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5 March 2015, 08:08 | Updated: 5 March 2015, 08:09
Council debt repayments to the private sector will peak at a time when they will face unprecedented demand for services from old people and schoolchildren, the public spending watchdog has warned.
Annual repayments to the Scottish Government's non-profit distribution public-private partnership debt and its private finance initiative predecessor is predicted to rise from £488 million to £600 million by 2024/25, the Accounts Commission said.
By this time, demographic pressures caused by an ageing population and more children will be rising.
Councils are already facing increasingly difficult financial challenges, according to the Commission.
Scottish Government funding for councils has decreased by 8.5% in the last four years, and many councils are now reporting gaps between their income and the cost of providing services.
English councils have faced more severe cuts by the UK Government with a 37% reduction over five years.
Scottish councils face increasing demand to implement SNP priorities such as the council tax freeze, free personal care, housing standards, class sizes and other legislation and national policies.
Pressure also comes from future spending commitments such as financing NPD/PFI debt, other borrowing, rising pension and equal pay costs and other liabilities.
The Accounts Commission said: "Annual interest and debt repayments have increased from £946 million in 2009/10 to £1.5 billion in 2013/14, with repayments for PFI and NPD contracts totalling £488 million in 2013/14 and predicted to peak at around £600 million a year between 2024/25 and 2027/28.
"Population projections indicate that there will be increasing demand for council services at the same time as financing charges are anticipated to peak.''
Scotland's population is rising by 0.2% a year, with over-65s expected to rise from 17% to 25% by 2037 putting pressure on social care and housing, and a 5.5% rise in children putting pressure on schools.
Midlothian Council alone, one of the smallest councils, thinks it will need 300 extra care home places at a cost of £6 million a year.
Some councils have increased or introduced new charges for services, but spending on services has decreased by 1%.
Council reserves fell by 2% in 2013/14 following several years accumulation.
It is not clear if councils' planned savings will be enough to cover the reported gaps in funding or if they will need to make more savings, the Commission said.
Edinburgh Council is considering 1,200 staff cuts and working with voluntary groups to plug the gap.
Almost all councils' auditors have indicated risks to the administrations' financial positions in the medium to long term.
Specific risks include councils spending more money than planned, not making planned savings, unexpected compromises on the quality of services, an inability to meet demand for services and inadequate funds in their reserves.
Rent arrears increased by 24% between 2012/13 and 2013/14 despite #29.4 million of Government discretionary housing payments (DHPs) handed out last year.
"This may, in part, be a result of welfare reforms,'' the Accounts Commission said.
"So far, councils are managing the impact of welfare reform and many are spending money on support for people affected.''
Douglas Sinclair, chair of the Accounts Commission, said: "Councils have coped well so far. But they will face pressures beyond next year of a scale not previously experienced, as budgets become even tighter and demands on services continue to increase.
"The challenge for councillors is to make best use of the money that is available and to take difficult decisions now to avoid storing up problems for the future.
"Regular reviews of governance are essential due to continuing changes in council staff, management and political structures and delivery models, such as the use of arm's-length external organisations and the new health and social care partnerships.''
Councillor Kevin Keenan, finance spokesman at council umbrella group Cosla, said: "I am pleased with the recognition contained within today's report that councils have managed the financial pressures they have faced very well because this is both exactly right and is exactly what they have done.
"The report is also correct in pointing out that even tougher years lie ahead.
"Scotland's councils should be applauded by communities for the job they have done in protecting them because despite the financial difficulties and extreme budgetary pressures local government feels year on year, Scotland's councils, based on their individual need and local priority, have done their utmost to protect frontline services and ensure to the best of their ability that the service user does not suffer.
"As the report points out it is also fair to say that this is going to get even tougher in the next few years and just like in previous years, really, really difficult decisions will need to be taken by Scotland's councils.
"That is why councils need to be far more empowered in relation to the resources that they have at their disposal.
"They need to be freed up to raise more of their own finances as it is local politicians who are held accountable for the success or failure in relation to the achievement of local aspirations.
"Cosla is currently lobbying Scottish Government for a strong sustainable model of local government funding through a political group which I chair.''
Theresa Fyffe, director of the Royal College of Nursing in Scotland, said: "While everyone working in the NHS knows the available resources are being spread thinner and thinner in an attempt to keep the health service going, there is no doubt that local authorities are in an even more difficult place financially.
"Indeed, today's report points out that local authorities are in the unenviable position of seeing an 8.5% real terms cut in funding over the last three years while trying to meet ever-increasing demand for services due to people living longer.
"So the new joint approach to integrating health and social care between the NHS, local authorities and other partners comes at an exceptionally challenging time.
"Audit Scotland is quite right to emphasise the need for strong governance arrangements for the new integrated health and social care partnerships to ensure they stay on track and efficiently deliver effective services. There is no point in taking these reforms forward unless they genuinely improve the health and wellbeing of Scotland's people.''
Scottish Labour finance spokeswoman Jackie Baillie said: "This report shows the huge pressure that local government is under in Scotland, and the reality of SNP austerity for the services we care about, like our schools and social care.
"We clearly need a new method of financing local government but after more than eight years in government, the SNP have done nothing but kick the problem into the long grass.
"The reality is starting to bite - jobs are already being lost and now we face the prospect of real and very damaging cuts to services. The SNP have underfunded local government for years and problems are now coming home to roost.''