Local Government 2025-26 Provisional Outturn and 2026-27 Budget Estimates
This publication summarises the 2025-26 provisional outturn and 2026-27 budget estimates for revenue and capital services provided by Scottish local authorities.
Capital Expenditure
Capital expenditure is expenditure that creates an asset, extends the life of an asset or increases the value of an asset. It creates the buildings and infrastructure necessary to provide services, such as schools, care homes, flood defences, roads, vehicles, plant and machinery. Capital expenditure also includes grants a local authority provides to third parties, to fund that party’s capital expenditure; direct expenditure on a third party’s assets; and loans to third parties to support capital investment of the third party where this is financed from capital resources. Capital POBE figures include amounts relating to a local authority’s direct provision of housing, which is recorded in the Housing Revenue Account (HRA).
It is important to note that the ‘lumpy’ nature of capital expenditure means that delays or changes to large capital projects at the end of the financial year can have a large impact on final figures compared to provisional outturn and budgets.
Capital expenditure in 2024-25 was impacted by IFRS 16, the International Financial Reporting Standard for leases. It replaced older standards to create a single model for lessees, requiring most leases over 12 months to appear on the balance sheet as a Right-of-Use (ROU) Asset and a Lease Liability. This brought most lease obligations onto the balance sheet, increasing transparency, though it allowed exemptions for short-term leases and low-value assets. The mandatory implementation date for IFRS 16 was 1 April 2024. As a result, overall capital expenditure in 2024-25 is higher as a result of IFRS 16 implementation.
Figure 4: Total Capital Expenditure for 2022-23 to 2026-27, £ millions
Source: POBE 2026 Return, LFR CR
Capital expenditure across local authorities was £4,779 million in 2024-25, and is provisionally reported as £4,461 million in 2025-26, a decrease of 7% (£318 million). It is budgeted as £5,318 million in 2026-27.
As shown in Figure 5, the HRA is the service with the largest capital expenditure in each year, and this is provisionally reported to increase to £1,310 million in 2025-26, and then to £1,583 million in 2026-27. Overall, HRA capital expenditure accounts for around 29% of all capital expenditure in 2025-26 and 30% in 2026-27.
HRA capital expenditure is driven by new construction and conversion, which accounts for 43 and 46 per cent of the HRA capital expenditure in 2025-26 and 2026-27 respectively.
Capital expenditure on Education decreased from £1,169 million in 2024-25 to a provisional outturn figure of £837 million in 2025-26, before rising again to a budgeted £1,000 million in 2026-27. For context, there has been a step change in Capital expenditure for Education, with an average of around £300 million more a year for the five years 2024-25 to 2028-29, compared to 2019-20 to 2023-24. This reflects the roll out of the Learning Estate Investment Programme.
Implementation of IFRS 16 has resulted in atypically high values for Central and other Services in 2024-25.
Figure 5: Capital Expenditure for 2024-25 to 2026-27 by Service, £ millions
Please note that ‘Non-HRA Housing’ includes capital expenditure related to Consented and Statutory Borrowing.
Source: POBE 2026 Return, LFR CR
Local authorities can finance capital expenditure in a number of ways, including use of grants and contributions; borrowing; credit arrangements; capital receipts and reserves. Figure 6 shows how capital expenditure was financed in 2024-25 and 2025-26, and how financing is anticipated in 2026-27.
Implementation of IFRS 16 has resulted in atypically high values for Assets acquired under Credit Arrangements in 2024-25.
Figure 6: In-Year Capital Financing for 2024-25 to 2026-27, £ millions
Please note that ‘Grants & contributions’ and ‘Borrowing from Loans Fund’ include amounts used to fund grants to third-party capital projects.
Source: POBE 2026 Return, LFR CR
In-year borrowing from the Loans Fund is the largest source of capital financing, at £2,103 million in 2024-25, with increases to £2,228 million in 2025-26 and £3,349 million expected in 2026-27. This increase in in-year borrowing is seen across most councils, with 18 out of 32 councils increasing their in-year borrowing in 2025-26 compared to the previous year, and 29 increasing their in-year borrowing in 2026-27, compared to 2025-26. In-year borrowing is now the primary source of capital financing.
In-year grants & contributions are expected to be £1,779 million in 2025-26 and £1,516 million in 2026-27. This source of capital financing includes grants and contributions received from the Scottish and UK Governments; other government agencies and Non-Departmental Public Bodies (NDPBs); other local authorities; and private developers. Capital grant from the SG includes capital allocations paid to local authorities as part of the Local Government Finance Settlement. Details of these allocations can be found in the relevant Local Government Finance Circular.
Financing from credit arrangements saw a marked increase during 2024-25 of around £690 million[1]. This is a consequence of IFRS 16 where these assets are now recognised on the balance sheet.
The Chartered Institute of Public Finance and Accountancy (CIPFA) Prudential Code sets out a framework for a local authority to demonstrate its capital investment plans are affordable, prudent and sustainable. The Capital Financing Requirement (CFR) is one of the prudential indicators set out in this framework. It represents the amount of capital expenditure a local authority has determined should be met from borrowing or funded from a credit arrangement, with the repayment of debt met from future budgets. That is, it represents an authority’s underlying need to borrow money. Local authorities have reported total provisional CFR of £28,468 million in 2025-26, and total budget estimate for CFR of £31,222 million for 2026-27.
Total External Debt reflects local authorities’ gross external borrowing, finance leases and other long-term liabilities. This may be less than the CFR where an authority has chosen to utilise cash reserves rather than borrow externally; or it may be more than the CFR where an authority has chosen to borrow in advance of capital expenditure being incurred. The Prudential Code limits local authorities’ borrowing in advance to the CFR amount plus up to two years’ planned capital expenditure to be funded from borrowing. Local authorities have reported provisional external debt of £25,617 million in 2025-26, and budgeted for external debt of £28,793 million in 2026-27.
Figure 7: CFR and External Debt for 2022-23 to 2026-27, £ millions
Source: POBE 2026 Return, LFR CR
As shown in Figure 7, Total External Debt continues to remain below the CFR. This means local authorities are under-borrowed and indicates their treasury policy is to utilise cash reserves to fund borrowing at this time. Should their cash requirements increase, a local authority can borrow externally to meet that need, utilising their under-borrowed position.