Scottish councils are showing increasing signs of financial stress and face even tougher challenges ahead, according to the Accounts Commission.

In its annual financial overview for 2016-17, the local authority watchdog said funding has reduced while costs and demands have increased, and more councils are using reserves to fund services.

The Scottish Government provides around two thirds of council budgets — and this fell by 5.2% in 2016-17 to around £9.7 billion of the councils’ £15.2 billion income.

2016-17 was also the last year of the council tax freeze. Council tax provides 14% of councils’ income.

The report showed Scottish councils had £11.5 billion of pension liabilities at March 31, 2017 .

“Following two years of reducing debt, councils’ net debt increased in 2016-17 from £13.7 billion to £14.5 billion (excluding Orkney and Shetland),” said the report.

“The increase in borrowing was lower than that originally planned when capital programmes were approved. This was primarily due to slippage in delivering capital programmes …

“On average councils spent almost 10% of their revenue budgets servicing this debt.

“Some councils are concerned about the ongoing affordability of servicing their debt as resources decrease.”

Ronnie Hinds, deputy chair of the Accounts Commission, said: “Our evidence tells us that councils are finding the financial pressures increasingly difficult to manage.

“The elections in May this year brought in major changes in council administrations across Scotland.

“Councils that have demonstrated effective leadership and robust planning will be in a better position to deal with the challenges that lie ahead.”