Image copyright PA Image caption Scottish councils could face a combined funding gap of more than £550m by 2018/19, auditors have warned

Scotland's councils face "significant challenges" managing their finances in future years, according to a new report from the Accounts Commission.

Auditors said local authorities were generally in good financial health in 2015/16, but face a difficult future.

They warned that rising demand for services and falling income could leave councils with a combined funding gap of £553m by 2018/19.

The Scottish government said it had treated local government "very fairly".

The Accounts Commission report warns that councils "need to change the way they work" and make long-term plans if they are to achieve the savings needed.

It found that councils had managed to reduce debt and increase their reserves slightly in 2015/16, but warned that "significant challenges" lie ahead due to shrinking income and rising expenditure.

'Increasing pressures'

The report notes that local authority budgets face a long-term decline in funding from the Scottish government - down 8.4% in real terms between 2010/11 and 2016/17 - alongside increasing demand on services and increasing costs on areas such as pensions.

Ronnie Hinds, deputy chairman of the Accounts Commission, said: "Councils are generally doing a good job with their finances in difficult circumstances. But pressures continue to increase on a number of fronts at the same time as they face the prospect of further reductions in their spending.

"It's vital that councillors and officers set medium and long-term financial plans based on clear priorities for the services they provide to their communities."

The report found that of Scotland's 32 local authorities, 14 had long-term financial strategies in place, with 15 more having at least a medium-term financial strategy.

Image caption Local councils run services such as road maintenance, refuse collections and education

Three councils - Glasgow City, Highland and East Renfrewshire - "do not have a financial strategy covering the medium or long term".

Kevin Keenan, a Dundee City councillor and finance spokesman for local government body Cosla, said it was "virtually impossible" for councils to set medium and long-term financial plans based on the yearly budgets provided by the Scottish government.

He said: "We all know the direction of travel for public sector finances. Indeed, the report actually warns of further reductions in funding for councils from central government while demand on council services, particularly social care, continues to rise.

"Whilst councils and councillors do their best to mitigate the damage to communities from political choices made at the centre, this is becoming harder and harder to do."

'Very fair'

However, a spokeswoman for the Scottish government insisted that local government had been treated "very fairly" by the Holyrood administration, "despite cuts to the Scottish government from the UK government".

She added: "This report highlights the pressures that councils - like other parts of the public sector - face, but also highlights that they are continuing to improve services.

"We expect local authorities to continue to use resources as efficiently and effectively as possible to ensure taxpayers get the best possible services and value for money.

"The report makes a number of recommendations aimed at helping councils to meet future challenges. We welcome the report, and would expect all councillors to consider and take any necessary action to implement its recommendations."

Image copyright William Starkey Image caption Glasgow City Council was one of three local authorities judged to lack a medium or long-term financial plan

Scottish Conservative local government spokesman Graham Simpson said it was getting "more and more difficult" for councils to cope.

He said: "The report rightly warns that worse is to come, and we would urge the SNP to come clean on what lies in store for local authorities down the line.

"The funding pressures put on councils will undoubtedly see some increase in council tax next year."

Scottish Labour's deputy leader Alex Rowley said the report showed the SNP had cut £500m from local authority budgets.

He said: "The SNP shouldn't use the Scottish Parliament as a conveyor belt for Tory austerity. We should use the tax powers of the parliament to invest in public services and give everybody a fair chance in life."

The Scottish Greens are holding a Holyrood debate on local democracy later in the week.

MSP Andy Wightman said: "It is clear we now need to dedicate as much time and energy on negotiating a fiscal framework for local government to set the ground rules for future funding and to increase fiscal autonomy and democracy.

Scottish Liberal Democrat leader Willie Rennie added: "The figures published today paint a very concerning picture for local services like schools and social care. These local services are lifelines for local communities and, as such, must be funded properly."