cuts to some services or, more importantly, the increasing barriers to accessing services, suggest that there is no unmet need, but we do not have a metric to explain the size of that need.

09:45  

It certainly appears that the bar to qualify for services is being raised. It seems to me that that would hide unmet need.

We cannot verify whether that is happening across all local authorities, but we hear that anecdotally and, if the bar is getting higher, people who previously would have got a service will no longer be getting it, which is clearly a signal of unmet need.

I am looking at the chart that Carol Calder referred to, which shows the impact on unprotected services over the past 10 years. Planning has certainly been hit hardest—believe me, I hear a lot of complaints about that—but central support services come next. What is covered by “central support services”? Is that a uniform term across all councils?

That covers things such as finance departments, human resources and back-office functions, which are important. We are finding a reduction in the capacity of finance departments across Scotland, which makes it more difficult for us to sign off our audits as part of the work that we need to do with those finance departments. Finance capacity is an issue.

Those services have been cut to protect the front-line services that people and communities receive, but they have important functions, including internal controls and all the work that goes on behind the scenes to ensure good financial management.

The bar chart shows percentage changes in spending, but that does not give a feel for how much money is behind the percentage figure. Being able to look at the budgets of those services, rather than a percentage change, would give us a better idea of the impact.

Culture and leisure have also been particularly hard hit. Does that mean libraries and so on?

That includes libraries, culture, museums, swimming pools, leisure centres and that sort of thing.

Service users have also sustained reductions in capital budgets. What has been the impact of those reductions in capital budgets? Are any user groups more greatly impacted by those reductions?

Any reduction in capital budgets means that there is less money to maintain and build new assets such as roads, schools or other community buildings. A cut to the capital budget means that those properties are not being maintained to the same level. We all know from the state of the roads that they are not being maintained to the level that we would expect, so cuts to capital budgets have an impact on infrastructure.

Has the commission made any assessment of the impact of reduced capital budgets on the net zero ambitions of local government?

I do not think so. We are doing work on net zero, but I am not involved in that and would not be able to confidently answer that question, Mr Coffey.

Does the Accounts Commission take net zero into account in its audits?

We certainly look at the environmental sustainability requirements for local authorities. Capital budgets have a significant effect on net zero plans and aspirations and will delay their delivery, but we do not have clarity about exactly what those plans are and therefore about how cuts in budgets will bring delivery forward or push it further back.

Who is monitoring local government progress on net zero?

That is a really important question. The Accounts Commission is undertaking a series of performance audits, with Audit Scotland’s support, to assess whether net zero targets are being achieved. Like Jo Armstrong and Carol Calder, however, I am not aware that there has been any direct link between reductions in capital budgets and an impact on net zero. That is certainly something that we can take on board, given your line of questioning. I can reassure you that a series of performance audits are examining the net zero targets and the achievement thereof, or not, and much of that work is referenced on the Audit Scotland/Accounts Commission website. I am not aware of a direct look being taken at the impact of a reduction in capital budgets, but we can take that point away and consider it.

Jo, could I ask you for some views on the Verity house agreement, particularly the planned monitoring and accountability framework? It sits alongside other frameworks such as the national performance framework and the local government benchmarking framework. How does the Accounts Commission see those frameworks working together, or is there a better way to consolidate them to give us a single picture?

It is an interesting idea that they ought to be interlinked—and they really ought to be. The extent to which we are actively involved in discussions about what the Verity house agreement is going to be and how we might get involved is limited, as nothing has come forward. We have signalled that we are very interested in being supportive of what comes out of those discussions, but we do not want to be actively involved in developing the agreement, because we would then be in danger of marking our own homework.

We definitely want to be involved in helping, however, by acting as the independent arbiter on accountability, allowing both sides to know that, while they might be ceding control on one side or another, there is an independent auditor and an independent assurance system in place that gives them comfort that, in ceding control or ownership of the moneys, they will get the outcomes that they have collectively signed up to. We must wait and see what comes out of that.

So, you do not have a direct role to shape, assist or develop that.

We have decided not to pursue that on the ground that, if we do that, we end up marking our own homework. We have therefore not gone into that space.

I will amplify that point. The chair is right: we cannot get involved in the detailed workings of how the Verity house agreement commitments are delivered or not delivered, as we would thereafter be in danger of assessing our own work, as Jo has said.

That is a really important line of questioning, however. It is crucial to say that the commission has been very welcoming of the fact that the Verity house agreement was signed last year. I know that you may be coming on to this point, but my saying “last year” is the crucial point: it is now over 12 months since the agreement was signed, and I am pretty sure that, aside from the current focus on the upcoming UK election, everybody in this room recognises that we are now less than two years away from the short campaign for the next Holyrood election, so there is a narrowing window of opportunity to finalise the details of the Verity house agreement, in particular the development of a fiscal framework, which will lie behind a lot of the potential solutions to the problems that we have been discussing this morning. The commission would contest, and I hope that everybody in the room would agree, that the closer we get to May 2026, the less chance there is of a consensual agreement around the fiscal framework. The further away we are from May 2026, the more chance we have of getting a consensual agreement. We would encourage the Government and COSLA to make progress on that.

The Government gave an update to us and to the committee in December 2023—in writing, I think—and that was welcome, but that is four months ago now. Like you, I am sure, the commission has heard Government ministers and the COSLA presidential team say that they want to get the agreement right, rather than rushing it and getting it wrong. That is totally understandable, but time is of the essence, and the commission would urge progress on the Verity house agreement and the fiscal framework within it in particular.

I will turn to a favourite question that the committee poses, on ring fencing and directed funding—using all the terminology that surrounds that. It sounds a bit like the debate that we had about reserves earlier, with multiple categories here and there. You have a figure of 26 per cent: that is your guess about the actual amount of ring fencing and directed funding. If we talk to the Scottish Government, it could be as low as 10 per cent; if we talk to COSLA, it could be as high as 60 per cent. Could you offer a wee flavour of why those discrepancies are there? Could you explain to the committee and to members of the public why there are those huge differences in figures?

Again, I will ask Blyth Deans to come in with more detail. Strategically, the ring-fencing debates are around what is, and is not, included in the baseline. As soon as you add something to a baseline, the percentage change that you get can be significant or not.

We would hope that the Verity house agreement and fiscal framework would give greater clarity and certainty—on both sides—of what is, and is not, included in a ring-fenced pot. If you have something in, the percentage change is an obvious arithmetic calculation. The differences between the Scottish Government’s assessment, our assessment and COSLA’s assessment is about what is, and is not, in that baseline figure.

In our exhibit 5 from last year’s local government overview, we attempted to illustrate the differing views and how we came to our number, which is between the two of them.

The Scottish Government views ring-fencing as relating purely to those funds in the specific resource grant. COSLA takes a different view, which is that it relates to all of the specific resource grant plus any obligations created by current or past policy initiatives from the Scottish Government. That would include, for example, all school teaching staff, because numbers are mandated, as well as a large amount of adult social care, where the costs are devolved to integration joint boards. Its estimate is therefore closer to 65 or 70 per cent.

The starting point for our calculation is the specific revenue grant. We then look through the budget documents—all revisions plus the financial circulars—for lines where funding has been directed to specific policies. Our calculation is therefore ring-fenced plus directed funding. When we add up all those elements, we get to a total for 2022-23 of 26 per cent, which is a small increase on the year before. That is how we get to our number, which differs from the other two.

That is really helpful. Do the Scottish Government and COSLA agree with your method of analysis?

It is a sad indictment that, every year, we end up having to have this debate about ring-fencing and what is, and is not, in. It would be much better if we could direct those efforts towards how we make the transformational change work, rather than towards having to defend, re-defend and reassess numbers. That would be my plea at this stage. Every year, there is a discussion about what percentage is ring-fenced and what is not.

I look forward to that day.

We have the fiscal framework in development. You would like to think that, within that, there will be an alignment around what we are talking about. That becomes really important, does it not?

Yes. Absolutely. That is correct.

There were positive movements in the most recent budget, for 2024-25. The specific revenue grant decreased hugely, and some of that was baselined into the general resource grant. On the other side of that coin, we may still class that as directed funding, even though it is within the general revenue grant.

Okay. There is a bit more work to be done there.

Willie Coffey has more questions.

I have a final question on the council tax freeze. The Scottish Government provided £147 million to councils to freeze the council tax, plus another £63 million through Barnett consequentials, giving a total of £210 million. However, a comment in your report says that freezing the council tax

“suppresses the growth of the council tax base over that period and the income generated when the freeze is lifted is potentially lower”.

Will you explain to committee members what the Accounts Commission means by that?

I will give you my interpretation of what we wrote. If I get it wrong, somebody can jump in and tell me that I am wrong.

If you do not increase your baseline by an amount and it is not guaranteed in future years, you will start off the next year with a lower baseline on which to levy your taxes. If you want to raise tax levels by a certain amount year on year, you have certainty on what your baseline is if you have increased your council tax year on year. If you cannot guarantee that budget allocation year on year, your baseline will be a smaller amount.

Blyth, have I given the correct answer?

It was perfect.

He has to say that, of course. Does that help, Mr Coffey?

10:00  

It certainly does. However, given that explanation, why would the councils choose to freeze the council tax if, by your estimation, they could actually generate more income in future years by not freezing it?

Clearly, I am not involved in the debate and discussions behind the scenes between the Scottish Government and local government with regard to why they chose to freeze it if they could have increased it. There have obviously been some interesting debates in some councils about whether they should have increased it, but all have accepted the council tax freeze as a starting point.

Thanks. I will leave it there, convener.

Good morning. We have spoken a little bit already about budget transparency, and I am quite interested in the public engagement part of that as well. The Accounts Commission says that is it important that councils are

“clear with the public about their finances and have frank conversations about what services they can realistically provide”.

What led the commission to make that recommendation?

Again, this work slightly predates me, and I cannot say exactly what was in somebody’s mind when they wrote that, but I am pretty sure that it involves the fact that, if councils are going to have to cut services or ration services, they have to explain to communities why that is happening. Greater transparency about how budgets are being allocated and how services are being provided increases the potential for communities to at least accept, if not like, the outcome. Am I correct, Carol? Is that the justification?

Yes. We have said in a few local government overviews that councils need to have honest conversations with their communities. Basically, they are asking communities what is the least worst scenario, and those are very difficult conversations to have. Even when councils have consulted on their budgets, the reality of something closing or a service being withdrawn is still very difficult for people to swallow, so there are a lot of barriers. You can say things conceptually, but when it actually happens, there is a lot of resistance to changing and reducing services, shutting schools and community centres and so on. However, there has to be a realistic conversation about what the least worst scenario is in those cases, even though they are difficult conversations to have with communities, and it is difficult for elected members to vote on those decisions, because they want to be voted back in. Such choices are against what communities want, but those are the hard choices that are being made at the moment. Of course, even when councils have consulted really well on their budget, we still see examples across Scotland of U-turns on decisions because of the public outcry.

Have you done work to explore how councils are communicating and engaging with the public, and whether that is influencing the decisions that are made?

Yes. In the individual best value reports on individual councils, we look at community engagement, which involves not only consultation but empowerment and the extent to which communities are involved in the decision-making processes around delivery of services.

That brings me to my next question. We are 10 years on from the Christie commission and the vision that it set out. I am quite interested in the programmes and the transformation that we have had over recent years, and what leads to successful transformation. Do you have a good example of transformation that has gone well, and can you say what the key reasons are why it has come out better than others?

I will hand that question over to Carol Calder, because she is definitely more informed in that regard than I am. However, I can say that it is about showing leadership and thinking strategically about what is needed, and ensuring that that leadership drives through the change that is necessary. That is a challenge when you have to maintain services on a day-to-day basis.

I will pick up on that but, first, I apologise to Mr Beattie for calling him Mr Coffey earlier in the discussion. I realised immediately and I have been trying to get in an apology ever since.

Have we seen any examples of transformation? Alongside the most recent local government overview report, there was a supplementary document that covered a number of case studies involving small-scale transformation of individual services in individual councils. There is a lot of work going on that is quite small scale.

When we gave evidence to the committee after the pandemic, we spoke about how the pandemic had enabled councils to be fleet of foot and to change the way in which they delivered services. At that point, we said that they were using data well to focus resources on need, that there was collaborative leadership that was driving councils forward with a common purpose and that there were new flexible ways of undertaking governance and using the workforce. Those things still apply.

In our local government overviews, we have also said that we need to work with the workforce to plan what the workforce should look like in the future. Those are all medium-term and long-term goals. At the moment, because the financial situation is so challenging, councils are focusing on the immediate term—on keeping the show on the road, making efficiencies and running services. I will shamelessly steal from one of my colleagues, who has said that it is really difficult to overhaul the aeroplane while you are flying it. That is a good metaphor for what we are asking councils to do right now.

The SOLACE document sets out a new paradigm for local government. What are we about? What should we be doing as guardians of place? How should we enable services to be provided without necessarily being the delivery body for those services? We face barriers in getting to that place. Those barriers include things such as getting the community to agree and come along with you, getting the unions and the workforce to understand, agree and come along with you, and getting the elected members to make the decisions and come along with you, along with all the issues that we have talked about around financial flexibility and being able to plan for the long term. Those are some of the barriers that get in the way of the bigger change that we are saying is needed.

Could you give a specific example of such partnership working and the empowerment of communities that goes along with that?

From memory, I think that South Ayrshire Council has been good at such community engagement and delivering things differently. There is a lot of information on the Improvement Service website. There is also the supplement that I referred to, which is on our website.

I will turn to colleagues in case they have any other examples on the tips of their tongues that they want to throw in.

South Ayrshire Council is specifically mentioned in some of the individual BV work that we have looked at. That is the example that I, on behalf of the commission, would direct members to have a look at. South Ayrshire Council has done some really innovative stuff that has saved significant sums of money.

Is that work tied into early intervention and prevention? I ask that because you mentioned significant sums of money being saved.

It is tied into Carol Calder’s points about significant and deep community engagement at an early stage—in other words, involving local residents and other participants who have a stake in the service that is being delivered or, potentially, transformed. South Ayrshire Council has a record of engaging in a deep and meaningful way at a very early stage. That does not apply to all local authorities. I do not want to underplay how difficult that is, but South Ayrshire Council has a good record of doing that in recent years.

Thank you. I should probably put on record the fact that I was a councillor on South Lanarkshire Council until 2022.

I want to pursue that strand of transformational change a little bit more. We understand from our work on the Community Empowerment (Scotland) Act 2015 that Scotland has a community empowerment agenda. The community planning partnerships were set up through that piece of legislation. We have been looking at the national planning framework, which brought forward the idea of communities creating local place plans. We have one vehicle that is about the built environment and another that is more about the delivery of certain services. On top of that, we are beginning to do work on the whole community wealth building agenda.

Are there tools in place that could support the process of transformational change that need to be spruced up or looked at? It is interesting that the Verity house agreement points to the community planning partnerships as vehicles for supporting things such as transformational change to happen. What are your thoughts on that and on how we can support local authorities to look in those directions for transformational change?

Again, my experience of that is more limited. Carol, is there anything specific that you want to pick up on?

On the SOLACE transformation projects, there are a number of “anchors”, as it describes them, one of which is about community action. Another specifically looks at partnership working and systems thinking—so place thinking—and another one is about design for needs. That again brings in data. I know that the sector is looking at all those things to draw on to enable it to make the transformational change that is required.

I think that there is a good understanding of what to do and how to do it, but some of the barriers that I referred to earlier are getting in the way of that. The Verity house agreement is one thing that might help to smooth the passage of making those changes.

I have heard in the conversation the question whether we can get to the place where communities lead with councils supporting and facilitating more nuanced local need, and then developers coming in to deliver what communities are looking for. Currently, we seem to have developers leading, especially in housing, but we are now talking about place making much more—thank you for bringing that in. Can we turn things around so that, instead of developers identifying land and saying that that is where things need to happen, communities say what needs they see, and there is then facilitation? You talk about the SOLACE report dealing with partnership working. I guess that that is what it is, but it is about the emphasis on who leads and how we get to the point at which communities have a sense of agency and a sense that they can lead in the first place.

That is exactly what SOLACE is getting at. It talks about “unlocking community action” and it refers to being “delivery agnostic”. Therefore, it is much more about empowering communities. In the current climate, empowering communities to do things for themselves might sound like councils cutting services, so a sell needs to be made around all that. However, that is what SOLACE and the sector as a whole are looking at for the way forward.

On that note of transformational change, I thank the witnesses for joining us this morning. The session has been very constructive and informative, which I really appreciate, and it has been great to have Jo Armstrong along for her first session with the committee. I look forward to seeing you in the future.

I will briefly suspend the meeting to allow for a changeover of witnesses.

10:13 Meeting suspended.  

10:22 On resuming—