Scottish councils are living with unsustainable finances and are facing "unprecedented financial and service demand pressures" in the future, a watchdog has said.

The latest report on council finances from the Accounts Commission said the total budget gap in the country’s local authorities has risen to £725 million for the next financial year – almost double the £476 million from the year before.

In England, a number of councils are struggling financially, raising the spectre of the same happening north of the border, with Middlesbrough Council appealing to the UK Government for financial aid to avoid declaring effective bankruptcy.

Scottish local authority body, Cosla, said the report shows how shaky the financial ground is for councils and highlights the need to secure a “solution to these long-term issues in order to protect the essential frontline service of our communities”.

The report said: “Local appointed auditors did not identify any councils in Scotland as being financially unsustainable in the short term.

“However, the financial outlook is extremely challenging, with Scottish councils facing unprecedented financial and service demand pressures which present real risks for the future.

“Although Scottish Government core funding increased in cash and real terms in 2023-24, councils reported a significant increase in the total budget gap to £725 million.”

It added: “Councils’ medium- and longer-term financial plans demonstrate a clear recognition of the difficult financial context and the need to continue to innovate at pace and make difficult decisions to become more financially sustainable.

“But some councils are already experiencing significant resistance when seeking to make service reductions to balance budgets.

“This reinforces the need for effective consultation and engagement with communities on planned local service changes.”

Last summer, the Scottish Government and Cosla signed the Verity House Agreement – a deal between the two bodies which pledged to create a fiscal framework for councils as well as better long-term budgeting.

The Accounts Commission said meeting the commitments of the agreement will be “important”, increasing financial certainty and flexibility for councils.

Cosla’s resources spokeswoman, Katie Hagmann, said some of the messages from the Accounts Commission report were “stark” but “came as no great surprise” to councils.

“Today’s Accounts Commission bulletin is a true reflection of where we are now,” she added.

“Our reality right now is extremely challenging – years of real-terms cuts to council budgets have been coupled with increasing additional policy commitments and increased ring-fencing.

“With so much funding still directed, the ability to take local decisions on most of our budget is almost impossible.”

The report also took aim at the Scottish Government’s proposed council tax freeze for next year.

The policy, announced by First Minister Humza Yousaf at the SNP conference in Aberdeen, will see councils given a share of £144 million to fund it.

But the decision drew the ire of councils, who claimed there had been no consultation on the issue before it was announced and dashed hopes that authorities could be able to raise the levy to ease pressures.

A spokesman for the Scottish Government said: “We welcome the report from the Accounts Commission that confirms the Scottish Government provided a real-terms increase in revenue funding for local government in both 2022-23 and 2023-24.

“The Scottish Government recognises the financial challenges that the entire public sector are facing and that local authorities and their employees play a pivotal role in our communities.

“In the face of a profoundly challenging financial situation, we are making available record funding of over £14 billion to councils – a real-terms increase of 4.3% compared with the 2023-24 budget.”

Scottish Liberal Democrat finance spokesman Willie Rennie accused the Scottish Government of treating councils as the “poor relation”, adding that ministers have “utterly failed to get the economy moving”, resulting in low growth and tax revenues.

Accounts Commission interim chairman Ronnie Hinds said: “There is intensifying pressures on council finances and services.

“Given the funding position for councils, there is increasing reliance on reserves and savings to deliver balanced budgets.

“This means councils are already making difficult decisions about future service delivery and the level of service they can afford.”