Scottish Local Government Finance Statistics 2024-25

5. Debt and Prudential Indicators

5.1 Debt

When a local authority borrows money or uses a credit arrangement to finance capital expenditure a debt liability is created that the local authority has to repay from future revenues. A local authority is required to make loans fund advances in respect of capital expenditure it has determined should be met from borrowing. Loans fund advances are repaid in future years.

Table 5.1 provides a summary of local authorities’ debt at 31 March 2025. Total debt across local authorities at 31 March 2025 was £25,296 million, an increase of 10.2 per cent or £2,347 million, from 31 March 2024. Some of this increase in debt will be due to the implementation of IFRS 16.

Table 5.1: Total Debt at 31 March 2025, £ millions

Source: LFR CR

Source: LFR CR

5.1.1 Loans Fund

The Local Authority (Capital Finance and Accounting) (Scotland) Regulations 2016 require a local authority to maintain a Loans Fund. Advances are made from the Loans Fund to record the amount of expenditure a local authority has determined should be met from borrowing, as permitted by legislation. The repayments made to the Loans Fund are the amount to be met in each financial year from a local authorities’ revenue accounts.

The value of a Loans Fund will increase whenever an advance is made for expenditure incurred, or loans made, in any financial year. The value of a Loans Fund will decrease when Loans Fund Advances are repaid by making a charge to the General Fund or HRA. The balance on a Loans Fund at 31 March each year represents the amount of past expenditure a local authority has liability to fund from its future revenue budgets.

A local authority will borrow externally to fund the advances made from the Loans Fund. The balance on the Loans Fund should be similar to the value of external borrowing but there may be legitimate differences between the two values. Local authorities may borrow internally, that is use cash reserves, rather than borrowing externally, or may borrow in advance of incurring the actual expenditure to take advantage of favourable interest rates.

Table 5.2 provides a summary of local authorities’ Loans Funds in 2024-25. The overall value of the Loans Fund across all local authorities at 31 March 2025 was £21,017 million, an increase of 8.4 per cent, or £1,629 million, from 1 April 2024.

Table 5.2: Loans Funds Advances Outstanding in 2024-25, £ millions

Please note that these figures only reflect local authorities own debt and exclude amounts relating to lending to other statutory bodies.

Source: LFR CR

5.1.2 Credit Arrangements

Credit arrangements, such as finance leases, Private Finance Initiatives (PFI) and Public Private Partnerships (PPP) including the Scottish Non-Profit Distributing (NPD) model, are not charged to the Loans Fund. However they are a form of borrowing and so are included in the total debt figures.

Table 5.3 provides a summary of local authorities’ credit arrangements in 2024-25. The overall value of credit arrangements outstanding across all local authorities at 31 March 2025 was £4,280 million, an increase of 19.2 per cent, or £690 million, from 1 April 2024. This increase is the consequence of IFRS 16 which means these credit arrangements are now recognised on the balance sheet. This is likely to be a one-off change and captures transactions which may have occurred prior to 2024-25.

Table 5.3: Credit Arrangements in 2024-25, £ millions

Source: LFR CR

5.2 Prudential Indicators

The Chartered Institute of Public Finance & Accountancy (CIPFA) Prudential Code sets out a framework for a local authority to demonstrate its capital investment plans are affordable, prudent and sustainable. A number of prudential indicators are set and monitored against three year capital expenditure plans. Further, the Local Government in Scotland Act 2003 places a local authority under a statutory duty to set their own maximum capital expenditure limits and they must be set with regard to the Prudential Code. The key prudential indicators are:

• Capital Financing Requirement
• Total External Debt
• Operational Boundary
• Authorised Limit

Chart 5.2 shows the change in prudential indicators between 31 March 2021 and 31 March 2025. More information on the individual indicators is provided in the remainder of this chapter.

Chart 5.2: Prudential Indicators at 31 March 2021 to 31 March 2025, £ millions

Source: LFR CR

5.2.1 Capital Financing Requirement (CFR)

The Capital Financing Requirement (CFR) 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 the debt met from future local authority budgets.

The CFR will increase each year by the amount of new capital expenditure to be financed by borrowing or credit arrangements, and will decrease by the amounts repaid. The CFR represents an authority’s underlying need to borrow money.

Table 5.4 shows the CFR calculation for 2024-25. The CFR increased from £24,468 million at 1 April 2024 to £26,668 million at 31 March 2025 (+£2,200 million, +9.0 per cent). This means that local authorities had a higher amount of new capital expenditure to be financed by borrowing than amounts repaid in 2024-25. This increase in CFR was reflected across both the General Fund and HRA.

The increase in the CFR is the consequence of IFRS 16 which means these credit arrangements are now recognised on the balance sheet. This is likely to be a one-off change and captures transactions which may have occurred prior to 2024-25.

Table 5.4: Capital Financing Requirement in 2024-25, £ millions

Please note that these figures exclude amounts relating to lending to other statutory bodies.

Source: LFR CR

Chart 5.2 shows that local authorities’ CFR has increased over the last five years which reflects the increase in local authority borrowing over this period, and the implementation of IFRS 16.

5.2.2 Total External Debt

Total External Debt reflects local authorities’ gross external borrowing 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. Total External Debt may be more than the CFR where a local authority has chosen to borrow in advance of actual capital expenditure; however the Prudential Code limits borrowing in advance to the CFR amount plus up to two years planned capital expenditure to be funded from borrowing.

Table 5.5 shows that total external debt at 31 March 2025 was £23,448 million. Around four-fifths (81.7 per cent) of total external debt related to external borrowing, with the remainder relating to credit arrangements outstanding.

Table 5.5: Total External Debt at 31 March 2021 to 31 March 2025, £ millions

Please note that these figures reflect actual gross external debt as calculated for comparison to the Capital Financing Requirement as per the Prudential Code.

Source: LFR CR

As shown in Chart 5.2, the CFR continues to remain above total external debt. This means that local authorities continue to be under-borrowed, that is they are utilising internal cash reserves rather than borrowing externally. At 31 March 2025, total external debt was 87.9 per cent of the CFR, an increase on the previous year, but below the five-year average (88.4 per cent).

5.2.3 Operational Boundary and Authorised Limit

The Operational Boundary is based on local authorities’ capital spending plans and should reflect the most likely, or prudent, but not worst-case scenario for borrowing. In general, it is not significant if an authority breaches the operational boundary for a short period, however a sustained or regular trend above would be significant. At 31 March 2025, the Operational Boundary was £27,377 million across local authorities.

The Authorised Limit represents the maximum amount that the authority may borrow and is set at a level that reflects capital expenditure plans but includes headroom to allow for unusual cash movements, i.e. treasury management. The Authorised Limit across all local authorities was £29,076 million at 31 March 2025.

As shown in Chart 5.2, neither the operational boundary nor the authorised limit have been breached in the last five years. This means that local authorities’ borrowing has consistently remained below these limits.